Secret Commissions in Trade

It is well known what a keen interest the high-minded and public-spirited Lord Russell of Killowen took in the question of secret commissions in trade. His wide experience at the Bar and on the Bench in England had convinced him, as he publicly acknowledged when summing up as Judge in the case of Oetzman vs. Long [1896], that “this business of corrupt bargains was a malignant canker; it was affecting honesty in all or in many details of the relations of life, and was not confined to commercial relations.” He spent much time and thought on the question in the last years of his life, and in conjunction with Sir E. Fry he drafted a Bill of which the object was to make criminal all corrupt practices by or with an agent in the exercise of his agency. As Lord Chief Justice of England he introduced his Bill into the House of Lords in 1899 and again in 1900, but he never had the satisfaction of seeing it become law. He concluded the speech by which he introduced the measure in 1899 with the following weighty words:

I feel strongly on this question, and have been led to detain the House at some length with the hope that your

Lordships will share the strong interest I feel. As a question of money, and as affecting trade, it is important; but that is not the only view presented to my mind. It is a practice that tarnishes the character of lawful commerce; it blunts the sense of honesty in the man engaged in it; it is injurious to the honest man trying to conduct his business on high and honorable principles, and has a corrupting and degrading influence in ways that I need not formulate or define. I commend the Bill as an honest attempt to deal with what I conceive to be a great and growing evil.¹

¹ R. B. O’Brien’s Life of Lord Russell of Killowen, p. 301.

Sir E. Fry explains the words of Ecclesiasticus 27: 2, concerning “ the sin that sticks fast in the midst of selling and buying” as a reference to secret commissions.²

² The sin that sticks between buying and selling, by the Right Honorable Sir E. Fry, p. 1.

The Judge’s exegesis may be somewhat too narrow, but in all probability secret commissions were given and taken in trading communities long before the days of the Preacher.

The London [England] Chamber of Commerce appointed a special Committee to inquire into the matter, and in 1898 this Committee issued a Report which contains a great deal of valuable information of which I have made large use in my paper.

Under No. 5 the Report says: ‘“ Your Committee conclude from the evidence before them that secret commissions in various forms are prevalent in almost all trades and professions to a great extent, and that in some trades the practice has increased and is increasing, and they are of opinion that the practice is producing great evil, alike to the morals of the commercial community and to the profits of honest traders.”

The Committee expresses its opinion that much good might be done by written papers, or oral addresses, or by public meetings directing attention to the “heinousness of the system of secret commissions and its detrimental effect upon morals and business,” p. 6.

Evidently it is a question which concerns the moralist and the priest, as well as the lawyer and the merchant, and no apology is needed for treating the subject in the pages of the Ecclesiastical Review. My instances will be taken from English sources, but I have no doubt that they could be paralleled from across the water.

The fundamental principle which should be kept in mind throughout this discussion is that an agent of whatever kind is bound by the nature of his agreement to act for his principal and not for himself. He is engaged by his principal to buy or sell or do something for him, and he receives compensation from the principal for what he does. He is bound to use ordinary care and diligence in the matter entrusted to him, or at any rate such care and diligence as the circumstances and the nature of the work to be done require. In consideration for this he receives, as we suppose, a reasonable and just salary. Besides his salary he cannot claim any additional payment for what he does.

However, as we have seen, it is a very common practice for agents of all kinds to receive something over and above the salary or wages which their principal pays them. Indeed some railway porters, hotel waiters, and others, are said not to be paid at all by their employers, but to gain their living from the tips given them by customers. Cases are mentioned where such employees actually pay their employers for their posts. There can be no moral difficulty about such arrangements, unless they involve hardship or extortion, which need not necessarily be present. The tips are freely given, as is here supposed, and they are reckoned on by employers and employed alike. Such practices may be objectionable, but in themselves they are not morally wrong.

