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16 July 2019
Following the Court of Appeal's decision in Staechelin v ACLBDD,(1) if an agent sells a principal's property and fails to disclose to the principal that it received a higher offer for the property, it will not lose its commission unless it acted dishonestly or in bad faith. The court decided that this situation was not comparable to an agent forfeiting its commission as a result of receiving a secret profit from its position.
Acting on behalf of the defendant trustees, the agent entered into discussions with a Qatari royal family representative for the sale of a painting by the impressionist artist Paul Gauguin. In the course of protracted negotiations, the buyer's representative made a $230 million offer. The trustees eventually sold the painting to the buyer for $210 million and the agent claimed the agreed $10 million commission from the trustees.
The trustees refused to pay the commission on the basis that the agent had allegedly breached his fiduciary duty to disclose relevant information. They claimed that the agent had failed to tell them that a statement by the buyer's representative, made shortly before the sale, that the buyer had not made a $230 million offer earlier in the negotiations was false. The agent sought payment of the commission.
The court decided that an agent will be deprived of its commission only if it fails to pass on relevant information dishonestly and in bad faith. The court considered that fiduciary duties are imposed to ensure that an agent is loyal to the principal. An agent may fail to pass on information through incompetence but still be faithful to the principal. In these circumstances, an agent should not be deprived of its commission (although a principal may have a claim against the agent for damages caused by the breach of any contractual duty to disclose information).
This is to be contrasted with a situation in which an agent secretly receives a profit from its engagement which it conceals from the principal. In that case, the agent would forfeit its commission because it acted dishonestly.
Although the court did not determine whether the agent had in fact breached his fiduciary duty, it seems doubtful that it would have concluded that a breach had occurred, not least as the trial judge found that one of the trustees had known about the previous $230 million offer. The trustee had also asked the buyer to send the email saying that it had not made the higher offer to:
An agent will be deprived of its commission on the basis of a breach of its fiduciary obligations only if it acts dishonestly and in bad faith. While the court did not decide the point, it seems unlikely that a principal will be able to use other equitable remedies unless the agent is dishonest. Agents should nonetheless be careful to pass relevant information to their principal, particularly if they are under a contractual obligation to do so.
Agents will make a greater error if they fail to record in writing the agreement reached in relation to the commission. In Staechelin, the court was satisfied that the $10 million commission had been orally agreed; however, the trustees' apparent attempts to avoid paying this commission are a reminder that it is always preferable to have a written agreement in place.
For further information on this topic please contact Emma West or Simon Hart at RPC by telephone (+44 20 3060 6000) or email (firstname.lastname@example.org or email@example.com). The RPC website can be accessed at www.rpc.co.uk.
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