Judge warns small businesses to ‘be on their guard’ in energy broker commission case

On 8 December 2023, His Honour Judge Hedley dismissed a claim against Drax Energy Solutions Limited (‘Drax’) in which the claimant alleged it had paid undisclosed commissions to its broker.

Whilst the Judge dismissed the claim the decision will no doubt cause energy suppliers concern given the Judge’s findings on the evidence and is unlikely to stem the rising tide of similar cases being brought by business of various sizes in England and Wales.

Neil Stockdale is head of group actions and financial mis-selling teams, specialising in handling claims for financial mis-selling relating to energy contracts, pensions, investments and timeshares at Hugh James. He observed that; “The Judge’s decision seems surprising given his findings and it remains to be seen how the Courts will resolve similar issues in future cases. What is clear from this decision is that brokers operating a similar business model are likely to be found to owe businesses a duty to act in their best interests. Questions of client sophistication and informed consent will no doubt continue to be fought out before the Courts in individual cases, particularly until there is some guidance from the higher Courts.”

The claimant was a business operating as a bowls club in Leicester. It alleged that electricity supplier, Drax, had paid secret commissions to the broker that it had instructed to arrange its energy contract, a firm called The Energy Checking Company Limited (“ECC”).

The club argued that commission was paid secretly without the business’s informed consent making Drax liable to the claimant for procuring a breach of the broker’s duty to act in its best interest as a fiduciary.

The claimant sought the repayment of the commissions which amounted to just over £18,400.

Judge Hedley accepted that the engagement by the club of  ECC quite plainly gave rise to a fiduciary relationship between them, going on to add, ‘In my judgment the Club was reposing trust and confidence in ECC to negotiate the best deal it could.’

However, the Judge found that it was not necessary for ECC to disclose the amount of commission which  was to be paid by Drax. ECC had therefore not failed to obtain informed consent and therefore, had not breached its duty. These findings meant that in law the supplier was not liable for procuring a breach and therefore the Judge dismissed the case against Drax for repayment of the commission.

The Court firstly heard the evidence of Harold Palmer, a voluntary company secretary of the bowls club. Mr Palmer informed the court that he was not aware that the club  was paying commission and was not well versed in the workings of the energy market. Mr Palmer did struggle to recall specific matters as the contracts had been agreed several years prior but was acknowledged by the Judge as being an honest witness doing his best to assist the court.

The Court then heard evidence from Drax’s Customer Sales and Marketing Director, Paul Miller, who explained to the court that Drax had a longstanding relationship with ECC and had entered into a brokerage agreement with ECC in 2016. Under the agreement ECC warranted that they would introduce electricity customers to Drax to provide quotations for the supply of electricity to customers that had already agreed to pay a commission.

Despite this, Mr Miller in his oral evidence, acknowledged that acceptance checklist document by which Drax monitored ECC did not include any reference to commission charges or any information to suggest that the customer was aware of those charges.

It was clear from the evidence that Drax had no interest or involvement in setting the broker’s commission and that it made little attempt to ensure that the commission figure was disclosed by ECC to its customer.

Mr Palmer was therefore unaware that prior to the contract being concluded, the broker had added 3.55 pence for each kilowatt hour of energy used to pay its commission. This resulted in commission being payable to the broker of £18,414,46. This commission uplift represents 37% of the contract price for the daytime energy rate and 45.8% of the night rate. The Judge accepted that the club was not aware of the rate of commission it was agreeing to.

Having heard the evidence the Judge was satisfied that the broker owed a duty of trust and confidence to the business. The Judge went on to consider the level of disclosure required by the broker and concluded that it was not within the scope of the broker’s duties to inform the business of the commission.

The Judge concluded that the club could have been expected to ask questions about commission saying Mr Palmer could have checked the OFGEM website or asked ECC or Drax commenting that, ‘Those who run Clubs and small businesses have to be on their guard and should be alive to the possibility if a conflict of interest in these circumstances.’ This is despite ECC acting as its fiduciary.

The Judge’s decision seems surprising given his findings on the facts. Having found that there was a fiduciary relationship, and that EEC was negotiating to be paid a commission in circumstances where the claimant was not being made aware of the amount of the commission, it would be expected that the burden of proving full disclosure would be firmly on ECC.

The position is all the more surprising given the finding that Mr Palmer was, ‘..not well-versed in the workings of the energy supply market ..’. Indeed, there was no evidence in the case that established the existence of a customary practice of energy brokers being paid commissions that the club was or should have been aware of.

The level of the commission also appears egregious on the face of it and very unlikely to have been agreed by the club had it been disclosed particularly had the club understood that ECC was effectively setting its own commission and therefore patently not securing the best deal as it had agreed  to do.

It remains to be seen how the Courts will resolve issues in future cases. What is clear from this decision is that brokers operating a similar business model are likely to be found to owe businesses a duty to act in their best interests. Questions of client sophistication and informed consent will no doubt continue to be fought out before the Courts in individual cases particularly until there is some guidance from the higher Courts.