Secret Commissions
Secret commissions arise when financial value or favour are passed to an agent without the knowledge of their principal.
The agent can be any person who is employed or engaged by another person. That other person - the principal - is usually a business.
It’s concealed remuneration, which includes:
- money offered or paid,
- benefits of any non-monetary value offered or conferred, including favours and dispensations where they should not be granted.
The secret commission - a secret profit - arises when the principal does not know anything about it.
Receiving secret commissions is serious misconduct of employment, freelancing, consultancy and agency relationships.
Agency Relationships
Payments of commission are common in business.
Sales networks and sales commissions form part of the payment regime for many businesses.
The prevalence of sales based networks may lead you to the impression that side deals which lead to an agent receiving a commission on the side without the knowledge of the principal are OK.
They’re not, and they haven’t been for over 200 years. There aren't many areas where the law has not changed over that period. This is one of them. The standstill isn't going to change any time soon.
The starting point for identifying an agent is any person which exercises authority of another business for that business. We've set out a list of commonly encountered types of agents further down.
Rule against Secret Commissions
The rule against secret commissions apply in a wide range of business relationships.
The prohibition on receiving secret commission applies to all those who are fiduciaries, whether commercial or business agents, employees, directors of companies, consultants to a principal.
The rule applies in any situation where the payment of commission deprives the person of the disinterested advice or assistance of the person owing the duty, ie the agent. For that reason secret commissions are unfair to the principal.
The prospect of secret commissions comes into play arises when the agent deals with another company on behalf of their principal and:
- represents the principal in negotiations with other businesses
- sources goods and services from other businesses
- has the ability to influence:
- the suppliers selected by the principal
- the prices paid by customers of the principal
- a sales person receives a backhander from a customer of the principal
- is a director of a principal
- uses assets of the principal for their own benefit and:
- receives money, shares or favours to grant contracts to a supplier to the principal
- derives a profit by using another company which they have an interest to supply the principal
These are just some examples of the sort of role an agent may have with their principal.
It's when the employee, consultant or director - the agent - does the business of the company that engaged them - the principal - with third parties.
In those situations, however they might arises:
- the agent conducts the business of principal.
- it’s a secret commission, which is a secret profit.
That’s not allowed. It's seen as a betrayal of their trusted position.
The prohibition on secret commissions doesn’t just apply to commission based arrangements. It applies to any profit where the benefit is connected to the agent's role because its a breach of their fiduciary duties.
Recovery of Secret Commissions
When agents receive secret commissions they must be handed over to the principal.
That’s because the agent is seen as doing the business of principal. Therefore, the principal is considered the owner of the commission, and not the agent.
Just because side deals might be common in industry generally, does not make them acceptable.
They remain recoverable by the principal.
What is a Secret Commission?
Secret commissions arise when:
- a person confers a benefit, such as money, to an agent of a business
- the person knows that the receiving person is acting as the agent of the business, and
- giving the benefit is not disclosed the business that the agent works with
In the context of secret commissions:
- a “commission” is any benefit received by the agent which compromises the interests of the principal, whether it’s taking a positive step or failing to act when the agent should have acted.
Put another way, a secret commission is a benefit bestowed on an agent, and - which is over and above what the principal knows about or has agreed to pay the agent
Agents have a unique position. The trust placed in the agent by the business to act in their best interests give rise to a series of legal protections.
When the principal doesn't know about the benefit, the agent colludes with others and undermines the integrity of their relationship with their principal.
The principal has a series of legal rights to protect the relationship from being undermined by receipt of secret commissions, and recover when they are paid to the agent without their knowledge.
That trust makes the agent a fiduciary, which creates a series of fiduciary duties which prevent the agent from taking advantage of that trusted position.
What sort of benefit?
The benefit which constitutes the commission is any benefit which is not trivial.
Benefits include financial and non-financial benefits. They can be:
- payments of money
- favours
- gifts
It does not really matter what the benefit is, how the benefit might be structured, what it might be called, or how it might be dressed up.
The benefit does not even need to be received by the agent. The ultimate beneficiary could be a member of the agent’s family, a relative, a business associate, or a company which the agent owns or is interested (such as receiving sales commissions from that company's own sales).
Examples
Here are a series of simple examples where benefits have been received by agents which have been recoverable.
Sales Roles
A sales person for a business sells kitchens. The kitchens retail for £10,000.
The sales person (the agent) agrees with a customer discount a kitchen by £800, provided the customer pays £100 direct to the sales person.
The business is entitled to recover from the salesperson the £100 secret commission and the £800.
