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R. v. Kelly.doc

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University of Alberta
Business Law
B LAW402
Elaine Geddes

R. v. Kelly 1991: Supreme Court of Canada The accused was charged with four counts of corruptly accepting a reward or benefit contrary to s. 426(1)(a) of the Criminal Code. He was one of the principals of a company ("KPA") which offers, for a fee, financial planning services, including advice respecting investment in real estate and tax planning strategies. In 1980, the accused persuaded a property development company to give KPA the exclusive right to sell the units of its MURB project. KPA sold all the units, mainly to its clients, within the relatively short time prescribed in the agreement and received a commission from the development company for each unit sold. These commissions were the same as those which the development company would have paid to any salesman. At trial, the evidence indicated that KPA's clients were unaware of the commissions paid by the development company to KPA. At their initial meeting with new clients, KPA only gave vague and general information as to its sources of remuneration on a "white board". The accused himself later advised his associates that, with respect to the MURB project, he did not want further disclosures in writing. In defence, the accused testified that the clients purchasing the MURB units should have known of the commissions to be paid to KPA from two small references in the Offering Memoranda on the "Issuing and Sales Costs". The accused was convicted on all four counts. The trial judge found that he had an obligation to make full, frank and fair disclosure of the sales commission. The majority of the Court of Appeal affirmed the conviction. The question raised on this appeal is what the Crown must prove in order to obtain a conviction pursuant to s. 426(1) (a) of the Criminal Code. In particular, this Court must determine whether s. 426 has any application where the party making the payments was not part of a corrupt bargain with the taker. C ORY J. The issue on appeal is relatively narrow. Namely, it must be determined whether s. 383 (now s. 426) has any application where the party making the payments, Qualico, was not part of a corrupt bargain with the taker, Kelly. In answering the "corrupt bargain" question, it is necessary to examine this issue in the context of the elements of the offence and the meaning of "corruptly". Section 426(1) of the Criminal Code provides: 426. (1) Every one commits an offence who (a) corruptly (i)gives, offers or agrees to give or offer to an agent, or (ii)being an agent, demands, accepts or offers or agrees to accept from any person, any reward, advantage or benefit of any kind as consideration for doing or forbearing to do, or for having done or forborne to do, any act relating to the affairs or business of his principal or for showing or forbearing to show favour or disfavour to any person with relation to the affairs or business of his principal; Before considering the purpose of s. 426, something must be said of the importance of the agency relationship in today's society. Society today simply could not function without the services of agents. The number of the principal/agent relationships is legion. It is difficult to sell a house or commercial property without relying upon a real estate agent. It is difficult to place insurance of any kind without consulting an insurance agent. Holidays are arranged through a travel agent. Brokers act as agents in the most complex and difficult financial transactions. Solicitors act as agents for their clients. With increasing frequency financial advisors are acting as agents for their clients. Very often business and professional people earning a good income are too busy earning that income to properly arrange their financial affairs. They turn to financial advisors for assistance. The principal/agent relationship is almost invariably based upon the disclosure by the principal to the agent of confidential information. The relationship is founded upon the trust and confidence that the principal can repose in the advice given and the services performed by the agent. The Definition of Agency Agency is the relationship that exists between two persons when one, called the agent, is considered in law to represent the other, called the principal, in such a way as to be able to affect the principal's legal position in respect of strangers to the relationship by the making of contracts or the disposition of property. The principal must be able to place trust and confidence in the agent since the agent has the authority to affect the legal position of the principal. (Fridman, The Law of Agency) This is perhaps the focus of the relationship. In essence the agent acts to achieve the same results that would have been obtained if the principal had acted on his or her own account. The influence the agent can have on the affairs of the principal and the power to take action on behalf of the principal are significant. They are of such great significance that it follows as the night the day that the agent must always act in the best interests of the principal. The Duties of an Agent The agent is obliged to perform those duties which he or she has undertaken to perform. The primary consideration in performing the duties of the agent must be to always act in the best interests of the principal. However, in performing them the agent must not exceed the authority which was delegated by the principal. In the context of the "Secret Commission" cases, the fundamental duties of the agent are those arising from the fiduciary nature of the agency