Court of Appeal

Published May 11, 2007

Hurstanger Ltd v Wilson and Another

Before Lord Justice Waller, Lord Justice Tuckey and Lord Justice Jacob Judgment April 4, 2007 Where a lender knew that a broker acted on behalf of a borrower and agreed to pay the broker commission, the borrower had to give informed consent.

A lender who did not pay a secret commission but procured the broker’s breach of fiduciary duty by failing to obtain the borrower’s informed consent was liable in a claim by the borrower for equitable compensation.

The Court of Appeal so stated in: (i) dismissing the appeal of Delroy Wilson and dismissing the appeal of Hurstanger Ltd against a decision by Mr Recorder Michael Douglas, QC, in Coventry County Court on April 28, 2006 that a loan agreement between them contained a prescribed term correctly stating how the borrowers, Mr Wilson and his partner Ms Pauline Burton, were to discharge their repayment obligations and that the agreement did not state the amount of each repayment to be made. (ii) allowing the appeal of Mr Wilson against the decision that there had been no secret commission paid by Hurstanger to the defendants’ broker.

Mr Bradley Say for Mr Wilson; Mr Thomas Seymour for Hurstanger; Ms Burton did not appear and was not represented.

LORD JUSTICE TUCKEY said that the relevant prescribed term was found in the Consumer Credit (Agreements) Regulations (SI 1983 No 1553).

Paragraph 5 of Schedule 6 stated what the agreement had to contain and gave a significant degree of flexibility about the way in which the agreement might deal with the debtor’s obligations.

The requirement was simply to state how the debtor was to discharge his obligations. There was no express requirement to state the amount of any repayment, provided the agreement otherwise stated what was required by paragraph 5.

Schedule 1 set out the information an agreement was required to contain. Noncompliance meant the court had discretionary power under section 65(1) of the Consumer Credit Act 1974 to order enforcement of the agreement. The requirements of paragraph 13 of Schedule 1 were more precise and demanding than those of paragraph 5 of Schedule 6.

Here the interest was stated only as a rate. It did not tell the borrower the amount to be repaid but left the calculation to him.

Stating the manner in which the amount to be repaid was to be determined was sufficient for Schedule 6(5) but not, in his Lordship’s judgment, for Schedule 1(13). Secret commission An agent who received commission without the informed consent of his principal would be in breach of fiduciary duty. A third party paying commission knowing of the agency would be an accessory to such a breach.

The remedies for breach of fiduciary duty were equitable and included rescission and compensation. What amounted to sufficient disclosure for those purposes?

Bowstead on Agency (18th edition (2006) paragraph 6-057) was an accurate statement of what amounted to sufficient disclosure. It depended on on the facts of each case given that the requirement was for the principal’s informed consent to his agent acting with a potential conflict of interest.

There was some doubt as to whether the agent’s duty of disclosure required him to disclose to his principal the amount of the commission he was to receive from the other party.

His Lordship thought that the requirement was more special than that enunciated in Bowstead (at paragraph 6-084). Borrowers like the defendants coming to the nonstatus lending market were likely to be vulnerable and unsophisticated.

A statement of the amount which their broker was to receive from the lender was, his Lordship thought, necessary to bring home to such borrowers the potential conflict of interest. Obviously, if there had been no disclosure the agent would have received a secret commission.

Logically, his Lordship could see no objection to a halfway house between the situation where there had been sufficient disclosure to negate secrecy, but nevertheless the principal’s informed consent had not been obtained.

Where there had only been partial or inadequate disclosure but it was sufficient to negate secrecy, it would be unfair to visit the agent and any third party involved with a finding of fraud and other consequences or, conversely, to acquit them altogether for their involvement in what would still be breach of fiduciary duty unless informed consent had been obtained.

There was no authority which shed any light on the question. Bartram and Sons v Lloyd ((1904) 90 LT 357) turned upon whether the principal had made his election with full knowledge of the material facts and not upon the consequences of an inadequate initial disclosure.

The present case was a halfway house case. The claimant did not pay the broker a secret commission but procured the broker’s breach of fiduciary duty by failing to obtain the defendants’ informed consent to the broker acting in the way he did.

The court had to consider the appropriate remedy for breach of fiduciary duty for which purely equitable relief was available. The court had a discretion whether or not to grant rescission: see Johnson v EBS Pensioners Trustees Ltd ([2002] Ll Rep PN 309).

As no claim was made against the broker to account to the defendants for the £240 commission received from the claimant, the defendants had a claim for equitable compensation against the claimant as it procured the broker’s breach of fiduciary duty. That mirrored the common law right to claim the return of a bribe as money had and received.

His Lordship thought the defendants were entitled to interest on the £240 from the date it was received. To rescind the loan transaction altogether would be unfair and disproportionate.

Lord Justice Jacob and Lord Justice Waller agreed.

Solicitors: Heer Manak, Coventry; Butcher Burns, Bloomsbury.

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