Does everybody in the financial services industry fully understand the concept of agency law and how it might affect the way they conduct their business and earn their money? The issue could surely not be more pertinent than today, when even the most hardened supporters of capitalism (of which in general I count myself one) have been badly shaken by the unfolding revelations of how the financial world lent and traded its way into the current global mess.
Having confessed to feeling outraged by the recent behaviour of many banks, a prominent barrister of my acquaintance recently sent me a judgment from the Court of Appeal that lays out, with splendid clarity, the principles that the law applies to anyone who acts as – and is paid to be – an agent of another person. The implications should not, one hopes, be lost on anyone who acts for clients in financial services.
The law sets out clear standards by which an agent’s behaviour and remuneration should be judged, and has done so consistently, as this recent judgment makes clear, since as far back as the 19th century. In an ideal world every agent would uphold these principles by choice, not just as a matter of professional and fiduciary duty, let alone because some regulator had told them to do so, but for reasons of personal integrity and observance of the law.
The case in question, on which judgment was handed down last month, concerns the case of a footballer, Trinidad and Tobago’s international goalkeeper at the time, who fell into dispute with his agent after agreeing a move to Dundee United. The world of football agents is one of the murkier areas of modern commercial life, but some might feel that drawing comparisons with the recent behaviour of, say, subprime lenders and brokers is no longer as far-fetched as might once have been thought.
The agent negotiated a move to Dundee United in return for a 10 per cent cut of the footballer’s salary, but then subsequently agreed a separate, undisclosed deal with the football club that enabled him also to be paid for arranging a work permit for the player. This second deal was worth £3,000 (€3,286, $4,414), about £200 less than a full year’s commission on the player’s salary, and several times the true value of work involved in the work permit application.
When the player found out about the agent’s separate deal with the club, he stopped paying the agent his 10 per cent cut and took the matter to law, claiming both the agency fees he had paid and the £3,000 work permit fee as well. (How a dispute involving such small sums managed to travel to the Court of Appeal is an interesting question. As a taxpayer, one has to assume that the courts felt moved to justify the expense by the need, once more, to restate the principles of agency law to a wider audience).
The three judges sitting on the case decided unanimously to find against the agent, and declared that he was not entitled to any of the money that he had earned from either transaction. Their judgment is a brilliant summary of the law’s findings on agency law down the years, starting with the landmark case of Boston Deep Sea Fishing v Ansell (1888) and three further important cases in 1903, 1923 and 1925. Of these, perhaps to nobody’s surprise, two involved estate agents and the third revolved around the sale of mineral rights in the Forest of Dean.
In the latter case, one of several magisterial precedents on which the Court of Appeal relied for its recent judgment, Lord Justice Scrutton laid down the law as follows: “An agent must not take remuneration from the other side without both disclosure to and consent from his principal. If he does take such remuneration he acts so adversely to this employer that he forfeits all remuneration from the employer, although the employer takes the benefit and has not suffered a loss by it.”
In another case Lord Atkin, better known for a famous judgment on negligence, said the courts always maintained “a very high standard of conduct on the part of agents”, and did so in part because the standards were often broken, “not by honourable men in commerce, but by a great many men engaged in mercantile transactions”.
Lord Justice Jacob, in the most recent case, pronounced as follows: “The law imposes on agents high standards . . . If you undertake to act for a man, you must act 100 per cent body and soul for him. You must act as if you were him. Your must not allow your own interest to get in the way without telling him. An undisclosed but realistic possibility of a conflict of interest is a breach of your duty of good faith to your client.”
If the principles of agency law are not well known today in the financial world, it is time they were. The one common theme that runs through the successive judgments cited by the Court of Appeal is that the principles of an agent’s duty cannot be repeated too often. As Lord Justice Scrutton concluded in the 1923 mineral rights case: “I hope it [agency law] is thoroughly understood in London; and if it is not thoroughly understood in the Forest of Dean, then the sooner it is understood there the better.” Today he might, alas, feel moved to reverse the geography, but not the sentiment.
A copy of the full judgment has been posted on Jonathan Davis’ blog www.independent-investor.com.
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