Demolishing the half-way house: what’s next for secret commissions

The Supreme Court took the unusual step of handing down its judgment in Johnson (Respondent) v FirstRand Bank Limited (London Branch) t/a MotoNovo Finance (Appellant) at 4.30 PM on a Friday, citing potential market volatility.

This reflected the commercial importance of the decision for the thousands of customers in the motor-finance industry, as well as the car dealers and lenders involved. But what about everyone else? Waves of secret commission claims over the years have hit the shores of other sectors, including the energy market, where brokers are traditionally utilized.

Common to both equity and tort-type causes of action arising from the payment of a secret commission, a claimant must show that a fiduciary duty existed between the broker and the customer. The claimant will then need to show that such duty was breached because there was insufficient disclosure of all material facts for the customer to have given informed consent to the broker receiving the commission. If successful, a variety of remedies are available.

Although Johnson provided a significant decision as to the requirement and establishment of a fiduciary duty of loyalty between the broker and the customer, the Supreme Court decided that several issues in the appeal were “best left to an occasion when they really mattered”[1]. We anticipate that these points may be developed in the judgment expected to be delivered by the Supreme Court year in Expert Tooling and Automation Limited (Respondent) v Engie Power Limited (Appellant) Tooling.[2]

Prior to Johnson

One of the key precedents deployed by claimants in these types of secret commission actions was Hurstanger Ltd v Wilson [2007] 1WLR 2351. In Hurstanger, a broker had breached his fiduciary duty because, although he had told the customer about the fact of commission, he had not disclosed the amount of the commission. This created what the court referred to as a ‘half-way house’, and later ‘half-secret’ commissions i.e. where some, but perhaps not full disclosure had been made. The payor’s liability in such cases depended on the claimant establishing the payor’s dishonest assistance in that breach. This distinction was also mirrored in the Court of Appeal’s decision in Expert Tooling, and was being appealed, although these grounds will have fallen away with the decision in Johnson.[3]

Learnings from Johnson on disclosure and informed consent

The Supreme Court has now overturned the distinction in Hurstanger. Johnson confirmed that where the fiduciary receives a commission from the party with whom the claimant contracts, it can only do so with the claimant’s fully informed consent, i.e. knowledge of all the material facts. That is because “the real evil”[4] of bribery is not the secrecy of the payment, but rather the corruption of the relationship between the fiduciary and the customer. Therefore, partial disclosure will never suffice. There is accordingly no longer a test for what constitutes partial disclosure and a test for what constitutes full disclosure: only informed consent matters. This requirement is the same for both the claim in equity and at common law.

Learnings from Johnson on remedies

In addition to the additional requirement to prove dishonesty on the part of the payor in equitable dishonest assistance claims, the equitable and common law claims also differ in their remedies in some interesting ways. While the Supreme Court did not want to decide the issue of remedies on an obiter basis, given that it had found that no fiduciary duty arose, it reviewed the historic development of the remedies. Two differences are of particular interest.

While both the action in tort and equity allow a claim in damages, the action in equity allows no presumptions as to the level of those damages (not even to the level of the commission, as in the common law claim). Moreover, while rescission is available, the strict requirement for restitutio in integrum at common law means that it will almost never be available in cases where the goods or services supplied are consumed, as in the case of energy supply contracts. These distinctions may become the guiding considerations for claimants as to what claims to pursue.

Questions left by Johnson 

One of the grounds in the defendant’s cross-appeal in Expert Tooling is whether the Court of Appeal was wrong to conclude “that informed consent to the payment of the commission had not been obtained.”[5]

It will be interesting to see whether the Supreme Court provides a specific test or guidance for the material facts that need to be disclosed to establish informed consent. The Court of Appeal in Expert Tooling provided fact-specific guidance, but it could include anything that might (not would) have affected the customer’s decision to enter into the contract. On the facts this was a duty to close: 

a) the amount of the commission;

b) that commission was added to the unit price of the energy contract;

c) that the amount of the commission depended on the length of the contract entered into;

d) that the broker was free to add what commission it wished to the unit price; and

e) that a very substantial upfront payment of anticipated commission was payable on commencement of the contract.

However, the Supreme Court may re-evaluate the test for informed consent. This may include discussions on the level of detail needed; the method of providing the material facts (verbally or through documents); whether it is necessary to establish that the customer understood the material facts disclosed and the conflict created; and how that informed consent may have been obtained (express or implied). Although a half-way house no longer exists, it remains to be seen whether the degree of informed consent required will create more, or less, uncertainty.

The second ground in the cross-appeal concerns limitation. Specifically, what was in issue was whether it runs from the date of payment of the commission, rather than the date of entry into the contract. This was not considered in Johnson where particular considerations apply for establishing limitation in a claim that a consumer credit agreement was unfair. Naturally, any shift in the limitation period may impact the value of remedies, and perhaps even the cause of action chosen to be pursued.

Conclusion

The Supreme Court’s decision provided much needed clarity on the law of secret commissions. However, the court’s reluctance to address all the issues before it and the remaining cross-appeal from Expert Tooling demonstrates that the development of this area of law is not over yet.