Wood v Commercial First Business (2021) – Court shines a light on secret commissions
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Wood v Commercial First Business Ltd & Others, and Business Mortgage Finance 4 plc v Pengelly [2021] EWCA Civ 471
Summary
The Court of Appeal held that it is not necessary to have a fiduciary duty in secret commission cases. In two cases that went together to the Court of Appeal, three key issues surrounding judiciary relationships and, secret and half-secret commission ruled in favour of two borrowers with the same broker.
Introduction
The background to both cases was extremely similar and involved the same broker; the original mortgagee for both Mrs Wood and Mr Pengelly was Commercial First Business Ltd and the broker was UK Mortgage and Financial Services Ltd (the “Broker”). Mrs Wood and Mr Pengelly (referred to collectively as the “Borrowers”) both had different appeal cases but they raised common issues on whether a fiduciary relationship was required between borrower and broker.
Wood – two mortgages on 26th May 2006 and 12th July 2007 respectively, as well as a further advance under the first mortgage on 30th November 2007 were taken out by Mrs Wood against her farms. Wood paid a fee to the Broker in respect to a first mortgage and the further advance, but for the second mortgage, no broker’s fee was paid. However, the Broker received commission from Commercial First Business Ltd (CFBL) in relation to both mortgages and the further advance – 3% for the first mortgage and 4% for the second and further advance. CFBL disclosed neither the fact nor the amount of these payments to Wood, as they required the Broker to do so.
Pengelly – after trying to raise capital and obtain more competitive interest rates, a single commercial mortgage was taken out by Mr Pengelly on 11th January 2006 on the advice of the Broker, which was secured against a barn on Pengelly’s farm. The mortgage was originally with CFBL, and later reassigned to Business Mortgage Finance 4 plc (Finance 4). Pengelly proceeded to pay a Broker Fee. The Broker received commission from CFBL, at 3% of the advance. Like with Mrs Wood, CFBL disclosed neither the fact nor the amount of these payments, as they required the Broker to do so.
Being that all of the mortgages were commercial, they were unregulated. In both cases, the Borrowers then defaulted on the loans and subsequently the Lenders commenced enforcement proceedings, which were met with counter-claims for rescission and recovery of payments as secret profits by the Borrowers. In Wood v Commercial First, the court ruled in Mrs Wood’s favour and rescinded the mortgage. In Business Mortgage Finance 4 Plc v Pengelly, the county court rejected Mr Pengelly’s counterclaim for rescission in its entirety. On appeal to the High Court, however, the claim for rescission was granted, after which the Lenders for both appealed.
Though the High Court both came to the same conclusion for the cases, which were both governed by the same Broker’s terms and conditions, the reasoning was different. In Wood v Commercial First the court found that they did not need to find a fiduciary relationship between borrower and broker to find liability for either party. In Business Mortgage Finance 4 Plc v Pengelly, the court held that a fiduciary relationship was required.
First Issue – “is a fiduciary relationship between the client and the broker a necessary pre-condition to the grant of relief against the payer of the undisclosed commission?
Second Issue – did a fiduciary relationship exist between the clients and the brokers in these cases?
Third Issue – are the commissions that were paid properly categorised as half-secret commissions?”
Judgement
First Issue – it was found that the “content of the duty, not the label attached to it, that matters” in establishing whether a relationship is fiduciary or not.
Second Issue – the Judge found that there was indeed a fiduciary relationship between both clients and broker.
Third Issue – the commissions were categorised as “fully secret” commissions, and the Lenders’ argument that a clause in the Broker’s terms and conditions rendered them half-secret was dismissed.
All appeals were therefore dismissed. Whilst – in accordance with the first issue – the Court held that a fiduciary relationship was not a precondition to the settling of rescission, the Judge gave the opinion that it is the “duty to be impartial and honest that matters”, as well as the “content of the duty, not the label attached to it” that should determine whether a fiduciary duty is owed. The implication of the “duty to be impartial” potentially softens the need to find an actual fiduciary relationship and instead that there needs to be a duty to offer “disinterested advice”, as was shown in cases like Prince Arthur Ikpechukwu Eze v Conway [2019] EWCA Civ 88.
In relation to the second issue, David Richards LJ relied on the trust and confidence of the Borrowers in the agent and stated that on the basis of the findings, as the contract applied to bribes and secret commission, the Broker owed a fiduciary duty to both of the Borrowers as principals. The Court held that the approach taken in Hurstanger Ltd v Wilson [2007] EWCA Civ 299, [2007] 1 WLR 2351 to partial disclosure. However, the Judge made it known that a fiduciary relationship was not a pre-condition for relief against the payer of undisclosed commission to the broker.
Pursuant to the Broker’s following identical terms for the Borrowers:
“Before you take out a mortgage, we will tell you the amount of the fee in writing. If the fee is less than £250, we will confirm that we will receive up to this amount. If the fee is £250 or more, we will tell you the exact amount”,
and in conjunction with the evidence that neither Borrower received any remnant of written notification, the Court found that they could assume that no such fee had been paid. As this was the case, the commission was found to be “fully secret”. Furthermore, David Richards LJ held that if reliance on the wording of a clause was to be had, the Broker would have to alert their clients to such, and so the final issue was also dismissed.
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