UK: Energy Sector Commission Claims: Legal And Practical Insights

Commission claims in the energy sector: Commercial context

In the latest potential source of volume work for claims management companies, energy suppliers are being hit with allegations that they have paid hidden or secret commissions to brokers/agents/introducers at the expense of customers.

The lure of quick and easy recovery from commission payers and/or intermediaries, often with the promise of 'no win, no fee' retainers, is, however, misleading. In fact, pursuing commission claims can be fraught with financial risk for would-be claimants and their funders.

The law in relation to commission claims is not as straightforward as many firms would have claimants believe. On the contrary, developing case law demonstrates that there are several hurdles at which a so-called 'secret' or 'half-secret' claim against an energy supplier or intermediary will fall.

Walker Morris' Commercial Dispute Resolution specialists and energy dispute experts Nick McQueen and Tayla Boote have successfully defended the energy companies who have been pursued to trial in the first two cases to have hit the UK courts to date.

In this article, Nick and Tayla share their legal and practical insights arising from the high profile Dark Blue Pig ¹case, the very recent decision in Leicester Indoor Bowls and Social Club Limited v Drax Energy Supply Limited ², and from their wider experience resolving energy sector commission claim disputes.

Legal insights on energy sector commission claims: Dark Blue Pig and Leicester Indoor Bowls and Social Club

The Dark Blue Pig case was the first energy sector commission claim against a supplier to be decided at trial in the UK courts. The facts are set out in our earlier briefing. The energy supplier defendant successfully defeated the claim, and the claimant was ordered to pay the energy supplier's legal costs of £20,000.

The December 2023 case of Leicester Indoor Bowls Club case was the second, and latest, energy sector commission claim to go to trial. The facts are set out below. It was another win for the energy supplier defendant, and left another claimant customer with an adverse costs order.

Together, the cases provide essential clarification of the law in relation to commission claims.

What are the essential elements of a commission claim?

• The payment of commission by a supplier to an agent of a customer may, in certain circumstances, give rise to a breach of duty owed by the broker to the customer. If the supplier knows of the agency/fiduciary and fails to disclose the making of the commission payment to the customer, the customer may also have a claim against the supplier. The availability of relief in such a claim will depend upon whether the commission was 'fully secret' or 'half secret.'
• Claimants often allege that they were unaware of the commission. This is a 'fully secret' commission claim, and was the position adopted in the Dark Blue Pig To be entitled to a remedy in a 'fully secret' commission claim, a claimant must prove that the fact and amount of commission was secret.
• However, a commercial entity that is not paying any fee itself is taken to be aware of the fact of commission. At best, therefore, a claim in such circumstances will be that the payment of commission is 'half secret'. The claimant in Leicester Bowls and Social Club accepted that its claim was a 'half secret' commission claim.
• In a 'half secret' commission claim, a claimant must prove:
  1. Fiduciary duties were owed by the broker/agent/introducer to the customer.
  2. The scope of those fiduciary duties.
  3. Breach of those fiduciary duties by the broker/agent/introducer.
  4. The claimant did not give its informed consent to payment of commission.
  5. And to succeed in a claim against the supplier:
     • Knowledge of that fiduciary relationship on the part of the supplier.
     • An act on the part of the supplier which gives rise to a liability to the customer e.g. procuring the broker/agent/introducer's breach of its fiduciary duties.

If a claimant can't establish any one of these essential components at (1) – (5), its commission claim will fail. If a claimant succeeds in establishing (1)-(4) but can't also establish (e), its claim against the supplier ought to also fail, but that issue has not yet been determined by the court.

What lessons arise from caselaw on energy sector commission claims?

In a 'half secret' commission claim, liability only arises where there is fiduciary duty (as to which, see below) and there is no informed consent given by the customer to the payment of commission.

A 'fiduciary' is someone who undertakes to act for or on behalf of another in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is an obligation of loyalty: a fiduciary must not act for its own benefit without the informed consent of its principal. (The principal, in these cases, is the customer/claimant).

Even if a person acting as a broker in relation to energy supply contracts is, at law, an 'agent', that is not the same as, nor conclusive to, the agent being a fiduciary.

As to what amounts to informed consent, where the principal knows that the agent will look to the other party in the transaction for remuneration (for example as a result of the custom of trades or usage), the principal can't object on the ground that it didn't know the precise amount of any commission. (See the below discussion about Leicester Bowls and Social Club for a worked example of the application of the law on what is 'informed consent'.)

However, where there's no such custom/usage, the principal's knowledge may need to be greater for the agent (and potential fiduciary) to avoid a breach. That may particularly be the case where the principal is vulnerable and unsophisticated.

If a claimant is aware that the broker/agent/introducer is or may be receiving a commission, it will struggle to prove that it did not give its informed consent to the broker/agent/introducer receiving a commission. It follows that such a claimant will struggle to prove any breach of fiduciary duty (if it has managed to establish that one is owed). The extent of the disclosure of the commission is therefore relevant.

As to the question of determining whether informed consent has been given, the court will consider:

• The nature of the contract being entered into.
• The reasons why the broker is being engaged, including the circumstances of the principal and any inequality of bargaining power.
• Whether the principal is vulnerable or unsophisticated. This will include a consideration of the moving spirit behind a claimant entity, including any personal vulnerability or lack of sophistication.
• The nature of the commission being paid by the supplier and how ascertainable that in fact by the principal.

What happened in Leicester Indoor Bowls and Social Club?

The claimant (the Club) was a company limited by guarantee, with no share capital. It operated a bowls and social club, and its profits were put back into the Club's activities.

