Assessing secret commissions
On 5 November 2019, the High Court released its judgment in the case of Wood v Commercial First Business Ltd (in Liquidation). This case is of interest to lenders, brokers, borrowers and assignees of debt.
In his detailed judgment, Pickering J carefully recites the at times contradictory authorities on secret commissions (otherwise known as civil bribes) and details the
consequences for both lenders and the assignees of debt if commissions paid to brokers were not disclosed.
The case concerned a series of mortgages and loan advances taken out by Mrs Frances Wood, a buffalo farmer and producer of organic mozzarella cheese. The lender was Commercial First Business Ltd (now in liquidation), a lender that described itself as ‘non-standard’ and ‘flexible’. As is common in commercial finance, particularly in the sub-prime and tertiary spheres, Commercial First did not accept applications directly
from borrowers. All applications came from some form of intermediary (eg a mortgage broker). The intermediary in this case was UK Mortgage and Financial Services Ltd (UKMFS). UKMFS was not a party to the proceedings as it was dissolved in 2013.
The second and third defendants had taken assignments from Commercial First which saw them take on the benefits and liabilities for the mortgages in question (assignees).
The mortgages/loan advances
Between 2006 and 2007, Mrs Wood entered into a number of loans of varying amounts. Three formed the subject matter of the case:
- On 26 May 2006, £1,020,000 was lent in return for a legal charge over Mrs Wood’s property known as Higher Alham Farm. Mrs Wood paid UKMFS the sum of £14,500 which was taken out of the advance. However, and importantly, UKMFS also received commission of £30,600 directly from Commercial First (first disputed mortgage).
- On 12 July 2007, £1,427,320 was lent in return for a legal charge over Mrs Wood’s other farm (Dean Street). UKMFS did not charge Mrs Wood a fee for this transaction, however it received commission of £57,092.80 from Commercial First (second disputed mortgage).
- On 30 November 2007, Mrs Wood and Commercial First completed on a further advance of £174,474 secured under the existing legal charge on Higher Alham Farm. UKMFS received £3,726 from Mrs Wood and a further £5,234.22 of commission from Commercial First (disputed further advance).
Prior to the loans, UKMFS purportedly sent Mrs Wood terms of business that included the following provision:
"We may receive fees from lenders with whom we place mortgages. Before you take out a mortgage, we will tell you the amount of the fee in writing. If the fee is less than £250, we will confirm that we will receive up to that amount. If the fee is £250 or more, we
will tell you the exact amount."
UKMFS received commissions totalling £92,927.02. Mrs Wood was not informed of this in writing and claimed she was unaware of the payments to UKMFS.
By the time the disputed further advance completed, Mrs Wood began to fall into arrears. Possession proceedings were issued by Commercial First in May 2008 with orders for possession being made later that same year. Mrs Wood issued proceedings on 11 February 2013 in relation to the disputed transactions. Up to the date of judgment, Mrs Wood was still in occupation of both properties subject to the orders for possession.
The assignees’ position was that Mrs Wood was still liable under the mortgage agreements. Mrs Wood’s liability up to the date of trial was said to be £3,824,141.07.
Unsuccessful grounds of challenge
Mrs Wood formulated her claim to challenge the validity of the disputed transactions on six grounds, two of which were successful. Dealing first with the unsuccessful grounds:
This related to the second disputed mortgage. Mrs Wood contended she never signed the mortgage deed. There is a rebuttable presumption of due execution and the burden of proof was on the borrower to prove otherwise (given that on the face of the documents, it appeared that she had indeed signed). Expert evidence was adduced in respect of Mrs Wood’s signature. The report concluded that there was ‘VERY STRONG evidence for the proposition that the author is the same’. The expert evidence clearly undermined Mrs Wood’s case both in the report and during cross-examination. Mrs Wood’s witness evidence was also found to be unreliable.
Lack of attestation
This concerned the first disputed mortgage. Mrs Wood accepted that she signed this document and did so in the presence of a witness; however, she did not accept that the witness duly signed the document in her presence. She argued the failure of a witness
to sign in the presence of the original signatory was fnatal to the validity of the document.
There was no existing case law authority on this point. The court instead had to rely on the wording of s1(3) of the Law of Property (Miscellaneous Provisions) Act 1989:
(3) An instrument is validly executed as a deed by an individual if, and only if –
(a) it is signed –
(i) by him in the presence of a witness who attests the signature; or
(ii) at his direction and in his presence and the presence of two witnesses who each
attest the signature; and
(b) it is delivered as a deed.
The court rejected the notion that it must have been the intention of those drafting the 1989 Act that the person executing the deed must sign in the presence of a witness and that witness must sign in the presence of the person executing the deed.
