Written by Richard Wee and Daniel

(Article originally written on 4th April 2016 by Richard Wee & Janessa Kok. This is an update).

Introduction

In December 2015, the football federation for North America, better known as CONCACAF initiated a Court action in the United States of America, to reclaim millions of dollars purported to have lost through a “kick-back” scheme orchestrated by their former office bearers. Jeffery Webb, former president of CONCACAF was convicted for money laundering while Enrique Sanz who has been banned from any football-related activity for life and fined CHF100,000, were both instrumental in the engagement of a travel agency called Cartan Tours. It was alleged that more than $40 million were steered towards Cartan Tours purportedly for travel services of CONCACAF staffs. This suit has been closely watched as it is the first of many expected from the FIFA scandal.

As a matter of fact, claims by sports organisations against corrupt practices are not uncommon. For example, in Ross River Ltd v Cambridge City Football Club Ltd [2007] EWHC 2115 (Ch), the Court decided that in a situation where contract succeed based on a secret payment or bribe received by an agent or representative, the principal will have his right to rescission.

That CONCACAF expose’ is unfortunately, a series of embarrassing explosive news in the world of football. FIFA’s former President Sepp Blatter himself faced investigations for misuse of funds. Albeit recently he said that one Swiss investigation into his handling of a television contract has been dropped, FIFA insisted that it does not mean he is free from guilt. The news in 2015 where Michel Platini was banned from all football activity for four years due to a corruption investigation highlights the need for integrity in Sports. It was reported that Platini had accepted an unauthorised payment from the-then FIFA president, Sepp Blatter who was suspended for six years. The exact words used by the ethics committee are “Mr Platini failed to act with complete credibility and integrity, showing awareness of the importance of his duties and concomitant obligations and responsibilities.”

Nonetheless the efforts by CONCACAF warrants a review of the position of law in Malaysia. In the local context of Malaysia, how would such corruption cases in Sports be dealt with? Can an ala-CONCACAF kind of action be taken by a sports organisation in Malaysian Courts? What would the cause of action be? How can a sports organisation re-claim the monies lost in a corrupt activity?

Equity as a Sword

Trust Laws is the obvious cause of action with reference to Tracing and Constructive Trust. These areas of laws, empower the Court to issue orders to trace beneficial monies lost in inequitable transaction. We suggest that there are elements in those laws which can also apply to sports.

In an action under the Law of Trusts, we will draw strength from the case of Attorney General of Hong Kong v Reid [1993] 3 WLR 1143. Anthony Reid was the Crown Counsel of the Hong Kong Government. Reid had taken bribes and amongst his ‘investment’ from this corrupt income, were properties purchased in New Zealand. Apart from the eight years of imprisonment imposed on him, the Court also ordered him to pay a total of HK$12.4 million, being the total value of his assets alleged to have been acquired from the bribes. Reid, holding public office and carrying the trust of the Government in prosecution matters, was deemed to be a fiduciary by the Court.

It is generally known that a fiduciary that receives any unauthorised profit out of his duty towards his principal would hold the property or profit on trust for the respective principal or rather, the victim. It was held that the moment Reid breach his duties in return for the bribe; he immediately owed the Government of Hong Kong a fiduciary duty.

However, the principle from the case of Lister v Stubbs (1890) 45 Ch D 1 would automatically convert Anthony Reid into a debtor to the Crown for the bribe money he obtained. Is Reid a debtor or a fiduciary?  Interestingly the Privy Council in Reid’s case, overturn Lister v Stubbs.

Briefly, Stubbs was appointed by his master, the firm Lister & Co to buy goods from Varley & Co. Stubbs subsequently accepted bribes and invested in properties apart from other investments. Alongside the bribe money, the plaintiff in that case also sought to claim for the properties in which Stubbs invested in. Unfortunately for the plaintiff in Stubb’s case, the Court was of the view that the relationship between the plaintiff and the defendant was more of a debtor and creditor relationship. The Court could not agree that trust existed in such a situation. The Court observed that the beneficiary should not be entitled to a proprietary right but merely a personal right simply because it is not their legal right to receive more than what is necessary in trust. Most importantly, the beneficiary may not have suffered any financial loss due to the bribery.

The Privy Council, in overturning Stubbs, applied Constructive Trusts on Reid’s properties in New Zealand and effectively permitted the AG (Hong Kong) to forfeit the assets which Reid had purchased with the bribe money mentioned above. The thrust of the Privy Council decision stems from the position it took, that Reid is in fact a fiduciary when acting for the Hong Kong government.

The Two Opposing Arguments

It is vital to pause for a while to analyse the two school of thoughts. In Reid, Lord Templeman was confronted with some theoretical concerns and policy considerations. In respect of the theoretical concerns, one of the reasons why the ruling in Lister has not been under siege for some considerable time was that the English courts were not prepared to impose a constructive trust on bribe money when it never formed the property of the principal at the onset. In other words, a constructive trust could not be imposed on property which has never owned by the principal. In this light, some commentators have required that the profits represent the property originally belonging to the claimant before a constructive trust imposed, permitting the claimant to conduct equity tracing. In relation to policy considerations, it was thought that the imposition of a constructive trust on bribe money which was within the possession of an agent unjustifiably prioritized the principal over other creditors of the agent.

Dismissing the policy argument, Lord Templeman explained that “bribery [was] an evil practice which threatened the foundations of any civilised society“, and hence it was imperative for the persons against whom the bribe was made to recover the bribe, taking into account the loss and damage that had been rendered as a consequence of the bribe. For instance, in the case of Reid, the detriment was occasioned to the administration of justice in Hong Kong. In respect of the theoretical basis, Lord Templeman explained that the defendant was under an instant obligation to hold the money for the claimant as soon as it was received by the defendant.