Somewhat different from these are cases in which the giving and taking of commissions are not equally reckoned on by the parties concerned. As an example I will take the case of the Great Western Insurance Company vs. Cunliffe [1874] from the Report of the London Chamber of Commerce, p. 17. In this case the plaintiffs, a marine insurance company in New York, appointed the defendants their agents for settling claims and effecting re-insurances. There was a fixed percentage payable for settling claims, but no remuneration for re-insuring. The agents were allowed by the underwriters, in accordance with custom, 5 per cent. on each re-insurance, and on the general balance of the year’s accounts 12 per cent. on the year’s profits, if there were any. The agents, in their accounts sent to the company, mentioned the 5 per cent. commission, but not the 12 per cent. on the year’s profits. When the company became aware of this they claimed an account of sums received in respect of such 12 per cent. commission. The action was successful in the first instance, but was defeated on appeal. In the Court of Appeal, Lord Justice James said:

Whether you call him a broker or not, the person who is the agent for the merchant or anybody else, by a well-established practice obtains the insurances, and receives a discount of 5 per cent. which he puts into his own pocket. He is paid by the underwriter, instead of by the principal. And then, by a practice quite as well known, recognized by everybody connected with the business, recognized by the Courts of Law of this country, referred to over and over again, there is another thing—there is a gratuity which the broker receives upon the settlement of the accounts, being 12 per cent. upon the balance, if the balance should happen to be a favorable one; that is, if the underwriter finds it to be a profitable account, he gives 12 per cent. upon it to the broker who brought the business to him. The plaintiffs have never disputed that the defendants were entitled to retain in their pockets the 5 per cent. They say, ‘‘We knew that, but we did not know of the other.’’ But they never inquired.

In such a case as this of course conscience follows the law; a well-recognized and legitimate custom is the agent’s title to keep the commission. Sometimes indeed there is a difficulty in such cases about the existence of a recognized and legitimate custom. This is illustrated by the case of Hippesley vs. Knee Brothers, an appeal case decided in the High Court of Justice on October 27, 1904. The appeal was from the decision of the County Court Judge sitting at Bristol. The following is the report of the case from the Times, October 28, 1904: —

It appeared that the plaintiff, Mr. Hippesley, a solicitor practising at Bristol, was desirous of selling a portion of his collection of bric-a-brac and also certain pictures which he had bought from Messrs. Frost and Reed, but which, not having been paid for, were still in the possession of that firm. With that object in view the plaintiff interviewed the manager of the defendants’ firm, who carry on the business of auctioneers, and as a result of negotiations between the parties it was agreed that the defendant firm should sell the plaintiff’s goods on the terms set out in two documents dated July 25, 1903. The terms of the defendants’ employment, so far as they are material to this case, were as follows: In order to enable the plaintiff to obtain possession of the pictures purchased from Messrs. Frost and Reed the defendants were to advance to the plaintiff a sum of £200, which sum, with interest at 5 per cent., was to be charged on the goods entrusted to them. The defendants were to sell the goods by auction, and were to be paid commission of 5 per cent. on all lots sold, the minimum commission to be £20. The defendants were also to be paid all out-of-pocket expenses in addition, which included ‘‘ advertisements, printing and posting bills, printing catalogues, posters, time, and postages.’’ The defendants instructed a firm of printers to print the posters and catalogues. The printers did the work, and in their ledger debited the account of the defendants with the sum of £13 9s., being the price which they would have charged to any ordinary customer, but, on payment, they allowed to the defendants, because they were auctioneers, the trade discount of 10 per cent., which they would not allow to any ordinary customers. The defendants in the account sent to the plaintiff charged him with the full amount of £13 9s. and did not make any rebate in respect of the trade discount allowed to them. In the same manner the defendants received a discount of £1 8s. 7d. on the newspaper advertising account, but charged the plaintiff with the full amount of the account. The sale of the plaintiff’s goods took place in September, 1903. The plaintiff, being dissatisfied with