Even if Mrs Wood was correct that the witness ought to have also signed in her presence, the court would have accepted one of the assignees’ ‘back-up arguments’. This centred on the application of s52 of the Land Registration Act 2002 which provides
that a charge created by means of a registrable disposition of a registered estate takes effect (once properly registered) as ‘a charge by deed by way of legal mortgage’ where it would not otherwise do so (per Bank of Scotland plc v Waugh ). This saving provision would have remedied any failure to attest the deed.
Undue influence and/or abuse of confidence
On the facts of the case, this was an ill-conceived argument. Mrs Wood sought to adduce undue influence and/or abuse of confidence by UKMFS (and further,
by Commercial First). She relied on the principles in Royal Bank of Scotland plc v Etridge (No 2)  in support of her claim for undue influence, and similarly relied on the key authorities of CIBC Mortgages v Pitt  in support of her claim for abuse of confidence.
Put simply, Mrs Wood claimed that her entry into the disputed transactions was as a result of the actual and/or presumed undue influence of UKMFS and/or as a result of an abuse of confidence from UKMFS. She further claimed that Commercial First had
constructive knowledge of these events throughout.
Mrs Wood failed adequately to address these serious allegations in her witness evidence. Additionally, Mrs Wood had the benefit of her choice of solicitors for all three of the disputed transactions and, while this was not conclusive evidence, the court considered it highly material to its finding of fact.
Additionally, notwithstanding Mrs Wood claimed to have only entered into the first disputed mortgage because of undue influence and/or abuse of confidence, she continued to do business with UKMFS and Commercial First. This did not support her argument that the second disputed mortgage and the disputed further advance were procured by undue influence and/or abuse of confidence.
Breach of duty
Mrs Wood claimed that a general duty of care arose at common law in relation
to the relationship between Commercial First as lender and her as borrower. She did not focus on this argument at trial, no doubt given the serious legal and evidential issues faced.
Claims for breach of duty are problematic in this arena, particularly where it is necessary to show an assumption of responsibility by a lender. In a typical lender/borrower relationship, particularly where communications are via a broker, this is likely to be a difficult hurdle to overcome.
Successful grounds of challenge
The court then turned its attention to two causes of action that were ultimately successful:
Mrs Wood argued that UKMFS was her agent and that payments made by Commercial First to UKMFS without her knowledge amounted to a secret commission/bribe. The
court conducted an in-depth review of the relevant authorities on secret commissions, including an analysis of the difference between ‘fully secret’ and ‘half secret’ commissions, the latter of which being a situation where the principal is aware a payment is to be made to the broker but not the amount.
There remains a long line of authorities that where a principal is induced by their agent to enter into a contract and the agent has received an undisclosed commission from a third party, that such payment is treated as a secret commission or bribe. The principal is entitled to relief as against the briber (the party paying the secret commission) and the bribee (the agent accepting the secret commission). The payment of a fully secret commission is treated as a special category of fraud.
During the court’s review of recent authorities on secret commissions, it concluded that the case of Commercial First Business Ltd v Pickup  had been wrongly decided. That case involved the same lender and the same counsel and related to half secret
commissions. In the Pickup decision the judge concluded:
"… the defendants were also told in that case that the lender [presumably a typographical error that should read broker] would be paid a commission. In those circumstances I cannot see how the defendants could reasonably have expected undivided loyalty and I do not conclude that the relationship was fiduciary…"
There being a fiduciary relationship is fundamental in half secret commission claims but of less importance in fully secret commission cases. The court disagreed with the finding in Pickup. The question as to whether or not there was a fiduciary relationship depends on the facts. Pickering J went further to conclude that if there was a fiduciary relationship between the borrowers and broker, disclosure of the commission did not negate the existence of a fiduciary relationship. Instead, it merely prevented a
breach of that fiduciary relationship.
In this case, the court determined that the payments to UKFMS were fully secret commissions as Mrs Wood had not received written notice of the amounts in accordance with the broker’s terms and conditions. Therefore, Slade J’s threefold test in Industries and General Mortgage Co Ltd v Lewis  applied:
That the person making the payment makes it to the agent of the other person with whom he/she is dealing
There was plainly no dispute as to whether Commercial First made payments to UKMFS. The issue to consider was whether UKMFS was Mrs Wood’s agent at the time of the various payments. The court concluded that it was because:
- UKMFS clearly acted on Mrs Wood’s behalf on multiple occasions;
- the service provided by UKMFS was not merely administrative;
- on two of the three occasions, UKMFS charged Mrs Wood broker fees for their services;
- the position was supported by UKMFS’s terms and conditions; and
- the terms and conditions stated ‘we will be acting on your behalf’.
That he/she makes it to that person knowing that the person is acting as the agent of the other with whom he/she is dealing
It must have been obvious to Commercial First that UKMFS was acting as Mrs Wood’s agent. The payment of commission to brokers was common practice.
