By Matthew Pascall, Legal Director – Head of Commercial
(Estimated reading time: 8 minutes 8 seconds)
Temple is currently insuring claims brought by businesses who have relied on brokers to arrange energy contracts but who knew little or nothing about the commission paid by energy suppliers to the brokers. Read on for what we’ve found out.
It’s fair to assume that most business energy brokers spend time and effort trying to secure energy at competitive prices for their clients. They are unlikely to provide their services for free. They are also unlikely to invoice energy buyers for their services.
Buyers will often give little or no thought as to how the broker is paid. Some will assume that the supplier pays. All the buyer wants is energy at the best possible price and if that is what they think they are getting, what is there to complain about?
It is now clear that, until recently, much of the commission that found its way to brokers was paid by the consumer through the price they paid for the energy they consumed. In other words, the cost to the supplier of paying the broker’s commission was simply passed back to the consumer, at times significantly increasing the cost of the energy to the buyer.
In a situation such as this, does the buyer have a remedy and, if so, what?
There are four important Court of Appeal cases to which reference should always be made:
- Hurstanger Ltd v Wilson [2007] EWCA Civ 299
- McWilliam v Norton Finance (UK) Ltd (in liquidation) [2015] EWCA Civ 186
- Medsted Associates td v Canaccord Genuity Wealth (International) Ltd [2019] EWCA Civ 83
- Wood v Commercial First Business Ltd [2021] EWCA Civ 471
The courts generally approach these cases by considering the following.
1. What was the relationship between the buyer and their broker? What did any written terms and conditions say and what happened in practice? Did the buyer place its trust and confidence in the broker and give the broker authority to enter into energy supply contracts on the buyer’s behalf? Was the net effect of the arrangement to make the broker the buyer’s agent?
2. If the buyer delegated sufficient authority to (and placed sufficient trust and confidence in the broker to act on the buyer’s behalf), the court will be willing to make the broker the buyer’s fiduciary and be subject to the usual duties of a fiduciary. These duties include (i) a duty to declare and avoid conflicts of interest, and (ii) a duty not to profit from the relationship without first having obtained, in these cases, the buyer’s informed consent.
3. I should add that in Wood Richards LJ sought to simplify the issue as follows:
“48. To ask in cases of this kind whether there is a fiduciary relationship as a pre-condition for civil liability in respect of bribery or secret commissions is, in my judgment, an unnecessarily elaborate, and perhaps inaccurate, question. The question, I consider, is the altogether simpler one of whether the payee was under a duty to provide information, advice or recommendation on an impartial or disinterested basis. If the payee was under such a duty, the payment of bribes or secret commissions exposes the payer and the payee to the applicable civil remedies. No further enquiry as to the legal nature of their relationship is required.”
4. The court will then examine the commission arrangements in issue:
How much was paid to whom and how? To whom is easy, the claimant has to show that the broker received commission and that is usually a straightforward exercise. How much and how it was paid should emerge during disclosure.
There is a role for experts in these cases who are familiar with the commercial energy market. They can identify commission arrangements and make the necessary calculations. What should emerge is a payment per unit of energy paid to the broker by the supplier, which is usually added to or forms a component of the price paid by the buyer.
5. In a “fully secret” commission case the buyer knows absolutely nothing about the commission arrangements, which were concealed from it (it doesn’t matter if that concealment was deliberate or not). These cases will be rare because most buyers will accept that the broker must have been paid by the supplier. These cases are partly secret commission cases.
In both types of case, the buyer still has a remedy but in fully secret cases the buyer can argue for the rescission of the relevant energy supply contracts; and in partly secret commission cases the remedy is limited to re-payment of the commission.
6. Where a buyer knows that the broker must have been paid commission but does not know how and, more importantly, how much, the court must then ask if the buyer gave informed consent to the receipt of the commission by the broker.
7. In deciding if informed consent was given, the court is entitled to look back across the whole of the relationship between the buyer, broker and energy supplier. If the broker never disclosed the commission payments it received but the buyer could see from documents it received from its energy supplier that commission was paid together with the amounts and how that cost was recovered from the buyer, then informed consent was given if the buyer continued to take and pay for the energy but such cases will be rare. The courts will also consider the sophistication or vulnerability of the buyer, along with their experience and knowledge of the energy market, as to which see below.