the result of the sale, brought this action in the County Court, claiming from the defendants £1 6s. 8d., the discount the defendants had received from the printers, on the ground that that sum was a secret commission which had been received by the defendants whilst acting as agents for the plaintiff, and £1 8s. 7d., the discount received by the defendants on the advertising account, on the ground that the defendants had expressly agreed with the plaintiff to allow him that rebate on the account. He further claimed that, inasmuch as the defendants, whilst acting as agents for him, had received a secret commission, he was entitled to the return of the £20 commission paid by him to the defendants. The defendants called evidence to prove, and did prove to the satisfaction of the learned Judge, that there was a long-established usage or practice amongst auctioneers to act as the defendants had acted with regard to the discounts on the accounts, and that it was the usual practice for the printers to deal with the auctioneers as principals, and to allow them as trade customers the trade discount off the retail price, the whole of the retail price being charged by the auctioneers against the vendors. It was admitted that no mention of the discount was made by the defendants to the plaintiff; and the plaintiff swore that he did not know of any usage or practice under which the defendants might claim such discount, though he admitted that he knew there was such a practice with regard to the bills sent in by newspapers for advertising. The County Court Judge was of the opinion that the defendants had acted honestly, and that, inasmuch as they took no secret commission from any person with whom they were negotiating a contract to be made between that person and the plaintiff, and inasmuch as the plaintiff was not in fact damnified, the plaintiff’s claim failed, and that he was not entitled to recover from the defendants the amount of the trade discount allowed to the defendants, nor the amount of the commission earned by the defendants on the sale of the plaintiff’s goods.

The Court of Appeal set aside the decision of the County Court Judge, and after delivering judgment the Lord Chief Justice said:

He must say that he thought that the law which had been applied in the cases referred to should be applied in all cases where an agent employed to do certain work received a secret commission in relation to the performance of his duty to his employer from any one other than his employer. He only wished to add that he thought it was highly probable that there did prevail, unfortunately, in commercial circles in which perfectly honorable men played a perfectly honorable part, a most extraordinary laxity in the view which was placed on these proceedings. If a principal employed an agent for a given remuneration to do work for him, and employed him upon those terms, that agent was not allowed to make secret profit for himself out of that transaction. The sooner that was recognized, and the sooner that these secret commissions were made to be disapproved of by men in an honorable profession, the better it would be for trade and commerce in all its branches. He said that not because for one moment he thought that these gentlemen were acting otherwise than in what they believed to be in accordance with their rights, but the argument of Mr. Duke had led the Court—indeed, it had invited them—to say that the Court should allow those commissions to these gentlemen as against their principal because the principal knew, or ought to have known, that something of the kind was going on. Of course, if it was brought to the knowledge of the principal that such things were being paid, it ceased to be secret, and then, of course, the question did not arise; but when there was no knowledge, the agent ought to account, and it was only honest that he should carry on his business on the principle that he should account. The two authorities Mr. Duke cited were authorities in which it was perfectly obvious that the employer knew that the agent was being remunerated by third parties; therefore they in no way affected the principle which he had endeavored to lay down. For the reasons which he had stated the appellant was entitled to judgment for the two sums which the respondents had received by way of discount, but was not entitled to recover the commission which he had paid to them.

In this case, I think law is somewhat stricter than conscience need be. The principal had his work done for him by the agent according to the contract, and on the usual trade terms; the commission was not intended for the principal, but was allowed to the auctioneer as such, by what seems to be a particular or local custom, much in the same way as booksellers deal with each other on more favorable terms than they grant to the outside public. There is no hint that the interests of the principal suffered in consequence of the agent receiving the commission from those whom he employed. In such circumstances there seems no reason why, as a matter of conscience and before the sentence of a competent authority, the commission received by the agent should be handed over to the principal. In conscience such a transaction may be looked upon as similar to the Christmas boxes which are given to postmen, or the little presents which are made to servants and others by tradesmen with whom they habitually deal. Unless debarred by special agreement or command, the agent will be safe in conscience if he retain such presents.

