9 April 2019
Reading time (1-10 minutes): 3ish
Sophistication level (1 (idiot) – 10 (expert)): 7
Entertainment value (1 (turgid) – 10 (side-splitting)): 2
You will often hear or read stories in the press about shadowy middlemen, often in the worlds of sport or showbusiness or jet set wheeler-dealing, where it never seems quite clear who these middlemen are representing or where they are getting their cut from.
Unfortunately this recent Court of Appeal case is not set in this glamorous shadowy world. It involves financial services, a less glamorous shadowy world, hence this legal briefing’s low ‘entertainment value’ rating.
The basic law is that if you act on someone else’s behalf you are known as their ‘agent’ and they are known as your ‘principal’. So for example an estate agent is an agent for a person looking to sell their property.
The actual law is a bit more complex. An estate agent is a ‘limited representative agent’, or an ‘introduction agent’, not a full common law agent (someone who has authority to create, change or terminate the legal relations of someone else). He is still however a ‘fiduciary’ – someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. As such he owes his principal a degree of loyalty, involving the following duties (amongst others):
- to act in good faith
- not to place himself in a position where his duty and his interest may conflict
- not to act for his own benefit or the benefit of anyone else without the informed consent of his principal (the person he is acting for).
The last of these can often catch people out because the principal doesn’t actually have to suffer any damage because of what the agent has done. It can include receiving a secret commission from a third party. Receiving a secret commission is also a category of fraud. So for example if an estate agent took a cut from a buyer without telling the seller the estate agent would be in breach of this fiduciary duty and would also be committing fraud.
A Court of Appeal case in 2007 (Hurstanger Ltd v Wilson) established that there can be a half-way house where there is no fraud because the commission arrangements weren’t really a complete secret, but there is still a breach of fiduciary duty because the principal hasn’t been given enough information about the agent’s commission to be said to have given its informed consent.
The protagonists in this case were Collins Stewart, an investment firm (it has since changed its name), and Medsted, an introducing broker. Medsted acted as agent for various investors, ie it acted on their behalf (although they didn’t pay Medsted anything for acting as their agent). Medsted and Collins Stewart entered into an agreement whereby Medsted would introduce investors to Collins Stewart in return for which Collins Stewart would pay Medsted a cut of any commissions received by Collins Stewart from these investors. There was a non-circumvention clause which said Collins Stewart would never do business directly with these introduced investors, ie it had to go through Medsted as their agent.
This arrangement worked quite nicely, with Collins Stewart working with Medsted in relation to investment arrangements (mainly ‘contracts for differences’) for 16 investors whom Medsted had introduced. But one day Collins Started started dealing with some of these investors directly, cutting Medsted out of its cut of commissions.
Medsted thought this was unfair and so it took Collins Stewart to court. Collins Stewart said that it shouldn’t have to pay Medsted anything because Medsted hadn’t told its investors how much of a commission cut it would be receiving from Collins Stewart and so it was in breach of its fiduciary duty to these investors not to earn a secret commission.
What did the High Court say?
The High Court agreed that Collins Stewart was in breach of the non-circumvention clause, and agreed that Medsted had suffered loss as a result. It also said that it must have been pretty obvious to the investors (who didn’t pay Medsted for anything themselves) that Medsted must be getting paid a cut of commissions by Collins Stewart.
But despite all this it only awarded Medsted nominal damages (ie something like £1). It said that Medsted as the investors’ agent should have told the investors exactly how much commission it would be receiving from Collins Stewart, and because it didn’t it was in breach of its fiduciary duty and so on public policy grounds it didn’t deserve to receive any damages.
Medsted thought this was terribly unfair and appealed to the Court of Appeal.
What did the Court of Appeal say?
The Court of Appeal was more lenient. It said that in some circumstances where a principal knows that its agent is being paid by someone else it can’t complain that it didn’t know the precise details of the amount paid. The more it is known to be a usual trade or customary practice, and the more experienced and sophisticated the principal, the less specific the principal’s knowledge of the actual commission amount needs to be. In this case everyone knew how the system worked, and the principals were wealthy and experienced investors and therefore sufficiently sophisticated to be said to have given informed consent to whatever commission Medsted might have agreed to receive from Collins Stewart. There was therefore no duty on Medsted to disclose the precise amount of commission it was due to receive from Collins Stewart.
So Medsted won its appeal and Collins Stewart had to pay damages for the commission obligations it had tried to circumvent by dealing directly with the investors.
Whilst this case offers agents some protection, there remains a big grey area over when a court might say it applies, and the best advice is always for agents to make full disclosure to their principals of any commission they are due to receive from someone else.
And in cases where you are looking to receive an introduction fee or referral fee from someone for introducing someone you know to them, you should try to ensure that you are not going to be treated as the agent of the person you are introducing, so that you don’t then owe all these fiduciary duties. This can be easier said than done – for example, do you want them to confirm in writing that you do not have a relationship of trust and confidence with them and so are not acting as their agent?!
Case: Medsted Associates Ltd v Canaccord Genuity Wealth (International) Ltd [Collins Stewart’s new name] (2019)