8. Finally, if the primary case is made out against the broker, the supplier will be liable as an accessory if they know that they have entered into the relevant energy contracts after the direct involvement of the broker.
9. The tort of bribery can be relevant to these claims and support them if it can be made out on the facts.
In December last year HHJ Hedley sitting at the County Court at Leicester gave judgment in a claim brought by Leicester Indoor Bowls and Social Club Limited v Drax Energy Solutions Limited. The case has attracted a fair degree of attention because it was a paradigm business energy claim where the buyer’s undisclosed commission claim was dismissed.
The amount of commission in this case was described by the judge as follows:
“The commission… was set at 3.5p per unit as against a daytime rate of 9.698p. per unit represents 37% of the price, and for the night rate (7.626p per unit) represents 45.8%.”
The Claimant conceded it was a claim in respect of a partly and not fully secret commission because it knew or assumed that that Drax was paying commission. The judge found that the broker owed fiduciary duties to the Claimant and thus the judge focused on the issue of informed consent. The Claimant relied on a retired and unpaid member (a Mr Palmer) to act as company secretary. He was described as:
“… an experienced company secretary involved in the day-to-day running of a small business. It has a turnover of up to £180,000 per year and had 6 employees. He handled not only the administration of the Club but was also responsible for the banking and finance. The reason for handing over the procuring of an energy supply contract was not because he was unable to sort this out himself (I accept that he had done so in the past) but because he did not want the hassle of doing so and believed that a broker might get a better deal.”
The judge dealt with the key issue of informed consent in the following way, ECC was the broker:
“83. The position, in fact, is that Mr Palmer on his own account did not even check who it was he was dealing with (see his statement at para 23 [67]). He could easily have done so. He could have checked the Ofgem website about remuneration of brokers. He could have asked the broker or even Drax. He chose not to do so in this case not because of any vulnerability or lack of sophistication but because it seemed to him that what they were doing benefitted the Club. In fact, he simply did not consider the question of how ECC was being remunerated, even though it is acknowledged (by the acceptance that this is a half-secret commission case) that the Club ought to have known that ECC would be remunerated. Those who run Clubs and small businesses have to be on their guard and should be alive to the possibility of a conflict of interest in these circumstances.
84. For those reasons, in my judgment it was not necessary for ECC to disclose the amount of the commission which it was to be paid and ECC was not in breach of duty in failing to do so.
85. Accordingly I find that ECC was not in breach of its obligations to the Club and the claim will therefore be dismissed.”
The Temple Perspective
This decision does seem somewhat inconsistent with the authorities to which the judge himself referred and the principles he derived from those cases and which he set out in the judgment.
This does look like an example of a judge setting a relatively high bar for an SME business energy consumer when pursuing an undisclosed commission claim and also appears to reverse the burden by placing a duty on the energy buyer to ask the broker about commission arrangements – yet it is the broker who is subject to the duty to obtain informed consent to the receipt of commission.
Neil Stockdale at Hugh James published a short article about this decision last December and it is well worth a read: https://www.hughjames.com/blog/judge-warns-small-businesses-energy-broker-commission-case/
Temple is still happy to insure these claims by working confidently with litigators who know and understand the pitfalls and who take the time required to bring these claims home. To find out more please contact us on 01483 577877 or send an email to matthew.pascall@temple-legal.co.uk
Matthew Pascall
Legal Director – Head of Commercial
01483 514428
Matthew Pascall
Matthew was called to the Bar in 1984 and joined Guildford Chambers two years later. Spending more than 30 years in practice there, he was listed as a Legal 500 Tier One barrister.
He joined the commercial team at Temple Legal Protection as Senior Underwriting Manager in 2017.
Matthew was appointed to Temple’s Board in December 2022 as Legal Director and Head of Commercial.
His knowledge of the commercial legal sector and litigation practice is invaluable to the business and our clients, providing specialist experience to lead the commercial litigation insurance team.
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