Secret commissions and You

Is your business involved in paying or receiving a referral fee? If so, you need to read this.

Section 176 Crimes Act

Under section 176 of the Crimes Act 1958 (Vic) (Act), if a principal-agent relationship exists between parties, the agent must not corruptly receive any valuable consideration from another person if the intent of paying consideration was to induce the agent to show a favour in relation to the principal’s affairs. If other conditions are satisfied, this law will punish both the agent and the person paying the consideration.

Agency

Section 175 defines ‘agent’ broadly. In R v Gallagher [1986] VR 219, the court held that the Act intends to give an extended meaning to the word ‘agent’ and the definition under the Act includes many who would not be within the common law concept of an agent.

Corrupt conduct

The next step is to determine whether the conduct is corrupt. The intention of the parties will be relevant. The authority on this is Dillon & Riach [1982] VR 434, where the Victorian Supreme Court held that conduct will be corrupt if the agent receives a benefit knowing that the donor expected an act of favouritism in return in relation to the principal’s affairs. The test is of an agent’s loyalty to the principal and whether the agent has put itself in a position of temptation with respect to the impartial discharge of its duties in consequence of accepting a benefit from a third party.

Section 186 gives more teeth to the prosecution because it bars an accused from raising the defence that the exchange of valuable consideration was customary in the trade.

Section 179

Section 179 of the Act is also relevant to referral arrangements. Unlike section 176, which applies only to a principal-agent relationship, section 179 is wider in scope.

An example of section 179 in operation: A person (D) recommends to person (O) that O enters into a contract with a third person (M), and D receives a commission from M (without O knowing about the commission).

In this situation, the conduct of both D (the recipient of the commission) and M (the payer of the commission) is likely to be punishable under law unless one or more of the following exceptions apply:

  1. a principal-agent relationship exists between M and D, and the relationship was disclosed to O;
  2. even if no principal-agent relationship exists between M and D, O assented to D receiving a commission from M; or
  3. there is no nexus between D’s advice to O and M’s payment of commission to D.

As you will note, contrary to section 176 where a principal-agent relationship had to be established between parties to invoke liability against the agent and the party paying consideration to the agent, the first exception of section 179 will, on the contrary, rescue the accused persons if they can establish a principal-agent relationship between them and O’s knowledge about the relationship. Pertinently, section 179 does not stipulate a ‘corruption test’, which was one of the key requirements of section 176.

Section 179 tests the culpability of parties against the knowledge and consent of the party affected by the secret arrangement; ie, O in this case. So if O was not privy to the referral arrangement between M and D, then both the giving and taking of secret commission will be a crime punishable by up to 10 years’ imprisonment (if D or M is a person) or a level 5 fine (if D or M is a corporation).

Disclosure

Section 176 will not be contravened if the referral arrangement was disclosed to the principal. Although section 176 is silent on this point, the Victorian Supreme Court in R v Jamieson [1988] VR 879 cleared any ambiguity when it observed that: ‘it is difficult to imagine a case in which the maker of a payment to an agent could be found to have acted corruptly if the agent’s principal was informed about the payment.’ Therefore, if the customers are made aware of the benefits and incentives, the offences under the secret commissions legislation should not arise. The extent and nature of disclosure can vary in different situations. As noted above, disclosure and consent also remove the risk of contravention of section 179.

Conclusion

A referral fee is likely to constitute a secret commission under either or both of sections 176 and 179 unless it is disclosed to the principal and the principal consents to it. If you pay or receive a referral fee, you should advise the principal and seek their consent.

Disclaimer

This article is general commentary on a topical issue and does not constitute legal advice. If you are concerned about any topics covered in this article, we recommend that you seek legal advice. The article only covers the secret commissions legislation in Victoria, and other laws may apply to a similar situation in Victoria or elsewhere.

Queries

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Authors

Michael Wilton and Kunal Sood

The Authors

Michael Wilton

PARTNER, MELBOURNE

Kunal Sood

LAWYER, MELBOURNE