In the well-known case of Attorney-General for Hong Kong v Reid [1994] 1 AC 324, Lord Templeman famously observed that:
Bribery is an evil practice which threatens the foundations of any civilised society. In particular, bribery of policemen and prosecutors brings the administration of justice into disrepute. Where bribes are accepted by a trustee, servant, agent or other fiduciary, loss and damage are caused to the beneficiaries, master or principal whose interests have been betrayed. The amount of loss or damage resulting from the acceptance of a bribe may or may not be quantifiable.
In Reid, the Privy Council held that bribes or secret benefits obtained by a fiduciary were held on a constructive trust for his principal, which gave the principal a proprietary interest in the bribe or secret benefit so as to enable the principal to trace or follow the same in equity. In doing so, the Privy Council disapproved the decisions of the English Court of Appeal in Metropolitan Bank v Heiron (1880) 5 Ex D 319 and Lister & Co v Stubbs (1890) 45 ChD 1, which held that in such circumstances the recipient of the bribe or secret benefit was merely under an equitable duty to account to his principal for the bribe or secret benefit, which was a personal remedy giving rise to no proprietary interest in the property.
For a while it was thought that Reid had settled the law on this point, although the decision in Reid was not without its critics. However, in 2012, Lord Neuberger MR, delivering the judgment of the English Court of Appeal in Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd (In Administration) [2012] Ch 453, declined to follow Reid, ruling instead that the court was bound to follow its earlier decisions in Heiron and Lister unless they were overruled by the Supreme Court.
The decision in Sinclair generated great controversy. In FHR European Ventures LLP v Mankarious & Ors [2014] 1 CH 1, Sir Terence Etherton C explained the controversy as follows:- (at [79] – [80])
As Lewison LJ has said, Sinclair Investments is a highly controversial decision. It has divided legal scholars and the common law world. Lord Neuberger MR referred to some of the academic literature in Sinclair Investments at paragraphs [82] and [83]. I think it would be fair to say, as reflected in all the leading textbooks, that prior to the decision in that case it was generally accepted by trust and equity practitioners and judges throughout the common law world that Reid would be followed in preference to Lister. Some have seen the academic protagonists in the early skirmishes after Sinclair Investments as falling into two broad groups: those with a particular trust and equity expertise and background, who were hostile to the decision, and those with a particular common law, especially commercial or restitution, expertise and background, who favoured the decision. That rather crude description and comparison, however, is not entirely accurate, and it devalues the important analyses of the increasingly numerous commentators on all sides of the debate both here and abroad.
The full Federal Court of Australia in Grimaldi v Chameleon Mining N L (No 2) [2012] FCAFC 6 has refused to follow the decisions in Sinclair Investments and in Lister. It held, following Reid, that a fiduciary who receives a bribe holds it on trust for his or her principal. It would be easy to dismiss the decision in Grimaldi on the short ground that Australian jurisprudence recognises the remedial constructive trust; and that was indeed one of the express reasons why the court in Grimaldi did not follow Sinclair Investments. That would, however, give less respect to the full reasoning in Grimaldi than it deserves. The Australian court gave important policy and other reasons for preferring the decision and reasoning in Reid. It is also worthy of note that Finn J, who delivered the judgment in Grimaldi, was the author of the well known magisterial work on Fiduciary Obligations (1977). Moreover, the law in England and Wales now differs on this matter not only from Australia, but also, as Finn J observed, New Zealand, Singapore, Canada and some jurisdictions in the United States. It also has to be borne in mind that, in addition to the United Kingdom’s overseas territories and crown dependencies, there are many current and former Commonwealth countries for which the final court of appeal is the Privy Council, which gave the decision in Reid and to which other countries look to provide a lead on specialist areas such as trust law and equity.
In FHR European Ventures, the Court of Appeal distinguished Sinclair on the facts of the case, and leave was subsequently granted to appeal to the UK Supreme Court.
The UK Supreme Court has now delivered judgment in FHR European Ventures LLP & Ors v Cedar Capital Partners LLC [2014] UKSC 45 (16 July 2014). In a unanimous decision, an enlarged panel of seven Justices of the UK Supreme Court has held that bribes and secret benefits received by a fiduciary are indeed held on trust for his principal, effectively following the decision of the Privy Council in Reid. The Supreme Court also held that the law took a wrong turn in Heiron and Lister, and that those decisions, and any subsequent decisions including Sinclair, in so far as they relied on or followed Heiron and Lister, should be treated as overruled.
There are several unusual features about the decision of the UK Supreme Court in FHR European Ventures.
First, despite the enlarged panel of seven Justices, and the great importance of the legal issues involved for which the individual Justices would normally issue separate opinions, the court merely issued a single composite judgment. Interestingly, this judgment was delivered by Lord Neuberger, President of the UK Supreme Court, who as Lord Neuberger MR had delivered the judgment of the Court of Appeal in the controversial Sinclair decision.