The Club's representative and main witness was a retired gentleman, Mr Palmer. He was the Club's company secretary – a voluntary, unpaid role he had held for many years – and was responsible for the running of the Club. One of Mr Palmer's tasks was to find and arrange the contract for the supply of energy to the Club. He wanted to find the cheapest energy suppliers possible and used a broker to do so. It was Mr Palmer's evidence that he was not aware that the broker was charging the Club a fee and/or that the energy supplier was paying commission to the broker.

Some years later, in September 2022, the Club's solicitors sent a letter of claim to the energy supplier asserting that it had paid undisclosed commission to the broker, which the Club was entitled to recover. The energy supplier denied those allegations. The case was ultimately decided at trial, where the County Court, for the reasons set out below, dismissed the Club's claim.

Leicester Indoor Bowls and Social Club is particularly important for its clarification of what amounts to 'informed consent' on the part of customers in energy sector commission claims.

Applying the considerations set out above to the facts of that case:

The court found that the claimant Club's representative and main witness was not well-versed in the workings of the energy supply market, but he was an experienced company secretary involved in the day-to-day running of a small business. He handled the administration of the Club and was also responsible for the banking and finance. The reason for handing over the procuring of an energy supply contract to an agent was not because he was unable to sort this out himself, but because he did not want the hassle of doing so and believed that a broker might get a better deal. (The court opined that it's unlikely that an individual customer would be able to command a price at the same level as a broker. An individual customer would not be supplying the same level of consumption as a broker who can introduce many customers, and dealing with an individual customer may also add to the time and attention which the supplier would need to devote to that case.)

The court commented that the Club's representative could have checked the Ofgem website about remuneration of brokers. He could have asked the broker or even the supplier. He chose not to do so, not because of any vulnerability or lack of sophistication, but because it seemed to him that what the broker was doing benefitted the Club. In fact, he simply did not consider the question of how the broker was being remunerated.

The court made clear that vulnerability or the lack of sophistication is not an essential ingredient of a lack of informed consent, but it is a relevant consideration.

The court concluded that it was acknowledged, by the acceptance that this was a half-secret commission case, that the Club ought to have known that the broker would be remunerated. It stated that those who run clubs and small businesses should be alive to the possibility of a conflict of interest in these circumstances.

The court concluded it was not necessary for the broker to disclose to the Club the amount of the commission which it was to be paid, so it was not in breach of duty in failing to do so.

What are the key takeaways from Dark Blue Pig and Leicester Indoor Bowls and Social Club?

The decisions in Leicester Indoor Bowls and Social Club and Dark Blue Pig are consistent on a key point: due to the sophistication of the claimants – that is, them being commercial entities– disclosure of the amount of commission was not necessary for the claimants to have given informed consent.

In both cases, the claim failed at hurdle (4). It was sufficient that the customer knew, or ought to have known, a commission would be paid. In such circumstances, there is no breach of duty by the broker, and a claim against the supplier must fail.

Leicester Indoor Bowls and Social Club is particularly helpful for suppliers for its confirmation that, for these purposes, a commercial entity can include a social club, or similar.

Leicester Indoor Bowls and Social Club is also helpful for its clarification that issues such as age, or the size of a commercial entity, for example, are not indicators of vulnerability or unsophistication. Those matters will be a question of fact in each individual case.

The hurdles a commercial entity claimant must overcome to succeed in a commission claim are high.

What are the risks to claimants of pursuing energy sector commission claims?

As the claimants found to their detriment in both The Dark Blue Pig and Leicester Indoor Bowls and Social Club, pursuing a hopeless claim can result in an adverse costs order.

In these claims, where legal fees can quickly overtake even the hope value of the claim, claimants can end up in a significantly worse position than when they started their claim.

'No win, no fee' arrangements might mean, in some cases, that claimants don't have to pay their own legal representatives' charges. However, they're unlikely to protect unsuccessful claimants from the lack of any recovery and liability for payment of the defendant's legal costs. Whilst claimants may be offered after the event insurance (ATE), such ATE providers may be unlikely to continue to provide cover when cases continue to be lost.

Practical insights on energy sector commission claims

Because it's not as easy to succeed at trial as some claims management firms are suggesting, many would-be claimants are now seeking to pursue potentially vexatious and costly commissions claims outside the main litigation process, by making court applications for pre-action disclosure ³. This is often done as a tactical attempt to extort a commercial pay-out from an energy company wishing to dispense with a troublesome (albeit not necessarily a sound) legal claim.

There are several reasons why pre-action disclosure can, and usually should, be resisted in energy sector commission claims. For more detailed advice and information on responding to pre-action disclosure applications in commission claims, see our recent briefing.

Energy companies should take specialist legal advice immediately upon receipt of any customer or claims management firm complaint relating to a potential energy commission claim and/or to any demand for pre-action disclosure. Importantly, staff should be educated to recognise such complaints and demands, and not to respond to unless and until in receipt of legally-guided instructions to do so.

Commission claims: How we can support you

Our Commercial Dispute Resolution lawyers regularly act for businesses facing energy sector commission claims. As well as helping clients to handle and defend an increasing number of claims, we help businesses to carry out health check reviews of existing contracts and relationships, including considering the extent to which commission has been disclosed, thereby helping to 'future-proof' against commission claims.

Where necessary or advisable, we also help our clients to ensure regulatory compliance and to proactively change terms and conditions and internal processes, in order to minimise future risk.

Please contact Nick McQueen or Tayla Boote for further information, training or advice.

Footnotes

1. The Dark Blue Pig Limited v ENGIE Power Limited, County Court (24 February 2023)

2. County Court (8 December 2023)

3. Pre-action disclosure is the disclosing of documents relating to a potential or intimated court claim before court proceedings are commenced. A request for pre-action disclosure can be made (and responded to) privately and informally between the potential parties to an alleged claim, or it can be dealt with via an application to court.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.