Secret Commissions in IT Contracts

Author:Tim Vollans
Position:Principal Lecturer, Coventry University Law School Faculty of Business, Environment and Society, Coventry email: t.vollans@coventry.ac.uk
Pages:73-81

Page 73

1. Introduction

The Penguin Dictionary of Modern Quotations attributes the quotation "a verbal contract isn't worth the paper it's written on" to Sam Goldwyn and that illustrates the evidential difficulties of establishing all the terms of a contract. Also, it cuts to the heart of business relationships: that, in business, trustworthiness or "character", as Sir Alan Sugar described it in The Apprentice (Broadcast BBC 1, Wednesday, 3rd June 2009) is more important than a mere piece of paper. This is particularly important where oral variations (or extensions) are effected to a written contract - a situation commonly occurring to reflect revised circumstances and to address unforeseen problems in IT provision. Although lawyers would always urge that such variations be fully documented and agreed, they do recognise that the reality is usually very different. Where the contract (irrespective of any variation or extensions) affords an unforeseen or undisclosed benefit to one of the contacting parties, the common law usually lets that benefit rest undisturbed.

However, the quiver of English Law contains not just Common Law but also Equity - the law operating on a man's conscience. Equity recognises that certain relationships are special and, as they can only operate on trust, necessitate fiduciary obligations engaging a higher, and rarely displaced, set of governing rules to manage that fiduciary nature. After their development immediately following the Provisions of Oxford (1258), the principles (Maxims) of Equity have remained remarkably constant - in marked contrast to the ever-changing scenarios and circumstances of their application. Imageview Management Ltd v. Kelvin Jack, although factually concerning a football club, an international footballer, an agent, and the regulation of work permits, clearly evidenced the Court of Appeal's broader principle of approach to fiduciary obligations generally and secret benefits in twenty-first century agency. There, Mummery LJ lamented (at para 65):

"that it is still necessary, in the 21stcentury, to remind agents of what was said by the greatest of all the judges, Bowen LJ in Boston Deep Sea Fishing at pages 362-363, about conflicts of duty and interest and the necessity for transparency in the dealings of agents, if confidence in them is to continue. In our age it is more important than it ever was for the courts to hold the precise and firm line drawn between payments openly, and therefore honestly, received by agents, and undeclared payments received by agents secretly, and therefore justly liable to all the legal consequences flowing from breaches of an agent's fiduciary obligations." Page 74

This paper briefly outlines the concept of agency in the context of a commercial IT contracts, describes the principle of fiduciary obligations and analyses their general application by the Court of Appeal to the specific context of secret commissions. It then addresses the issue of remedies consequent upon breach, and proceeds to argue that whilst acknowledging the continuing need of effective remedies for secret benefits, the judicial normative approach is restitutional rather than penal. It concludes by suggesting that the inclusion of a de minimis benefits provision would illuminate the existence of commissions, evidence agreement in advance, and thereby obviate unnecessary minor disputes.

2. The Concept of Agency

In its simplest articulation, agency is epitomised by one person acting for another to bring that person into a legal relationship with a third party. The agent metaphorically sits between the principal and a third party and has the ability to effect legal relations between the principal and third party; and the resultant contract is between the principal and the third party, so obviating the obstructive principle of privity of contract. However, as Mann J. demonstrated in Spearmint Rhino Ventures (UK) Limited v. The Commissioners for H.M. Revenue and Customs, simplicity risks masking the subtle complexities of agency and fails to illuminate its variety and diversity (reflecting its historical legal origins in contract, tort and equity). Whilst it is not surprising that academic commentators continue to struggle to agree on a single definition, the learned editors of Bowstead and Reynolds on Agency propose it to be a fiduciary relationship, with the consequentially burdensome fiduciary duties imposed on the agent as shown in Tesco Stores Ltd v. Simon Pook, Natasha Kersey Pook, Universal Projects (UK) Ltd. But this onerous fiduciary nature is a justified, if limited, counterbalance to the agent's power.

Agency was a common necessity in eras without real time global communication and where actual attendance of the principal was impractical or even impossible. Whilst some elements of the rationale for agency have diminished over the years, the use of agency in commercial contracts remains commonplace - not least in IT provision where several parties need to interact to achieve successful delivery. Typically, such contracts rely heavily on third party provision for the procurement of basic elements (e.g. hardware architecture, software design, data input) as well as for the development of more 'sophisticated' applications or features to satisfy commercial demands. At the simplest level, a large organisation (the principal) seeking a new IT system, might choose, for convenient and practical reasons, to appoint a consultant (agent) to review the available systems meeting the specification and to effect recommendations. Presuming the principal's acceptance of the agent's recommendation, the agent may then also negotiate for the principal the best contractual terms with the supplier (third party); and the resulting contract is between the principal and third party. Through the application of the rules of agency, and throughout this process, the agent's contractual nexal link remains with the principal to which the agent's duties were owed (and to the exclusion of any to third parties). Whilst the duties are fiduciary, their extent and nature remain subject to the terms of the underlying legal contractual agreement - as the High Court confirmed in Towcester Racecourse Co Ltd v. Racecourse Association Ltd. Thus, the fiduciary rules are not immutable but are protected, and whilst all of these obligations can be displaced by agreement between the principal and the agent, the playing field is tilted against the agent asserting any such displacement i.e. contra proferentem.

3. The Fiduciary Obligations

The agent is expected to behave in a manner reflecting respect for the commercial legal power to commit the principal to contracts. The principal can agree to the displacement or amendment of these fiduciary obligations, but there must be fully informed consent; and the burden is upon the agent to show not only the actual consent but also that the principal gave it willingly and after being fully informed. In outline, those duties include the expectation that the agent will carry out his duties personally, give to the principal a full and proper account of financial transactions, and furnish supporting documentation (Yasuda Fire and Marine Insurance Co of Europe Ltd v. Orion Marine Insurance Underwriting Agency Ltd). One consequence is that the agent needs to be adequately involved in the agency to be able to do so, hence the rule delegatus non potest delegare - that the agent (where an individual) should act personally (and not leave the work to others) without the principal's consent (Quebec and Richmond Railway Ltd v. Quinn), unless it is customary (De Bussche v. Alt), or there is an emergency, or where the work requires no discretion (Allam & Co Ltd v. Europa Poster Services Ltd ), and keep the principal's business confidential (Faccenda Chicken Ltd v. Fowler). Although the issue of delegation where the agent is a corporate structure has not taxed the courts, it might be thought that as equity operates on a man's Page 75 conscience, and clearly there is no one 'man' where the agent is corporate, the rule has no application; but the better view, is that if the core personnel of the corporate structure are material to the selection of the (corporate) agent, then that personnel is burdened with the fiduciary obligation not to delegate.

The overriding imperative is that the agent acts in good faith; and in the financial context, that obligation is characterised by the duty to avoid conflict of financial interest such as not profiting from entrusted property (Shallcross v. Oldham) or information (Regal (Hastings) Ltd v. Gulliver), not making secret profits (English v. Dedham Vale Properties Ltd), not...

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