Agents, brokers and intermediaries beware: When is it not a crime to receive commissions and rebates after you have helped someone?

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Introduction

On 1 June 2020, the Court of Final Appeal (the “CFA”) handed down its decision in  HKSAR v Chu Ang FACC No. 6 of 2019 (on appeal from HCMA No. 119 of 2018 [2020] HKCFA 18) allowing the prosecution’s appeal and setting aside the lower courts’ previous rulings that there was no case for the Defendant to answer. The leave to appeal was granted on the basis that it was reasonably arguable that there had been a substantial and grave injustice in the misapplication of section 9 of the Prevention of Bribery Ordinance (Cap 201) (“POBO”).


Background

Chu Ang (“Chu”), the respondent in this case, was a private violin teacher who gave violin lessons to young students on an hourly basis. Upon the request of one of her students’ parent (“Ms Law”), she agreed to help with sourcing a suitable new violin for Ms Law’s son. She recommended a music instruments company, CITL, to Ms Law and accompanied them to purchase an Italian violin there with a listing price of HK$99,000. Chu took part in the bargaining process with CITL and negotiated the price down to HK$80,000 for Ms Law. Two weeks later, CITL paid Chu a commission of HK$20,000 for Ms Law’s purchase of the violin, and Chu had never told Ms Law about such commission.

There appears to be a “conventional” system for rebates or commissions in the music instruments industry such that a certified music tutor can enjoy a “tutor’s price” which is roughly 60% of the original price. As for walk-in customers, they might enjoy a 10-20% discount. Where tutors refer their students to CITL to purchase musical instruments, CITL would pay the difference between the actual selling price and the tutor “introduction” price to the tutor as a rebate.

Ms Law said that she sought Chu’s advice and assistance in purchasing the violin because Chu was her son’s violin teacher, and she would not have picked the same violin but for Chu’s professional recommendation. Also, she would not have allowed/agreed to Chu receiving such rebate. Accordingly, Chu was investigated by the Independent Commission Against Corruption (“ICAC”) and charged with a statutory offence for accepting an advantage as an agent contrary to section 9(1)(a) of the Prevention of Bribery Ordinance (Cap 201) (“s.9 POBO”).


Judgment

At trial, Chu was acquitted because the Magistrate found that there was no pre-existing legal relationship between Chu and Ms Law which made the former an “agent” of the latter in respect of the violin purchase, and thus ruled that there was no case to answer. The Department of Justice appealed and the Judge agreed with the Magistrate’s conclusions.

However, on further appeal by the prosecution, the CFA overruled the lower courts’ rulings for the reasons and legal considerations as discussed below. The correct question to be asked should be whether, in accepting an advantage consisting of the secret commission, Chu had subverted the integrity of the agency relationship with Ms Law. Accordingly, the previous rulings were set aside and the appeal was allowed.


No need for a pre-existing legal relationship to invoke s.9(1) POBO

S.9 POBO provides it is an offence if any agent who, without lawful authority or reasonable excuse, accepts an advantage as an inducement to or reward for doing something in relation to the agent’s principal’s affairs or business.  The CFA stated that the lower courts erred in restraining their assessment of the relationship between Chu and Ms Law within the four corners of the violin teaching contract, and thus erroneously drawing the conclusion that Chu’s recommendation or introduction of the violin purchase was outside of the scope of Chu’s duties owed to Ms Law, i.e. as a private tuition music teacher giving four violin lessons each month. The lower courts wrongly ruled on the basis that there must be a pre-existing legal relationship between the “principal” (being Ms Law) and “agent” (being Chu) that covers the acts in question (i.e. recommending which violin to purchase) to invoke s.9(1) POBO.

For the purposes of s.9(1) POBO,  the CFA explained that a person shall be regarded as an “agent” where he or she “acts for another”, having agreed or chosen so to act in circumstances giving rise to a reasonable expectation, and hence a duty, to act honestly and in the interests of that other person to the exclusion of his or her own interests. There is no need for any other or pre-existing legal relationship between them. As such, Chu’s acceptance of Ms Law’s request to assist her in purchasing a suitable violin for her son is sufficient for her to be regarded as an “agent” under s.9 POBO. Indeed, it may be sufficient for an agent to choose to act for another voluntarily even without a request to do so.

In this case, the correct focus should be on Chu’s involvement in the violin purchase. Given that she (1) agreed to assist Ms Law to source a violin, (2) made the preliminary arrangements with CITL, (3) accompanied Ms Law and his son to the shop, (4) helped them select the violin and most importantly, (5) actively took part in negotiating the price with CITL that Ms Law eventually paid, the CFA found that she was in a position of conflict of interest because the greater the discount offered to Ms Law, the smaller Chu’s commission rebate would be. Further, as such acts clearly constituted the “affairs or business” of Ms Law (as the “principal” of Chu), Chu could be properly regarded as Ms Law’s “agent” in respect of the violin purchase.


No need for the “principal” to have suffered economic loss

It was also wrong for the lower courts to suggest that Chu was not caught under s.9(1) POBO because the parent did not suffer any economic loss, and as such, the commission was not considered as a benefit she received at the parent’s expense.

Chu argued that even if she was not paid the commission of HK$20,000, Ms Law would not have otherwise received any further discount under CITL’s discount system; and that if it had not been for Chu, Ms Law would not be able to enjoy the relevant discount from HK$99,000 to HK$80,000 due to Chu’s referral and help in price negotiation.

Insofar as Chu’s defence that Ms Law suffered no economic loss, the CFA referred to its earlier decision in Secretary for Justice v Chan Chi Wan Stephen (FACC 11/2016) that immediate or tangible economic loss to the principal is not required for the agent’s conduct to fall under s.9(1) POBO. As long as the agent’s acts were “aimed at the principal’s affairs or business” and had prejudiced the principal’s interests, the agent will be considered to have breached s.9(1) POBO. More about this decision can be found at our previous article, “Moonlighting Is Not an Offence Unless It Undermines the Employer’s Interests, as Clarified in the Stephen Chan Chi-wan Case”.


Invalid defence of “customary practice” under s.19 POBO

Another erroneous consideration taken into account by the lower courts was Chu’s argument that it was the normal practice in the industry to rebate a commission to music tutors who introduce student-customer making a purchase.  Under s.19 of the POBO, the defence of receiving any advantages being customary in any profession, trade, vocation or calling shall not be a valid defence.

For the aforesaid reasons, the CFA was of the view that Chu, knowing all along that she would be rewarded by CITL by a payment of commission but did not mention that to Ms Law, clearly subverted the integrity of the agency relationship between them and hence breached s.9 POBO.


Conclusion

S.9 POBO should not be construed unacceptably widely as far as to criminalize helpful assistance given to others honestly and in good faith. However, a person should nonetheless be mindful not to put himself in a conflict of interest situation and should in no event make a secret profit out of acting for another so as to subvert the integrity of the agency relationship. Liabilities under the POBO can be easily avoided by, for example, disclosing any benefit/commission arrangement to the principals and seek for their permission to accept and retain the same in return for acting for them. The key is to be open and transparent about receiving any rebate or commission.

 

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.
Published by ONC Lawyers © 2020