Notwithstanding the decision of the Privy Council in Reid, the Court of Appeal in Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2011] EWCA Civ 347 declined to rely on the case and preferred the position set out in Lister. The Court of Appeal and Lord Neuberger evidently opined that the claimant has no recourse to any proprietary claim where a trustee had made a profit in breach of his duties where the beneficiaries could not show that the profits represented the property originally belonging to them. However, it is counter-argued that the foremost duty of a trustee is to act in the interests of his principal or beneficiary to the exclusion of others. The law is required to safeguard that principal or beneficiary and permits that principal or beneficiary to claim against profits made as a consequence of one abusing the undertaking as a fiduciary. 

The issue was again revisited in the case of FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45 where the Supreme Court held that the decision in Sinclair Investments was erroneous. The Supreme Court held that an unauthorized profit made by an agent would be held on constructive trust for the principle and failure to show that the affiliation between the profit and the principal was not fatal. The Court was resolute that bribery was to be treated harshly. To echo the Court’s approach, bribery is a criminal act and it is trite that any criminal acts should be given no mercy. 

It matters not whether there was some proprietary link with the unauthorized profit and the principal. Lord Neuberger observed that the whole reason that the agent should not have accepted the bribe or commission is that it puts him in conflict with his duty to his principal. Besides, Lord Neuberger provides that there must be a strong possibility that the bribe has disadvantaged the principal in elementary economics terms. The example that his Lordship gave was that if the vendor was prepared to sell for €211.5m, on the basis that it was paying a secret commission of €10m, it must be quite likely that, in the absence of such commission, the vendor would have been prepared to sell for less than €211.5m, possibly €201.5m principal.

The position in FHR European Ventures should arguably be observed. Lord Neuberger noted that the rule in the case is compatible with other common law jurisdictions. In the High Court of Australia, in Chan v Zacharia (1984) 154 CLR 178, Deane J stated that any benefit obtained ‘in circumstances where a conflict … existed … or… by reason of his fiduciary position or of opportunity or knowledge resulting from it … is held by the fiduciary as constructive trustee’. Similarly, in Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6, the Full Federal Court of Australia refused to follow Sinclair and preferred the position in Reid instead. Furthermore, the decision finally tackles the uncertainty created in cases where the courts had either give the claimant a proprietary right or personal claim. Legal certainty is something that has never been more emphasized in any jurisprudence. The Supreme Court views that certainty and clarity in the law was a desperate need and there could be no real justification as to the distinction between situations where an agent made an unauthorized profit to the detriment of his principal and situations where the agent received some bribe from a third party, not necessarily to the principal’s detriment in reality. Moreover, the decision anchors the established equitable principle that those who undertake to become a fiduciary must prevent conflict of interest from arising. This view is further supported by the fact that no-profit and no-conflict, by themselves, are fiduciary duties. If that conflict of interest arises then equity will take the form as a shield to prevent this occurrence in a strict sense. As Lord Herschell in Bray v Ford [1896] AC 44 penned: “[I]t is an inflexible rule of a Court of Equity that a person in a fiduciary position … is not, unless otherwise expressly provided, entitled to make a profit; he [is] not allowed to put himself in a position where his duty and interest conflict. It does not appear to me that this rule is, as has been said, founded upon principles of morality. I regard it rather as based on the consideration that, human nature being what it is, there is a danger, in such circumstances, of the person holding a fiduciary position being swayed by interest rather than by duty, and thus prejudicing those whom he was bound to protect. It has, therefore, been deemed expedient to lay down this general rule. But I am satisfied that it might be departed from in many cases, without any breach of morality, without any wrong being inflicted, and without any consciousness of wrong-doing.”

Conclusion

Should the CONCACAF-like corrupt case occurs in Malaysian sports organisations, cases like Reid and FHR European Ventures would be applicable. However, what is crucial here in terms of sports law, is the requirement of integrity in sports. Most sports organisations enforce the element of integrity very strongly. One example is the ASEAN Football Confederation (AFC) whereby a dedicated team is formed to maintain and enforce integrity in Asian football. That team oversees and investigates any suspicion of breach of integrity which includes match fixing, kickbacks and corrupt practices. A few footballers and sports officials have fallen foul of this integrity code by AFC and has either been suspended or permanently banned from football. It seems that integrity is no more a mere punch line of sports politics but it is in fact becoming essential to maintain the sanctity of sports.

If corrupt practises goes on in Sports, be it on the field or the boardroom of the organisation; the reputation of Sports would be dented. There is no doubt that integrity plays an extremely important role in sports. Participants, spectators, sponsors as well as the public and media will often judge a sports organisation based on the level of integrity they portray to have.

Therefore, if integrity in sports is constantly enforced and if corrupt practices/kickbacks are weeded out, actions taken by CONCACAF may not be necessary anymore. The sports integrity movement in recent years is a positive preventive step to prevent corrupt practices in sports.

In addition to all the above discussion, it is submitted that more steps ought to be taken in order to eliminate all possible corrupt practices. Basic steps like advertising or promoting ethics in sports, issuing anti-corruption measures, setting stricter in-house rules, getting the Governmental bodies to work closely with sports organisations or even allow media to spread awareness. Considering the fact that the media are often the “eyes and ears of the public” and with such transparency available, it would be beneficial to sportsmen, the public and the government.

The future of good clean sports should start with powerful integrity mechanism in all sports organisations. Once the mechanism is effectively enforced, sports organisations will severely minimize the CONCACAF debacle and FIFA scandal. Recourse to law and activation of cases such as Reid’s case ought to be the last resort for any sports organisation. In time, sports must learn to clean itself and develop its own internal rule of law to weed out corrupt practices.

 

 

Published on 17 July 2020

Photo by Glen Carrie on Unsplash

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