Shh…can you keep a (half) secret commission? Energy sector brokers beware…

Posted: 27/06/2024

In the energy sector, brokers have long plugged the gap between energy suppliers and consumers. While this arrangement has benefits for all parties, the existence (and extent of) the broker’s remuneration has sparked multiple disputes in the English courts. In high energy usage sectors like manufacturing, commercial real estate, and leisure, claims of this nature are expected to increase. Insolvency Practitioners should also be alive to these claims when taking office in companies in those sectors where brokers were used. This article considers the current legal position and assesses the likelihood of successful claims to recover secret or half-secret commissions. 

What is a secret commission?

A fully secret commission is where a broker and supplier (or lender) agree a commission which is kept secret from the customer. At common law and in equity, this kind of commission is treated in the same way as a bribe. There is no requirement for a fiduciary relationship to exist between the broker and the customer to establish civil liability. The only test the court will apply is whether the broker was under a duty to be ‘honest and impartial’[1]. In that instance, both the payer and the recipient of the commission have primary liability to the customer. The remedies for bribery or payment of a secret commission include recovery of the secret commission (known as ‘money had and received’), damages for fraud, and rescission of the underlying contract.

However, where the existence of the commission is disclosed but not the amount, this is termed a ‘half-secret’ commission. In this scenario, it is (arguably) necessary for a fiduciary relationship to exist to establish liability. The customer’s ability to recover the commission in this instance will depend on the amount of information disclosed about the commission, the relative vulnerability and sophistication of the customer, and the scope of any ‘informed consent’ given to its payment. Recent case law on this point has shed light on the way in which the courts are currently approaching these claims, although they are subject to appeal.

Key takeaways

Two recent High Court decisions demonstrate how difficult it can be to analyse the concepts of ‘informed consent’, the relative sophistication of customers, and the scope of any fiduciary duty. In Expert Tooling v Engie Power[2], the judge admitted that (emphasis added): ‘Absent the close analysis of the law which this case has demanded I would have instinctively assumed that, absent informed consent, the scope of a fiduciary's obligation extended not only to the disclosure of the fact of commission but also the amount. As can be seen, that is not, I think, where the case law takes one.’

While the decision in Expert Tooling is anticipated to be subject to appeal, the key points that can be derived from the current authorities are as follows:

• in half-secret commission cases, a fiduciary relationship in substance, if not in name, is likely to be required;
• the scope of the fiduciary relationship will always depend on the facts, but the relative sophistication and vulnerability of the parties will be a key consideration;
• in questions of informed consent, a customer’s awareness of the context of the transaction, and the general market practice in relation to commissions in the sector is likely to be relevant;
• informed consent and the scope of fiduciary duty are closely interlinked;
• the court is primarily interested in whether something has been ‘hidden’ from a customer or whether the information would have been freely provided, but the customer failed to enquire;
• turning a blind eye could amount to an intention to induce a breach for the purpose of accessory liability;
• quantum of the compensation is based on what the customer actually pays to the broker in respect of commission, rather than the amount paid by the energy supplier, which can be less due to set offs being applied.

Expert Tooling and Automation Ltd v Engie Power Ltd[3]

In Expert Tooling and Automation Ltd v Engie Power Ltd, the High Court considered a claim by a manufacturer, Expert Tooling, to recover ‘half-secret’ commissions paid to an energy broker, Utilitywise Plc. Expert Tooling knew that Utilitywise would receive a commission for five energy contracts. However, it did not know the amount or how the payment would be structured (ie that it would be added to the unit price paid by Expert Tooling) (a half-secret commission). Utilitywise subsequently went into administration and Expert Tooling brought claims against the energy supplier, Engie. Expert Tooling brought its claim in two ways: 

• a claim to recover the commission paid (as equitable compensation or money had and received) on the basis that Engie was an accessory to Utilitywise’s breach of its fiduciary duty; and
• a claim for inducement to breach of contract on the basis that Engie induced breach by Utilitywise of an implied term of good faith.

While both heads of claim failed at first instance, the case highlights how the courts are currently interpreting what constitutes a fiduciary relationship between the energy broker and client, and the requirement of informed consent, as well as the limitation issues to be considered. 

Limitation

The claim in relation to the first contract with Engie (in which 31% of the unit price was said to represent the commission payment, which dropped to 9% by the last contract) was commenced six years and seven weeks after the date of the contract. Expert Tooling claimed there was deliberate concealment of the facts giving rise to the cause of action (ie the amount of the commission and the ‘commission model’), meaning the claim could be brought in time under section 32 of the Limitation Act 1980. However, the court held that the claim under the first contract was time barred as there had been no intention by Engie to conceal the facts.

More fundamental to the court was that Expert Tooling was aware of the commission and all it had to do was ask what the commission was and how it was to be paid, and there was no reason to believe it would not have been told. This conclusion was also relevant to the court finding that Engie did not have liability as an accessory, which required dishonesty and an intention to induce breach. Although the court accepted that turning a blind eye could amount to an intention to induce a breach, it did not in this case due to the terms of the brokerage agreement referred to above.   