Secondly, having considered the rival arguments, authorities and academic views, the Supreme Court somewhat surprisingly observed that “[i]n the end, it is not possible to identify any plainly right or plainly wrong answer … as a matter of pure legal authority” as to whether bribes or secret benefits were held on trust ([2014] UKSC 45 at [32]), and instead justified its conclusion on the basis of “considerations of practicality and principle”.
The Supreme Court also appeared to observe that the proposition that all bribes or secret benefits were held on trust “has the merit of simplicity … Clarity and simplicity are highly desirable qualities in the law. Subtle distinctions are sometimes inevitable, but in the present case, as mentioned above, there is no plainly right answer, and, accordingly, in the absence of any other good reason, it would seem right to opt for the simple answer.” ([2014] UKSC 45 at [35].)
This was a very unusual approach towards answering the important issue before it. After all, one would expect the Supreme Court as the apex court not to shy away from giving what it opined to be the right answer as a matter of authority, instead of opting for a “simple” answer, which has the danger of being misinterpreted as the Supreme Court taking the easy way out.
Thirdly, and more importantly for the purposes of Malaysian law, what about the decision of the Privy Council in the case of T Mahesan v Malaysian Government Officer’s Co-operative Housing Society [1979] 1 AC 374, [1978] 1 MLJ 149?
In Mahesan, the appellant was a director and secretary of the respondent co-operative society, and had accepted bribes and secret commissions to induce the respondent to enter into a contract to purchase land from the person who paid the bribe and secret commission. The respondent subsequently claimed against the appellant for the recovery of the bribe and secret commission which the appellant had received. Lord Diplock, delivering the judgment of the Privy Council, made these important observations:- ([1978] 1 MLJ 149 at 151 and 153)
By the early years of the nineteenth century it had become an established principle of equity that an agent who received any secret advantage for himself from the other party to a transaction in which the agent was acting for his principal was bound to account for it to his principal: Fawcett v Whitehouse (1829) 1 Russ & M 132. The remedy was equitable, obtainable in the Court of Chancery, and there appears to be no reported case at common law for the recovery of a bribe by a principal from his agent before the Judicature Act 1875. No precedent for such a count is to be found in the 3rd Edition of Bullen & Leake, published in 1868. Nevertheless by 1888, Bowen L.J. felt able to say that the bribe was recoverable at common law as money had and received by the agent to the use of the principal.
“The law implies a use, that is to say, there is an implied contract, if you put it as a legal proposition — there is an equitable right, if you treat it as a matter of equity — as between the principal and agent that the agent should pay it over, which renders the agent liable to be sued for money had and received, and there is an equitable right in the master to receive it, and to take it out of the hands of the agent, which gives the principal a right to relief in equity.” Boston Deep Sea Fishing & Ice Co v Ansell (1888) 39 Ch D 339, 367. …
This extension to the briber of liability to account to the principal for the amount of the bribe as money had and received, whatever conceptual difficulties it may raise, is now and was by 1956 too well established in English law to be questioned. So both as against the briber and the agent bribed the principal has these alternative remedies: (1) for money had and received under which he can recover the amount of the bribe as money had and received or, (2) for damages for fraud, under which he can recover the amount of the actual loss sustained in consequence of his entering into the transaction in respect of which the bribe was given, but he cannot recover both. (Emphasis added)
The decision of the Privy Council in Mahesan is in fact consistent with Heiron and Lister, in that the remedy against an agent who has received a bribe or secret benefit is an action for money had and received or an equitable duty to account, all of which are merely personal remedies which do not give rise to any proprietary interests in the bribe or secret benefit received.
Curiously, although Mahesan was a decision of the Privy Council, it was neither referred to nor considered in any subsequent decision of the courts discussing the same issue, including Reid, Sinclair and the Supreme Court decision in FHR European Ventures. Although Mahesan was cited in argument by counsel in Reid, it was not considered in the judgment of Lord Templeman. It should also be noted that in Mahesan, Fawcett v Whitehouse was regarded as merely imposing an equitable duty to account for a bribe or secret benefit received, whereas in Reid and FHR European Ventures, Fawcett v Whitehouse was thought to be authority for the proposition that such a bribe or secret benefit was held on trust.
What then, is the status of Mahesan? Being a decision of the Privy Council on appeal from Malaysia, it is clearly binding on Malaysian courts. Should Malaysian courts follow Reid and FHR European Ventures instead of Mahesan? Will Malaysian courts simply ignore Mahesan altogether? It is unfortunate that Mahesan appears to have been completely overlooked by the courts in this important area of law which now appears to have been settled (at least) as a matter of English law. It remains to be seen what the position under Malaysian law will be.