Manufacturers
A consultant is engaged to sell machined parts for a manufacturer.
The consultant diverts enquirers for parts to another business, and receives an "introductory fee" of £20 per introduction from that other business.
Company Directors
A director of a company agrees to grant contracts for supply of services to a business.
The business agrees to pay the tuition fees of the children of the director.
Buyers of Property
A property owner and the estate agent agree the amount of commission for arranging the sale of a property.
A side deal is agreed between the estate agent by the buyer, without the knowledge of the vendor.
The agent then secretly negotiates with the seller to be paid a commission on the sale
Lenders and Brokers
The borrower pays a broker a fee and commission based on a proportion of premium for payment protection insurance. The customer knows about it, so that’s OK.
The broker also receives commission from the lender in respect of a loan, which the customer does not know about.
Brokers
A mortgage broker receives referral fees from lenders to referring business to them.
Rarely are real-world cases this simple. All sorts of variations can come to pass.
The absence of full disclosure to the principal of the payments, fees or favours received makes it a secret commission. The commission is secret when it is paid or agreed to be paid without the fully informed knowledge and consent of the principal business.
Side Deals
The commissions can and commonly arise from side deals, which might involve:
- money, however it might be calculated, including:
- commissions on sales
- percentage of the money to be paid over to the principal
- referral fees
- reducing overall charges payable in exchange for a personal payment
- introductory payments
- an increase hire rates to increase their own commission
- inflated expenditure to receive payments of money which were not actually incurred on expenses
- property:
- a transfer of ownership of shares
- transfer of ownership of property
- services, such as receiving the benefit of services at no cost or reduced cost
- services or products ultimately supplied by third parties, such as:
- holidays
- school tuition fees
- membership to clubs, such as a private members club or a golf club
- favours:
- manipulating prices
- turning a blind eye
- supplier bias and commercial parochialism
Agents aren’t permitted to stand by and say “I'll go along with it”, or stand back and let it all happen.
That’s because the benefit creates a corrupting influence. It is susceptible to constituting a bribe.
When commissions are offered the intended receiver is expected to do the right thing by the business that employs them, and:
- notify the business that they have been offered and obtain permission to receive it, and
- pass on benefits offered to them or received by them to the business.
Types of Agents
The prohibition on receiving secret commissions extend to:
- employees
- the full range of agents:
- introduction agents, which introduce potential customers or suppliers to a business
- business agents, which are agent appointed for selling or buying goods or services on behalf of the principal.
- selling agents
- purchasing agents
- estate agents and vendors of property
- Money lenders
- Brokers, which includes:
- insurance brokers
- mortgage brokers
A broker is a type of business agent who acts as a middleman between a buyer and a seller. They are engaged to bring about a contractual relationship between the principal and the lender.
- auctioneers
- individuals who enter into an agreements to negotiate sales contracts on their behalf, such as:
- distributors
- in-house sales representatives.
- IT services contracts and services
Examples
Examples of the sort of role which might be played by an agent with the power to influence the decision making of the business includes the power to:
- select, shortlist or filter suppliers which are used by the principal company
- arrange purchase of assets or services for a business
- negotiate on behalf of another person
- advise on suitable suppliers for purchase or hire of services
Also, it commonly arises that agents:
- redirect enquiries for new business to another company for a "fee"
- pass on trade secrets and other confidential information such as customer lists and pricing information and make a side-profit from it.
Each of these can also lead to liability.
Recovery of Secret Commissions
There are a whole series of factors which are irrelevant to whether the business is entitled to recover the secret commission. It's a breach of the agent's fiduciary obligations.
They just don’t come into the equation to defend a claim that a secret commission has been received.
There is no requirement for:
- the secret commission to be received for a corrupt purpose
- any dishonesty on the part of the receiving fiduciary
It’s also irrelevant that the payer (ie the briber) realised that they were doing wrong
- the agent's behaviour to be affected by receiving the payment. The agent’s behaviour is assumed to affected by receiving the secret commission
- a loss to be suffered by the principal from the side deal
- the agent or payer of the commission not acting in the best interests of the principal. An agent acting in the best interests of the business is still be liable
- the transaction was somehow unfair to the agent or the principal
- the payment to be associated with any particular contract. The bribe might have been paid to influence the agent’s behaviour in favour of the briber generally, for future contracts and favours
So even if a person believes it is all right to make the side deal, if it’s accepted practice or common practice is no defence to a claim by the principal.
The fact that a commission was received that the principal did not know about it is enough to attract liability. So too when the parties would have behaved the same way if the commission had not been received.
