Philip Murrin and Graham Ludlam look at the importance of good record-keeping to avoid legal disputes between principals and agents


There has until recently been no modern legal guidance concerning the liability of an agent to account to its principal.



In particular, the answers to the following important issues were uncertain:

l At what point it becomes reasonable for a principal to issue proceedings against an agent for failure to account and the consequences for who bears the legal costs;

l On whom the burden lies to show what sums have been received by the agent and what has been paid on to the principal;

l The circumstances in which an agent can rely on a settled account; and

l The extent to which an agent's own working documents have to be disclosed.



Equitas Ltd v Horace Holman & Company Ltd [2007] EWHC 903 (Comm), a recent decision of the Commercial Court, has provided much-needed guidance in this area. The facts of the case and its procedural history are complicated. However, in an illuminating judgment, Mr Justice Andrew Smith has provided clear guidance of much assistance to principals and agents alike.



The case arose from a dispute between parties in the reinsurance market. While the decision is very important in that particular market, especially for the discontinued business sector, the decision is applicable in a much wider context, and carries significant implications generally for agents handling money on behalf of their principals.



Equitas (the principal) believed that Horace Holman (its broker) was withholding money and sought an account. In the absence of co-operation from Horace Holman, Equitas commenced proceedings seeking an account of all funds then held by Horace Holman due and payable to Equitas, including the date of receipt of any such funds. The claim also included a request for delivery-up of hard copies of ledgers and other accounting documentation relevant to any funds held.



The basic principles in such claims are fairly straightforward, although it is helpful that they have been reiterated in a modern precedent. An agent, who holds the position of a fiduciary agent, owes the principal a duty to maintain proper records. The records must be kept so as to allow a principal at any stage to ascertain the true state of the account with them, and to ascertain what remains due from third parties with whom they had contracted via the agent.



An agent will be in difficulty if its records are in a poor state such that it becomes difficult or even impossible for a proper and clear account to be provided to the principal. In those circumstances, as it was held in this case, it becomes reasonable for a principal to issue proceedings against an agent for failure to account, and the likely consequence is that the agent will be liable for the costs of those proceedings.



As to the burden of proof on accounting issues, the decision makes it clear that the starting point is for the principal to demonstrate that sums have been received by the agent. The burden then shifts and it is then for the agent to show that the sums received have been passed on to the principal. The court will have little sympathy with a defendant agent who makes life difficult for the principal owing to insufficient or poorly-kept records. In this case, Equitas could show that certain monies had been received by Horace Holman, but Horace Holman could only show that some, but not all, had been passed on.



Turning to the issue of when the account becomes settled, such that the accounting party then gains a defence, generally it is a defence to an action for an account that the accounting party has already given the account, which has been adjusted, and that the balance has been agreed and paid. But where an agent has provided accounting information that is inadequate or unsatisfactory, such a defence will not succeed, and the agent will either have to render a fresh and proper account, or the account previously stated will remain open to challenge by the principal. The consequence of this is that the accounting party remains vulnerable until it has produced an account that is demonstrably satisfactory and paid balances and interest due.



The other issue raised above concerns disclosure of the accounting party's 'own' documents. It is sometimes the case that an agent will keep records relating to a number of accounts within one accounting system, such that those relating to one principal are inextricable from records relating to other principals. However, that does not excuse the agent from providing the principal with copies of the records relating to their affairs. On a practical level, this may involve disclosure by an agent of information relating to other principals, which will generate its own problems between the agent and the other unconnected principals. Equally, an agent will have created documents for its own purposes, containing information as to accounts with principals.



Most importantly, in Equitas the relevant documents included insurance broking accounts ledgers, which should include the transactions and balances arising from insurance business, including debit and credit entries on the underwriters' payments of cash.



As between professional adviser and client, following the decision in Chandrey Martin v Martin [1953] 2 QB 286, it is clear that a professional adviser's own working papers need not be handed over to a client following a request for delivery-up of the client's files. Horace Holman sought to argue that ledgers and the like were not within the ambit of a proper request for documents and information from a principal.



However, the court declined to apply the rule in Chandrey to the principal and agent relationship, holding that the agent is obliged to provide copies of such documents, insofar as they record transactions that the agent carried out as agent of the principal. A distinction was thus drawn between the relationship between professional and client, and accounting agent and principal.



The message from the Commercial Court in this case is that good accounting and record-keeping is something an agent must strive to achieve. With that in hand, disputes concerning an agent's obligation to account ought not to occur. Faced with poor record-keeping and an inability to account, principals are justified in commencing legal proceedings against their agents, and defences will not succeed which might otherwise be available to the properly organised agent who accounts accurately.



Philip Murrin is a partner and Graham Ludlam a professional support lawyer at City firm Davies Arnold Cooper, which represented Equitas