Knowledge of bribery, liability in equity and enforceability of contracts

Published: 2/11/2017

The Court of Appeal has delivered an interesting and important judgment concerning the extent of knowledge of bribery needed to impose liability in equity.

In the case of UBS AG (London Branch) and another v Kommunale Wasserwerke Leipzig GmbH [2017] EWCA Civ 1567, the Court of Appeal (CoA) considered a number of issues relating to the enforceability of contracts for the acquisition of certain complex derivative products that had been facilitated by secret payments.

The CoA upheld a first instance decision which found that a customer was entitled to rescind contractual debt obligations with a bank on the grounds of bribery and conflicts of interest, where bribes had been paid by a party other than the contracting bank.

The facts were relatively complicated but concerned the following:

  • A customer had been advised by its financial advisers to acquire certain complex derivative products from the bank and two intermediaries.
  • The customer was liable to the bank on certain defaults under the transaction and the bank sought payment.
  • The relationship between the customer and the financial advisers had been corrupt in that the advisers had bribed the customer's managing director to enter into the debt obligations.
  • The bank was unaware of that bribe, but it had reached its own secret and corrupt arrangement with the advisers whereby they would advise the bank's clients to enter into the debt obligations regardless of the clients' interests.

The judge at first instance held that the customer was entitled to rescind the debt obligations on the grounds of bribery and conflict of interests.

The CoA upheld the first instance decision and considered a number of legal questions.  Amongst the findings of the CoA included:

1.The financial advisers were not acting as the bank's agent when they paid the bribe.

The existence of a fiduciary relationship and duty (between the customer and the advisers) did not mean that the arrangement between the advisers and the bank was an agency arrangement of itself.  There were reasons pointing away from a relationship of agency between the bank and the advisors (by reference to the characteristics of agency relationships set out in Tonto Home Loans Australia Pty Ltd v Tavares [2011] NSWCA 389).  Ultimately, both the bank and the advisers had been acting for their own financial benefit; neither had been in a fiduciary relationship with the other.

2. The bribe rendered the debt obligations unenforceable.

The bank had dishonestly assisted in the advisers’ abuse of their fiduciary duty to the customer by entering into a secret arrangement with the advisers to further their own corrupt aims. 

The transaction with the customer came about only as a result of the bribe to its managing director. However, the bank’s conscience was affected not only by the corrupt agreement which it had reached with the advisers (of which it knew), but also by any other form of abuse (i.e. the bribe) which the customer’s agent (the advisors) might choose to deploy so as to conclude the transaction.  The bank’s conscience was therefore affected by the advisers’ bribe, with the result that it would be unconscionable for the bank to enforce the transaction against the customer.

3. The judge was right to find that rescission was justified by the advisers’ conflict of interests.

The knowledge attributable to the corrupt managing director of the customer (which was a company) would not be attributable to that company where the company claimed against the advisers (a third party) in respect of their involvement as an accessory to a breach of fiduciary duty by the customer’s own director.  Therefore, the knowledge of the customer’s corrupt managing director of the bribe and that the advisers had not given independent and disinterested advice regarding the transaction could not be attributed to the customer.  The customer could not therefore be taken to have consented to the conflict of interest that the advisers’ suffered from.

4. The judge was correct to grant rescission. 

The finding of the CoA that the bank was responsible in equity and not at law did not affect the decision of the first instance judge that rescission should be granted. In the circumstances, rescission was neither unfair nor disproportionate.

5. The judge had been right to reject the bank's deceit claim.

The bank had claimed that the deceit had caused it to suffer loss. However, the CoA, upon holding that the managing director’s knowledge could not be attributed to the customer  and that it could therefore not be vicariously liable for the fraudulent assertions about the transaction, concluded that the losses which the bank suffered on the transaction arose as a result of rescission of the debt obligation which had itself occurred on account of the bank’s own dishonest assistance in the advisers’ abuse of the fiduciary relationship with the customer.

Of the above highlighted points in the judgment of the CoA, the second is perhaps the most notable. The CoA considered the previous authorities on the degree of knowledge of a bribe or secret payment needed to render a contract unenforceable.  The analysis of previous case law which enabled the CoA to confirm the broad reach of accessory liability and the consequential effect on the validity and enforceability of contracts is important to note.  It is now established that where a party to an intended transaction deals with the other side’s agent secretly and dishonestly so as to assist the agent in breaching his fiduciary duties to the principal, that contracting party’s conscience may be affected not just by the form of abuse of which it was aware, but by any other form of abuse that the agent might employ as against its principal so as to conclude the transaction.


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