He/she fails to disclose to the other person with whom he/she is dealing that he/she has made that payment to the person whom he/she knows to be the other person’s agent
The payment of commission by Commercial First to UKMFS was not disclosed to Mrs Wood. Moreover, any honest belief by Commercial First that UKMFS would have disclosed the commission payments to Mrs Wood does not waive its liability.
The court also concluded that UKMFS owed fiduciary duties and clearly put itself in a position of conflict when accepting the commissions without the borrower’s informed
consent. Therefore, even if Pickering J was wrong on secret commissions, Commercial First would be liable in any event as an accessory to UKMFS’s breach of fiduciary duty.
Unfair relationship under the Consumer Credit Act 1974 (CCA)
The court considered ss140A-140C of the CCA as well as the leading authority on the matter, Deutsche Bank (Suisse) SA v Khan , which ‘summarised the general principles as to the application of the unfair
relationship test’. The court then quoted from Nelmes v NRAM plc , which it considered the most ‘relevant authority’, which states inter alia:
"A relationship between lender and borrower which involves such a payment [the payment of commission] deprives the borrower of the disinterested advice of his broker and is, for that reason, unfair."
UKMFS had put itself in a position where its ‘interest and duty may conflict’ (per Millett J in Logicrose Ltd v Southend United Football Club Ltd. (No. 2) ). Accordingly, the relationship was unfair for the purposes of s140A CCA.
Remedies and limitation
The court next turned its attention to the question of remedies and limitation. Where an agent receives a fully secret commission, the principal will be entitled to:
(a) rescission as of right (subject to counter-restitution);
(b) recovery of a sum equal to the amount of the relevant secret commissions; and
(c) damages for fraud in respect of any losses suffered.
The court made an order in relation to (a) and (b) but did not make an order in respect of (c).
In respect of (b), Mrs Wood faced various difficulties given that Commercial First was in liquidation and the benefits and liabilities of the mortgages had been assigned.
In relation to the recovery of funds, the court noted ‘the use of the well-established route of money had and received may seem a little curious’. This is because the claim was against the briber, being Commercial First, and not the bribee, being UKMFS. Commercial First was liable but the court had to consider whether to order recovery
as against the assignees.
Pickering J needed to determine whether the liability to repay a secret commission was personal as opposed to proprietary. Mrs Wood argued, following the decision in FHR European Ventures LLP v Cedar Capital Partners LLP , that the bribe was held on constructive trust for her benefit. The court rejected this; in FHR it was the bribee (being the agent) that held the funds on trust, not the briber.
Pickering J was not willing to extend the remit of the constructive trust to apply to the briber, therefore, the assignees were not liable to account for the secret commissions.
Notwithstanding this determination, the court had to consider an argument that assignments are ‘subject to equities’ and that therefore equitable set-off applied in the amount of the secret commissions to reduce any liability to the assignees. This argument ultimately failed as the court determined the secret commissions and the unfair relationships were not sufficiently ‘closely connected’ to the mortgage contracts. The borrower was not claiming breach of the mortgage contracts. The claims arose outside
of the actual contracts, particularly given the quasi-fraudulent aspects.
It was also necessary for the court to consider limitation. Mrs Wood commenced proceedings on 11 February 2013. Therefore, in line with the Limitation Act 1980,
any causes of action arising before 11 February 2007 were, at least on the face of it, time barred. The first disputed mortgage (entered into on 26 May 2006) was therefore at risk.
In relation to the recovery of the secret commissions:
- As the cause of action was for money had and received, s5 of the 1980 Act applied (Re Diplock ). Therefore, the claim should have been brought within six years.
- In the alternative, the court concluded that in the event the claim for secret commissions was not one for money had and received, but instead for a form of equitable compensation based on Commercial First’s accessory liability to UKMFS’s breach of fiduciary duty, the claim would still be barred by s36 of the 1980 Act. This section enables the court to apply the same limitation period for breach of contracts, namely six years, to claims for equitable relief.
- Section 32 of the 1980 Act postpones the running of limitation in limited circumstances where the defendant has committed fraud. Despite a prompt from Pickering J, the borrower failed to develop this argument in any meaningful way so no order could be made postponing the relevant limitation period.
In relation to the remedy of rescission and the claims relating to an unfair relationship, limitation did not operate as a bar.
Trading of debt is common practice. Many lenders will look to sell part of their loan books, particularly if loans are underperforming. The risk of there being a secret commission arrangement potentially drastically reduces the value of any security held. Prior to enforcement, lenders and assignees ought to give consideration to any payments previously paid to a broker to assess the risk of enforcement action in respect of any potentially secret commissions.
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