relationship. The relationship of trust focuses on the principal with the result that agents must not let their own personal interests conflict with the obligations owing to their principals. A conflict of interest exists when an agent is faced with a choice between the agent's personal interest and the agent's duty to the principal. Fridman, supra, put it in this way (at p. 153): "Where the agent is in a position in which his own interest may affect the performance of his duty to the principal, the agent is obliged to make a full disclosure of all the material circumstances, so that the principal, with such full knowledge, can choose whether to consent to the agent's acting." The policy of the courts has been stringent in seeking to prohibit not just actual fraud perpetrated by agents on their principals but also in prohibiting the creation of a situation where agents could be tempted into fraud. The text, Bowstead on Agency (14th ed. 1976), provides several examples where the agent has a personal interest and, therefore, must make full disclosure (at p. 130): . . . an agent may not buy his principal's property or sell his property to his principal because in such a case his interest will be in conflict with his duty. He is not allowed to receive a commission from both parties to a transaction; he may not make any secret profits by exploiting his position or the property of his principal; he may not acquire a benefit for himself by dealing with a third party in breach of his relationship with his principal, nor may he compete with his principal. The agency relationship is extremely important to the functioning of our society. It is a relationship based on trust and it is fiduciary in nature. It is essential that the integrity of that relationship be preserved. There can be no doubt that s. 426 acknowledges both the importance of the agency relationship and the necessity of preserving the integrity of that relationship. It confirms that an agent should not be placed in a position which is in conflict with that of the principal. It recognizes that a benefit taken by an agent from a third party will place that agent in a conflict of interest position with the principal unless the benefit is promptly and adequately disclosed. No one should provide an agent with a benefit, knowing the benefit to be secret, in order to influence the agent with regard to the affairs of the principal. To do so corrupts and destroys the agency relationship. The secret benefit renders the advice and services of an agent so suspect that they cannot be accepted. The intent of the section is that no one shall make secret use of an agent's position and services by means of giving him any kind of consideration for it. . . . [T]he intent in passing this section was and is to protect the principal, the employer, in the conduct of his affairs and business against people who might make use or attempt to make use of his agent. The legislative history of this section demonstrates that the purpose and intent of it is to criminalize an agent's or employee's act of accepting "secret commissions" for showing favour or disfavour to any person with relation to the affairs or business of his principal. There can be no doubt that the commendable aim of s. 426 is to protect the agency relationship, to preserve its integrity and to protect the principal. First the Crown must establish that Kelly was acting, and knew he was acting, as an agent for the clients of his company KPA. There can be no doubt in this case that an agency relationship existed between Kelly and his clients and that Kelly was aware of the existence of that relationship. Indeed this element of the offence was not an issue on this appeal or at the trial The second element the Crown must prove is that the agent took the benefit as consideration for acting in relation to the affairs of the agent's principal. There can be no doubt that Kelly accepted a commission from a third party. It goes without saying that this commission comes within the category of a "reward, advantage, or benefit" required by s. 426. Nor can there be any question that the commissions were accepted as consideration for doing an act in relation to the affairs of the principals. Clearly, Kelly accepted the payment for recommending and eventually selling the MURBs to his clients. To establish the requisite mens rea for this second element, the Crown must prove that the taker, knowingly accepted the commission as consideration for acting in relation to the affairs of his clients or principals. It must be remembered that offences involving "secret commissions" are by their very nature secretive. They arise from operations that are inherently covert. It follows that courts should in these cases apply common sense and draw the reasonable and appropriate inferences from the proven facts. Certainly Qualico's purpose in paying commissions to Kelly would be to encourage Kelly to influence his clients to purchase Qualico MURBs. Here it was Kelly who sought out Qualico to negotiate an agreement for selling MURBs and for receiving commissions on those sales. It was Kelly who advised the resident manager of Qualico that he had "good solid" clients to whom he could sell the MURBs. On the first development, Kelly was prepared to incur the risks of a performance bond with a strict time limit as part of the agreement for selling the entire development. The only time that Kelly advised any of his clients to purchase MURBs was when the Qualico developments were put on the market. Thus, it is clear from the inherent nature of commissions and from Kelly's actions that Kelly knowingly accepted the Qualico payments as cons
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