A recent decision on fiduciary liability, the duty of loyalty and consequences for corporate relationships

How ‘commercial’ really is the relationship between a finance lender and its customers? To what extent should a lender be expected to set aside its own commercial concerns in the interests of its clients? Fiduciary liability is an oft-litigated topic: useful for its flexibility, but often confusing for clients, barristers and solicitors alike for its wide-ranging application. The recent Supreme Court decision in Hopcraft v Closebrothers adds useful texture to this commercially vital concept.

Background

A number of motor car lenders had paid undisclosed (or only partially disclosed) commissions to dealers in car finance transactions. Customers who had purchased cars on finance agreements on the advice of the dealer in ignorance of this commission contested the legality of this.

Claims were brought against the lenders in equity for secret profit or in the tort of privacy, and for the declaration of a statutorily unfair relationship under section 140A of the Consumer Credit Act 1974 (the “CCA”). Although the sums in these particular cases were small, the prevalence of motor-finance lending and the potential consequences of a finding of a fiduciary relationship warranted Supreme Court determination. The customers had succeeded in the Court of Appeal on the basis of either the claim in tort or the equitable alternative. The lenders appealed to the Supreme Court.

Decision

The Court unanimously held that the claims against the lenders in equity and in tort could not succeed, allowing the lenders’ appeals, with the only remaining claim under the CCA succeeding. The decision presents a number of useful points for those practicing in the areas of financial regulation, consumer protection and corporate law.

Firstly, the Court offered a useful framework for the definition and application of ‘fiduciary relationship’, defining a fiduciary as ‘someone who has undertaken to act for or on behalf of another in circumstances which give rise to an obligation of single-minded loyalty, to the exclusion of the fiduciary’s own interests’ [89], quoting Millett LJ in Bristol and West Building Society v Mothew [1998]. The Court then set out that such a relationship is unlikely to arise in the context of commercial relationships, holding that it is inappropriate to expect a commercial party to subordinate their own interests. In affirming this definition, the Court presented an anchor point for the equitable remedies that flow from a finding of a fiduciary relationship.

Secondly, the Court held that such a relationship does not flow from the mere fact that an individual was (as in the case of the lenders in question) able to influence another person’s decision. It reaffirmed that the authorities state that for a claim in bribery to succeed, a fiduciary relationship is required, overturning the Court of Appeal’s decision in Wood v Commercial First Business Ltd [2022] Ch 123.

Thirdly, having drawn the parameters of a fiduciary relationship relatively tightly, the Court then went on to rule the relationship unfair under the Consumer Credit Act. Having used the commercial nature of the relationship between the parties to justify a finding of no fiduciary relationship between the parties (and thus the claims in tort and equity fell away), the Court then highlighted the non-commercial terms on which the parties were dealing as part of the unfair relationship finding. Although this formed part of a highly fact-sensitive nexus of reasons for the decision (as required by the CCA statute), by categorizing the relationship between the parties as ‘not commercial enough’ to evade CCA regulation, but ‘too commercial’ to give way to a fiduciary relationship between the parties, the Court may risk introducing further confusion into the already blurred parameters of fiduciary liability.

Conclusion

Although on its face confusing for its dualistic interpretation of ‘commercial relationship’, the judgment draws a bright line around consumer protection and financial regulation – where equity and tort will not answer the call, statutory relief can.

For practitioners in all aspects of consumer protection, it is clear that the discretion available to the Court under the statutory scheme of the CCA remains broad and open textured. Those engaging in third party transactions involving commission payments should be particularly careful when drawing up such agreements.

Note: This is a general summary of a recent judgment and is made available for general discussion purposes only between CANDEY and its clients and prospective clients. This memorandum does not constitute legal advice and must not be relied on as such. It should also not be cited as legal or academic authority.

CANDEY is a boutique litigation law firm with extensive experience and resources to evaluate and advise on commercial litigation. We frequently advise on financial regulation, the duties of lenders and fiduciary liability inside and outside of the commercial context.