Agent’s Breach of Fiduciary Duty to Vendor Entitled Vendor to Agent’s £744,035.02 Commission on the Resale

To cite the Judge in the case that follows: ‘Many commercial property transactions involve local agents and developers and they will tend to know each other. An agent (A) will frequently have a contact book that he can exploit for the benefit of a vendor (V). Many of the contacts in that book, who might become purchasers (P), might also be former clients of the agent. In one sense it is therefore in the interest of the vendor to use an agent who has strong local connections and who can, through using his local contacts and goodwill, identify potential purchasers and introduce them to the property in question. And of course once the sale is over there may very well be ongoing work for a good and competent agent now acting for a new client, viz., the purchaser.

But this conceals a problem which is that an agent who has an interest in the transaction from both sides of the negotiating table has a clear conflict of interest. The vendor wants to sell for the highest price; the purchaser wants to buy for the lowest price. The incentives operating upon the agent can depend upon the nature and structure of the fee arrangement. A fee structure can operate to create a powerful incentive on an agent to favour the Vendor or P and he might fashion his advice accordingly. From V’s point of view if A is also advising P then A might not loyally be seeking the highest price possible. He might also be using information of a commercial or confidential nature which belongs to V and which A has acquired only by virtue of acting for V, but which could be of real value if communicated to P.

This value could lie in P negotiating a lower price in the sale from V and/or at a later stage when P wishes to sell the property on, or develop it, or otherwise exploit it for commercial gain.

It is important also to recognise that the point in time at which a conflict might arise can be well before A actually negotiates a fee arrangement with P. If A seeks, speculatively, to procure P as a client then A might well promote himself upon the basis of the “inside track” knowledge that he has of V. That information might be valuable to P in deciding upon the optimal level of offer to make to secure the purchase; but the information might be proprietary to V and be in the possession A only because of his retainer from V. For instance it might relate to problems that V is facing in negotiations with individual officials in the planning authority or financial pressure imposed on V by its bank or creditors, which make it anxious to sell and prepared to accept a low offer.

If A is actively soliciting instructions from P then he risks putting himself in a position of conflict because his personal interest runs in the opposite direction to his duty of loyalty to his principal (his existing client).

The solution to the conflicts which arise is full disclosure by A so that all parties become fully aware of the position that their agent is in. Disclosure might enable V to impose limitations or conditions upon A’s dealings with P. If the principals accept the position then the agent is secure from an allegation of breach of fiduciary duty.

Because of the advantages that can accrue from an agent who uses his skill and contacts to bring sellers and buyers together, the respective principals might well be content to approve the agent’s dual role possibly subject to conditions. Generally, it will be the consent of the first principal (usually V) that is critical because the second principal (P) will almost invariably be fully aware that A is instructed for the vendor and indeed that might be the very reason that makes A attractive to P in the first place. But the key is disclosure – “sunlight bleaches”.’

In the case of The Northampton Regional Livestock Centre Co Ltd v Cowling & Anor [2014] V advised by A had sold the site to P for £2.25m. P again advised by A had on the same day completed the site’s sale to Kilmartin Ltd for £5m. So P turned a profit of £2.75m on the same day without any material outlay on their part.

A had during August 2005 been providing information belonging to V to P that would have been of use to them in formulating their offer to V for the Site; and (ii), on 31st August 2005 A made a fee agreement with P which entitled A to one third of the difference between the price at which P bought off V and P’s resale price. So as a result of the sale, A had became entitled to one third of the uplift, i.e. £744,035.02.

The Court was quite clear that A should have made full disclosure of all these facts to P.

This was necessary because had that been disclosed in advance V might have taken a number of protective steps. It might, for instance, have objected upon the basis that in providing this information and advice he would be divulging commercially valuable information that he had only acquired by virtue of this long association with V by virtue of his partnership in the Estate Agency.

He thereby risked compromising the ability of V to obtain the best price from P for the Site. They might, by way of further example, have terminated his agency to act for V.

A placed himself in breach of his duty when he placed himself in the position of conflict and before and irrespective of any loss by V.

A was accordingly liable to V for the amount of his commission on resale i.e. £744,035.02.

V also sued A’s former partner but under the Partnership Act 1890 but it was found that A’s unauthorised conduct in relation to P was” sufficiently divorced from the ordinary business of” the partnership to not be “in the ordinary course of it’s business. This is closer to the “frolic of own” cases and to cases of dishonesty or malpractice where case law suggested were outside the scope of vicarious liability in cases of negligence etc. Therefore the former partner was not vicariously liable for the breach of fiduciary duty on the part of A.

This blog is posted out of general interest and does not replace the need to obtain proper legal advice in individual cases.