Liability of the Payer / Briber
The payer of the secret commission is also liable to the principal, along with the agent.
It is not for the payer of the secret commission to assume that the receiver would inform the principal that a payment would be made to the agent. It’s no defence to a claim.
Secret commissions can also taint future transactions between the principal and the person making the payment, where the agent continues to be involved in the decisions made by the principal.
What matters is whether conferring the benefit or promise which amounts to a bribe depends upon whether it puts the agent in a position of the agent has a conflict of interest with the principal.
Disclosure
Where receipt of commission is kept from the principal, the agent can no longer act consistently with their duty, unless the agent discloses the facts to the principal.
To correct the situation, the agent is required disclose the secret commission to the principal. It is for the principal to decide whether the agent can keep it or not.
In that way, agents receiving secret commissions are able to discharge their duty to remain faithful to their principal.
Disclosure of the offer or receipt of the secret commission to the principal is a test of honesty and integrity of the agent. If the employer consents to the commission, the agent performed everything that is required of them an upright and responsible way.
Compensation for Secret Commissions
Undeclared payments received by agents secretly justifies compensation to the principal for the amount of the commission.
Secret commissions give rise to a presumption that a transaction between the principal and the third party would be reduced by an amount equal to the amount of the commission.
For example, if the seller was prepared to sell a property for £210, and a secret commission of £10 was paid, it must be quite likely that, in the absence of such commission, the vendor would have been prepared to sell for £200 or less.
The Illegality of Secret Commissions
Payment of secret commissions is a form of fraud, and are quasi-criminal acts. The events involving payment of secret commissions are actionable as civil claims.
They are treated seriously because:
- an agent's duty of fidelity is compromised
- trust and integrity in commercial transactions are undermined.
Receiving secret commissions is so serious that agreeing to receive them usually gives rise to right to terminate the agency relationship or dismiss the person from employment.
Payments must be made to agents openly and honestly, due to the necessity for transparency in the dealings of agents and their trusted role.
Remedies
Secret commissions undermine trust in business transactions.
So much so, that negotiations to receive a secret commission can taint an entire transaction, and receipt of a secret commission almost certainly will.
Remedies for receipts of secret commissions are relatively straightforward.
The principal is entitled to receive the entire benefit of the agent's acts in the course of the agency.
The secret commissions is treated as the property of his principal.
If the benefit has already been spent the employee, the employee is liable to make it up from their own assets.
The agent is liable to the principal jointly and severally with the payer of the secret commission:
- for the amount of the bribe or secret commission
- for any loss suffered by the principal from entering into the transaction in respect of which the bribe or secret commission was given or promised
- the amount of the secret commission, and
- the person who pays or promises to pay the bribe The principal may also require either the agent or the briber to give an account of profits.
Also, when a secret commission has formed part of a transaction, a principal may render relevant contracts void. The contract is treated it as if it never existed, and the transaction is reversed. Rescission is usually available when there is a payment of money and offers to pay money.
Further to that, the overall outcome may be the principal makes money out of the unlawful behaviour out of the agent’s secret commission.
Conclusion
Usually, the parties deal with each other as principals and at arm’s length, each looking after his own interests.
Fiduciary duties are imposed on parties in a mandatory way regardless of their wishes.
It’s the fiduciary duties which address particular circumstances of responsibility assumed by agents when they are trusted and responsible for the conduct of the business and affairs of another.
A principal is entitled to have an honest agent, and it is only the honest agent who is entitled to any commission. Without full disclosure, an agent's own interest has been allowed to conflict with those of the principal.
If a profit arises out of the transaction, it belongs to the principal, rather than the agent.
A fiduciary is bound to account for any profit that he or she has received in breach of fiduciary duty.
When they apply, they are more onerous and intrusive into relationships. They do so to preserve honesty – or more to the point, to avoid corruption of business relationships.
Secret Commissions and Bribes: Legal Advice
Agents are not entitled to receive or agree to receive secret commissions from third parties where the benefit is connected to their role.
The law has not changed in over 200 years, because receiving commissions and payments is seen as a form of corruption. They undermine trust in business transactions.
Recovery proceedings are available in the civil courts. Companies do not need to rely on the criminal law to take action.
We're business solicitors, advising businesses on recovery of secret commissions paid to agent without their knowledge.
We've advised media, manufacturing and technology companies on taking steps to make things right, and require agents to correct situations so as that they are as they should have been from the beginning.
If you're ready to take steps to recover secret commissions and make the situation right, call us on +44 20 7036 9282 or email us at contact@hallellis.co.uk to speak to a solicitor.