Fiduciary relationship and informed consent

The court determined that Utilitywise’s relationship with Expert Tooling was a fiduciary one. While its terms and conditions sought to negate the possibility of agency, the court rejected this interpretation, holding they were ‘wholly inconsistent’ with a letter of authority creating the agency. The court also held that simply because the payment of commission is common practice in the energy sector and did not confer any competitive advantage, this did not negate the possibility of the relationship being a fiduciary one. Rather, these were factors which were relevant instead to the question of informed consent.

The court recognised that the commission arrangement in this instance gave rise to a conflict of interest. Provided that the nature of that conflict fell within its fiduciary duty, Utilitywise would therefore be in breach unless it could prove that Expert Tooling had given its ‘informed consent’ to the arrangement, or that this was not required as a result of ‘trade custom and usage’.

Informed consent and the scope of the fiduciary duty (in which there is a very significant overlap) depended on the ‘specificity’ of Expert Tooling’s knowledge. Previous case law has established that where the customer is ‘vulnerable and unsophisticated’, a fiduciary duty is more likely to require disclosure of the amount of the commission, to ‘bring home’ the potential conflict of interest[4]. Where, however, those factors are not present, failure to disclose the level of commission may not amount to a breach of fiduciary duty.

Overall, the court concluded that given the level of sophistication (or perception thereof) displayed by Expert Tooling, and given the ‘customary rate’ of the commission in this case, Utilitywise was not obliged to inform Expert Tooling of the amount. If necessary, the court also concluded that in any event, Expert Tooling had given its informed consent. In coming to this conclusion on the ‘overlapping’ questions of informed consent and scope of fiduciary duty, the court relied on the following points:

• Expert Tooling knew commission was to be charged and that it was not paying that commission directly;
• Expert Tooling believed it was getting additional services (such as smart meters) which it could not have ‘seriously’ believed Engie would pay for;
• Engie’s contracts and Utilitywise’s terms and conditions referred to commission;
• the individuals at Expert Tooling negotiating the contracts were neither naive nor vulnerable; and
• the structure of the commission (adding to the unit cost) was a known industry practice.

McHale v Dunlop

In McHale v Dunlop & Anor[5], the court considered a claim by Mr McHale, an individual investor, to recover a half-secret commission from a financial advisor. Mr McHale’s primary claim was for negligent financial advice in relation to the investment of his pension savings. While that head of claim failed, Mr McHale succeeded in claiming for an account of profits on a half-secret commission. He successfully claimed that while he knew a commission was payable, he did not know the amount and further, that he had been offered a share of it. The court analysed his claim in two ways: 

• a claim for recovery of the specific agreement to a share of the commission promised; and
• a claim for recovery of the ‘half-secret’ commission arising from the breach of fiduciary duty.

Ultimately, the court concluded that both approaches led to the same conclusion. While Mr McHale did not fulfil the criteria of a ‘vulnerable or unsophisticated’ customer, the scope of Mr Dunlop’s fiduciary duty in this instance did require him to disclose the level of commission, because Mr McHale had been promised a certain share of the commission and had repeatedly asked about the level of commission. In those circumstances, Mr Dunlop’s duty extended to disclosing the precise amount, not just the existence of, his commission.

Interestingly, in this case the court also observed that ‘insofar as it is necessary’ to establish a fiduciary duty to bring a claim for a half-secret commission, it found that such a relationship existed. This seems to expand the observations in earlier case law that it is the ‘content’ of the duty rather than the label attaching to it that matters. Potentially, it may open the door for recovery of half-secret commissions even where a fiduciary relationship is not found.

Where next for half-secret commission claims?

As can be seen from these recent cases, the success of ‘half secret commission’ cases will depend upon the facts of each case and the outcome of any appeal of the Expert Tooling case, particularly in relation to issues such as what is required for the customer to be deemed to be ‘vulnerable or unsophisticated’. Given the clear direction from the courts that where vulnerable or unsophisticated consumers are concerned, disclosure not just of the existence of commission, but also the amount, is likely to be required, it seems likely that further litigation will ensue.

While awaiting the outcome and impact of any appeal in Expert Tooling in relation to half secret commission cases, there are still many more fully secret commission claims that are being pursued. These include those cases where the customer paid a fee to the broker in addition to the broker receiving a commission from the supplier. In these cases, the customer should be in a much stronger position, assuming there is no evidence of disclosure of the commission. This is because it will be difficult for the broker or energy supplier to argue that the customer must have known that the broker was being paid somehow, and that this was likely to be via commission from the supplier. 

However, in these circumstances, the customer may have assumed that the supplier had paid the broker, but this was not added directly to the unit price. These customers are also less likely to face the same limitation issues in Expert Tooling, as there would be no reason for the customer to use reasonable diligence to discover the commission if they considered the broker’s remuneration had been covered by the fee they had paid. 

If you have any queries about the topic, please get in touch with your usual Penningtons Manches Cooper contact or any of our expert group actions team.

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