The line between these and a large class of more or less objectionable practices is not easy to draw. The difficulty is touched upon by the Report of a strong committee of business men appointed to consider the question on behalf of the Rochester [England] Diocesan Conference of the Church of England, 1903:

The Committee is convinced [we read in the Report, p. 2) that what modern times and modern ways most require, in order to make the nation clean and true, is faithfulness in Christian people to Christian duty and to Christian ideals. At the same time it is not infrequently difficult to discover which is the path of duty. The Committee had before them two clergymen of experience with the view of obtaining in confidence an account of their methods of dealing with cases of conscience in matters of Commercial Morality. The answers to a series of questions which the Committee put, showed a considerable difference of opinion; and it was abundantly manifest that there is a need for some guidance in the application of moral principles to individual cases of difficulty.

As a type of the cases which I am here considering I select the following from the Report of the London Chamber of Commerce, p. 10:

A representative of a lubricating oil firm sent a copy of a letter which he had received from an engine driver: “Sir, having used your cylinder oil for going on eight years, I now take the liberty of asking you if you cannot allow me and my mate something for using the same. A gentleman came to our mill and asked me whose cylinder oil we were using, and how much a cask you were allowing me. I told him we were using your oil. He asked me if I would give their oil a trial and he would allow me a good discount. I said it was no use of him bothering as we were quite satisfied with what we were using at the present time. Hoping you will oblige us by return of post. I remain, etc.’

If the oil of the rival firm in this case was equally cheap and equally good, so that the employer would suffer no damage by its use, there would seem to be no injustice done if the driver gave it a trial in consideration of the discount promised him. The rival firm must be supposed to be ready to share part of their profits with those who use their oil, and this they have a right to do. No injustice is done by leaving the firm with which business has been done for eight years, though naturally such conduct is resented by tradesmen. It cannot be denied, however, that there is danger in such practices. If the engine driver receives a commission on the oil he uses, he is exposed to great temptation to waste it, so as to increase his earnings; if he finds that in course of time an inferior article is supplied, or if the invoice shows a greater quantity than he actually took, he is hardly in a position to defend the interests of his employer. In the great majority of cases he would hold his tongue, pocket his discount, and fail in his duty to his master. On this ground Sir E. Fry absolutely condemns such transactions.

Another, and less genuine line of defense, [he says] * is the assertion that the gift is not made with any intention to bias the recipient, or that the recipient is not biased by it, and does his duty to his master in spite of it. This ignores the real point of the matter. To say whether a bribe has or has not operated on the mind of the recipient is a metaphysical inquiry which it is difficult for the man himself, and often impossible for others, to answer; to say what is the tendency of a bribe is a matter of no difficulty; and in all transactions of this sort, often obscured and embarrassed by the complications of modern commercial life, the true inquiry is, has the payment (made under whatever name it may be, of gratuity, of Christmas box, of discount, of percentage, of capitation fee), has it a tendency to blind the eyes of the receiver, to make him less vigilant for his master than he ought to be—to look with more favor on the giver than on others who are not givers of like gifts? If this tendency be found to exist, the transaction is to be condemned—however innocent may have been the intentions of the donor, however untainted may have remained the mind of the recipient.

8 The sin that sticks, p. 7.

This is indeed the legal attitude toward such transactions, especially if a positive law already exists which forbids them on account of the presumption of fraud. But the moralist must not confound things so different as the tendency to produce evil and evil itself, especially as the strength of the tendency may vary almost indefinitely according to character and other circumstances. However, if this be allowed for, the moralist’s attitude toward such transactions will not differ widely from the lawyer’s, for he will recognize them as full of danger, and to be avoided by all who wish to escape the snares of sin. The confessor then will dissuade his penitents from such transactions in the future, but, unless it is clear that injustice has been done by them in the past, he will abstain from imposing any obligation to make restitution to the employer.

The agent must not buy or sell for himself what he has been engaged to buy or sell for his principal, without that principal’s knowledge and consent. Law and conscience are here almost at one. The doctrine may be illustrated from the Report of the London Chamber of Commerce, p. 13.

