European Union raises fundamental questions relating to the doctrine of parliamentary sovereignty

'It can be argued that the taking of a bribe by an agent destroys the very foundation of the agency contract and it is right that the principal should enjoy substantial remedies afforded by the law in such circumstances'.

Discuss the extent to which the judiciary take into consideration the two notions expounded in the above statement and by reference to the case law, examine the criteria relied on to determine what remedies should be made available to the principal.

Agency merely refers to the action of the principal delegating the rights of another to contract on their behalf. This is used in commercial transactions regularly, for example insurance brokers, mortgage brokers and loan agencies. The duties of an agent are; exercise due care and diligence in the performance of his duties; to render an account when required; not allow duty and interest to conflict, i.e. not to become a principal against his principal without disclosure ; not to make secret profit from his position; not to delegate his authority; and not to disclose confidential information. Therefore the duties are very similar to a trustee or a director. Therefore a situation of bribery indicates a situation of secret fraud and dishonesty, i.e. it is a breach of good faith therefore a fraudulent transaction. The following discussion will consider the basic duties of a director and the remedies for breach of duties, i.e. making secret profits and fraud and then consider the similarity to agents.

It will then consider equity, the duties that are imposed on a director and the remedies that are available to the shareholder in a case of misconduct. The conclusion will then consider deeper the changes in company law and consider if this is due to the deficiencies in the law - should the director be fair-spirited in personal transactions, if so should the enforcement be stricter than the present law? Also the duty that the director holds to the company and subsequently to the other shareholders, in this case the other directors is the same as the trustee that is owed to the beneficiary. Therefore the first section will consider the duty of directors to efficiently monitor the actions of other directors rather than relying on their goodwill.

The director owes a fiduciary duty to the company as a whole, which is strictly adhered to in Regal (Hastings) Ltd v Gulliver . This creates a limitation in the extent that the law of equity can protect the individual shareholder’s interest, because it means that the company must bring a claim . This can cause problems in the case that all the directors enjoy a personal interest in the transaction and therefore leading to a situation where there is no one in the company prepared to take action against the directors. This has lead the law to make exceptions, but these exceptions are not for the interest of the shareholders but for creditors  and employees . Therefore as long as the director believes he is acting in the best interest as the company then he can use and dispose of company property as he wishes.  In addition in personally interested transactions, as long as the company is notified and the board agrees, that are in the best interests of the company and for proper purposes, i.e. not fraudulent, negligent or reckless, are seen as perfectly valid . If the director is to make profit from valid personal dealings this then must be fully disclosed, otherwise he would be in breach of his fiduciary duty to the company ; even if the company could not have made profit without this dealing

Therefore any profit needs to be disclosed, therefore taking a bribe would be a breach of this trust and the equitable remedy available for the company is that any director that makes an unauthorised investment due to a bribe is liable to pay the amount of the bribe and any profits made from it to the company.  Therefore this case created a constructive trust for the company due to the wrong doing of the director because bribery is seen as an evil practice. This is the case for all situations of fiduciary duty and the role of equity. In the case of insurance law this is legislated for the acts of the person seeking insurance and the agent of the principal.  Utmost good faith refers specifically to insurance law; whereby the insured must disclose all the material facts otherwise the insured can vitiate the contract. The concept of good faith is present within all types of contracts whereby it refers to the honest intent to act without taking an unfair advantage over the other person within the contract. In the area of insurance law it is essential for the insuree to notify the insurer of all applicable information because this will effect if the policy can be made and the amount of the policy. This is because the insuree is in the position of power as they know all the information and their duty is to disclose it, i.e. owe a fiduciary duty. The notion of utmost good faith has been lately used to expand the protection for the insurer from pre-contractual fraud to include post-contractual fraud as well. However in the Sea Star Case  it was determined that this section of the Marine Insurance Act can only apply up to the signing of the contract, as it refers to the elements of a valid contract. Fraudulent acts after the signing or non-disclosure is not provided by Section 17, as a valid contract is apparent. Therefore the insurer has to use equitable remedies or other defences provided within insurance law, i.e. any profit made will be payable back to the principle.

Section 19 refers to the scenario whereby agents are affecting the insurance for the insuree, i.e. middle-man/insurance brokers. This section provides that this duty moves to the insurance brokers, as they are setting the contract with the insured and the insuree. There is no duty for the insurer to investigate the circumstances as this is the role of the agents and if they fail in their duty not only does the contract become void, but there are other possible avenues that the insurer can take because of the negligence/fraud of the insurance broker, i.e. they have breached their duty and recompense is available. The higher duty of care that the insurance broker holds is due to their further knowledge in the area, i.e. it is no longer a circumstance of a company and an individual rather it is the circumstance of two companies or competent businessmen.  This higher duty of care is apparent in equity of all types of agents whereby if profit is made via fraud/bribery it must be paid to the principle plus any subsequent profits whereas the person who offers the bribe only has to pay the profits with exclusion of what would have been made anyway. This was the case in Fyffes Group Ltd and Others v Templeman and Others  because it was seen as just that the agent who owed a fiduciary duty pay a higher cost, but it was seen as unjust enrichment of the injured party to receive the same amount from the person who offered the bribe. This illustrates that the courts will create constructive trusts to justify equity’s needs for justice and if one owes a higher duty the penalties are tougher, which is important to create fair competition and pricing for all consumers.

Bibliography:

  • N. Bridge, 2004, Directors Behaving Badly, NLJ 154(7129)
  • Charlesworth and Morse, 1999, Company Law, Sweet & Maxwell
  • Department of Trade and Industry can be found at: www.dti.gov.uk
  • R. Edwards & N. Stockwell (2002) Trusts and Equity, Harlow England, Longman
  • Farrar et al, 1998, Farrar's Company Law 4th Edition, Butterworths
  • Paul L Davies, 2003, Gower's Principles of Modern Company Law (7th Edition), Sweet & Maxwell
  • The Insolvency Service can be found at: www.insolvency.gov.uk
  • Keenan and Bisacre, 1999, Company Law (with Scottish supplement), Prentice Hall
  • J. Martin (2001) Hanbury and Martin: Modern Equity (16th Edition), London, Sweet & Maxwell
  • Pillans and Bourne, 1999, Scottish Company Law, Cavendish
  • Sealy, 2001, Cases and Materials in Company Law, LexisNexis UK

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