Fiduciary obligations and secret commissions

18th April 2019

Nick Pointon

Nick Pointon looks at the Court of Appeal’s decision in Medsted v Canaccord Genuity Wealth [2019] EWCA Civ 83 and its implications for the law concerning fiduciary obligations and secret commissions.

In Medsted Associates Ltd v Canaccord Genuity Wealth (International) Ltd [2019] EWCA Civ 83 the Court of Appeal considered the scope of the fiduciary duties owed by an introducing broker, and the secrecy or otherwise of their commissions, in the world of international investment.

Medsted is a BVI company which conducts business as an introducing broker. Canaccord is a Guernsey company which conducts business as an investment institution. Medsted introduced a number of wealthy Greek individual investors to Canaccord, to trade in contracts for difference (“CFDs”).

The investors contracted directly with Canaccord and paid nothing to Medsted. Canaccord generated income by charging a commission on opening and closing the CFD and a daily financing charge for keeping the position open.

Medsted received a share of these charges from Canaccord by way of commission. The investors were told that Medsted would receive a commission but were not told how much that commission was.

By March 2010 Medsted had introduced 16 investors to Canaccord and Canaccord was paying Medsted a share of the income generated on those investments in commission. Keen to cut out the middle man and increase its own revenue, Canaccord secretly agreed with a number of investors to open new accounts without telling Medsted, and to hide trades from Medsted by putting them through these accounts.

Medsted got wind of this and sued Canaccord for its lost commissions. Teare J, at first instance, found that Canaccord had acted in breach of contract but held that Medsted were entitled to only nominal damages because of their own related breach of fiduciary duty in failing to disclose the extent of their commission to the investors in the first place.

The Court of Appeal allowed Medsted’s appeal, holding that (1) even if Medsted occupied a fiduciary position towards the investors, its fiduciary obligations did not extend to require it to disclose the extent of its commission; and (2) in any event, as a matter of public policy, there was no basis for limiting Medsted to nominal damages here.

Fiduciary obligations

It is trite law that a fiduciary must not receive a secret commission, but it is less clear what amounts to “secret” in this context.

Longmore LJ considered at length the nature of the relationship between introducer and investor in this context. Finding it to be fiduciary in character, he went on to hold that “the scope of the fiduciary duty is limited where the principal knows that his agent is being remunerated by the opposite party” (at [42]). In this case the duty was limited so as to require disclosure of the existence, but not the extent, of Medsted’s commission. Consequently Medsted was not in breach of fiduciary duty in the first place, and so there was no basis for rendering damages nominal only.

The judgment is interesting for Longmore LJ’s discussion of the circumstances in which the fiduciary obligations of a broker may go further and require fuller disclosure of the amount of any commission earned. The relevant principles can be summarized as follows:

  • A broker occupying a fiduciary position cannot receive a secret commission. But the level of disclosure required of the broker depends upon the circumstances of the case.
  • In the ordinary case a broker need only disclose the fact of that commission, and not its amount, in order to avoid breaching his fiduciary obligations.
  • In some circumstance those fiduciary obligations will be stronger, requiring the fiduciary to disclose the amount of his commission too. Such circumstances include dealings unsophisticated or vulnerable investors.

Where an “enhanced” obligation requires disclosure of the amount of the broker’s commission, disclosure of the existence (but not the amount) of the commission will prevent it from being a “secret commission” but will still amount to a breach of fiduciary obligation. The practical consequence of this halfway house is that the claimant is not entitled to the enhanced proprietary remedies available for secret commissions (following FHR European Ventures LLP v Mankarious [2015] AC 250), but is still entitled to damages (or equitable compensation) for breach of fiduciary duty. Indeed this was the outcome reached in the earlier case of Hurstanger Ltd v Wilson [2007] 1 WLR 2351, in which an ordinary consumer (an unsophisticated investor) was introduced to a lender via a broker in receipt of a disclosed but understated commission.

The upshot of the decision is that care must be taken in analysing the specific scope of any fiduciary obligations owed by a broker or other agent. The simple fact of being a fiduciary does not necessarily entail an obligation to disclose the full extent (rather than mere existence) of an otherwise secret commission.

Public policy and illegality

The decision to cap damages at a nominal sum was an application of the maxim ex turpi causa non oritur action – the illegality doctrine. At first instance Teare J held that it would offend the public policy imperatives underlying that doctrine to permit Medsted to recover more than nominal damages where the circumstances of that loss were so closely connected to their own breach of fiduciary obligation in failing to disclose the full extent of the commission earned from Canaccord.

On appeal it was unnecessary to address this issue, having already resolved that Medsted did not owe (and so could not have breached) any fiduciary obligation to disclose the amount of their commission. Nevertheless Longmore LJ addressed the point briefly (at [48] – [51]), suggesting (without reaching any conclusion) that even if Medsted had been in breach of fiduciary obligation it would have been a disproportionate reaction to cap damages at a nominal level.

For Longmore LJ it was important to consider the requirement imposed by the Supreme Court in Patel v Mirza [2017] AC 467, that non-recovery of damages would be a proportionate response to any illegality. Having regard to the fact that Canaccord agreed to pay commission to Medsted knowing that the extent of it would be kept secret from the investor clients, Longmore LJ felt that it would be disproportionate to allow Canaccord to avail itself of an illegality defence based on those same facts.


The case underscores the need to be careful when considering the scope and content of fiduciary obligations. The level of disclosure of commissions required by agents will depend upon the circumstances of their agency.

The decision also suggests that the proportionality element introduced into the illegality defence by Patel v Mirza [2017] AC 467 will prevent defendants from crying “illegality” where they have knowledge of, or acquiesced in, the circumstances underlying any wrongdoing.

Permission to appeal to the Supreme Court was refused. It is not yet known whether the application will be renewed to the Supreme Court itself.

In brief…

  • A broker occupying a fiduciary position must ordinarily disclose the existence (but not the extent) of any commission received.
  • In some circumstances (e.g. dealings with unsophisticated or vulnerable investors) the fiduciary obligation of disclosure will be stronger, requiring the broker to disclose the extent of his commission.
  • Where an “enhanced” disclosure obligation applies, disclosure of the existence (but not the extent) of commission will be a breach of fiduciary duty but the commission will no longer be “secret”. The principal will be entitled to damages / equitable compensation, but not to the enhanced proprietary remedies available in bribery / secret commission cases.

Nick Pointon
20th April 2019

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