The leading case which illustrates the rule forbidding an agent for sale to purchase for himself, or an agent for purchase to sell his own property to his principal without full disclosure, is Brookman vs. Rothschild [1829]. There the plaintiff employed the defendant to buy and sell foreign securities, and directed him to sell 20,000 French Rentes. The defendant, without the plaintiff’s knowledge, purchased these for himself and his partners, but gave the plaintiff the market price. The defendant then pretended to purchase Prussian bonds for the plaintiff, but in fact the purchase was of the defendant’s own bonds, remaining in the hands of the defendant and his partners, the plaintiff being debited with the market price and commission. Other similar transactions took place between the parties, and finally accounts were balanced, and the plaintiff paid the balance which appeared to be due from him. Four years afterwards the plaintiff, having discovered the nature of the transactions, applied to the court to have them set aside and his money returned, and was successful.

As a general rule, at any rate, conscience should here follow law. Exceptions might be permitted where extraordinary diligence has been used by the agent to sell or buy in a better market; but even here, on account of the danger, and because the agent’s judgment can hardly be unbiased when his own advantage is in question, and he is not usually prepared to take both sides of the risk, the practice should be condemned.

There are many cases where the only course open to an honest man is, at whatever cost, to take his stand on the eternal and immutable principles of justice. In spite of the commercial corruption of our time, in such cases honesty is still the best policy. Certainly this must be the maxim to be followed in cases like that mentioned by Lord Russell in the speech by which he introduced his Bill dealing with secret commissions into the House of Lords on April 20, 1899. Lord Russell said : —

One of the most painful experiences which I have had professionally was at the Leeds Assizes, where I had to defend an old man who had been in business for something like fifty years. He was a member of the local Corporation. His son was succeeding him in business. He was charged at the Assize Court with having entered into a conspiracy with Lord Masham’s foreman dyer to defraud Lord Masham, who is the head of a silk manufactory in Bradford, by invoicing goods which were never delivered, by invoicing inferior goods and charging the price of higher-class goods, and, occasionally, when they sent the best goods, by charging an excessive price for them. When I saw my client and his solicitor, I said, ‘‘If the evidence as on the depositions comes out, the case is hopeless. How could a man holding a respectable position, and so long before the public, be a party to such transactions?’ His explanation was a very pathetic one. He said he could not help it; that he was driven to it. It began first with small commissions, but gradually the screw was turned on, and his trade profit would have disappeared altogether if he had not fallen in with the arrangement. I asked him if he could not have gone to Lord Masham and told him. He said he could, but the result would have been that the foreman would have been dismissed, and another man put in his place; and if he had not made an arrangement with the new foreman, that man, when a vat containing perhaps £220 or £300 worth of stuff was in the process of dyeing, would have put some noxious stuff into the vat, and would have said to Lord Masham, ‘‘See the kind of drugs you are using. You will have to change your drug merchant.’’ I do not believe that is at all an isolated case.⁴

⁴ R. B. O’Brien’s Life of Lord Russell of Killowen, p. 300.

The hardship endured or at any rate feared by the conscientious agent in such cases might often be mitigated or removed if only the principal would condescend to take a little trouble in his own interests and for the sake of justice. In proof of this an example taken from the Rev. J. Carter’s Commercial Morality may serve as a conclusion to this paper: —

A short time ago, a friend of mine, a veterinary surgeon, was requested by a coachman to put down half a dozen more horse-balls to his master; but he did not want any sent in, adding, ‘‘Don’t forget it is near Christmas!’’ The inference was clear. The balls were to be charged, and the money given to him. My friend consulted me about it, saying, ‘‘If I do not do it that beggar will get me out there somehow, either by complaining of the way I treat the horses or by some other cause!’’ I replied, ‘‘It is your business to go to his master and report the matter to him.’’ Now, this veterinary was a young man who had just purchased a practice in our town, and had fairly high ideals of justice and truth; but he was a Scotchman, and before all things he meant to get on. He took my advice, went to the gentleman, and told him. The gentleman was much annoyed at being bothered over such a matter. The coachman still holds his place, and my friend has ever since had the greatest difficulty in keeping the gentleman’s custom. Now, when he hears me talking about what I think is right, he sits smiling, and concludes by saying, ‘‘Yes, you’re right, but it doesn’t pay.’’⁵

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