We support energy brokers across the UK to collect & protect their revenue

Most energy brokers have encountered the frustration of contracts not going live, leading to revenue losses. PreAction can recover those losses on your behalf.

We support energy brokers across the UK to collect & protect their revenue

Most energy brokers have encountered the frustration of contracts not going live, leading to revenue losses. PreAction can recover those losses on your behalf.

In our latest blog, written by our Legal Director, Stephen Wiles, we delve into a recent court judgment that holds significant implications for the energy brokering industry in the UK.

The case of Leicester Indoor Bowls Club v Drax, decided in the County Court at Leicester on 8th December 2023, offers a comprehensive examination of the legal intricacies surrounding commissions paid to brokers.

In the County Court at Leicester 8th December 2023

These notes summarise this court decision.  At 39 pages the judgement helpfully provides quite some detail as to the facts and then comments at some length as to both side’s legal arguments.

The Club: Leicester Indoor Bowls And Social Club Limited  (“the Club”), claimant

The Supplier: Drax Energy Solutions Limited (“the Supplier”), defendant

Brief facts

A broker arranged a supply contract with Drax for the term 1st September 2017 to 31st March 2022.

The Club claimed against the Supplier the commission paid under that contract, the commission paid to the broker was in the region of £23,000.

There was no claim against the broker as it was now in administration.

No evidence was provided in court that either the broker or the Supplier referred the Club to the payment of commission to the broker.

Mr Palmer, club secretary

All relevant contact was between Mr Palmer and the broker.

One of Mr Palmer’s tasks over a number of years was to find and arrange energy contracts for the Club. He understandably wanted the club to enjoy the cheapest energy contract prices. When an energy contract was nearing its end he would check to see if prices lower than those of the current contract were available.

From about 2007 Mr Palmer caused the club to use the services of a broker.

The Supplier had changed approximately every two or three years prior to the end of the then existing contract during 2017.

LOA and commission

LOA 10th March 2017

The Supplier locked the contract in at 3.5p commission.

Supplier’s instruction to the broker

15 March 2017 the Supplier sent an email to the broker:

“Please find documentation attached for your client as detailed below: Clients name: Start date: 1/9/17 Payments terms: VDD Commission: 3.5ppu. Additionally I need you to have discussed all charges with the client so they fully understand the additional pass-through elements of this contract and what extra charges will appear on their invoice.” 

Whilst the Supplier argued this obligation on the broker included disclosing commission to the Club the broker did not made any such disclosure and therefore this requirement as between the Supplier and the broker was academic.

Terms and conditions review

Letter Before Action

30th September 2022 the Club’s solicitors sent a letter of claim to the Supplier asserting that the Supplier had paid undisclosed commissions to the broker and that (amongst other things) the Club was entitled to recover the undisclosed commission from the Supplier.

The Supplier’s solicitors responded on behalf of the Supplier denying liability but saying that in any event the Club knew or ought to have known that the broker would be paid a commission and that, at best, the Club’s claim was that a half-secret commission had been paid.

The Club’s solicitors accepted that the Club’s claim was for a half secret as opposed to a full secret commission.

Claim form issued 9th March 2023.

The basis of the Club’s claim against the Supplier

Mr Palmer received a cold call from the broker.

The broker told the Club that it could find the best and cheapest energy deal for the Club.

The contract was recommended to the Club by the broker.

The broker owed the Club fiduciary duties on the basis that it acted as the Club’s agent and the Club put trust and confidence in the broker’s expertise and trusted the broker to act in its best interests.

The Supplier agreed with the broker (without the Club’s knowledge) to pay a commission to the broker. The Club was unaware that a commission would be paid by applying an uplift to the pence per kWh rates charged to the Club.

The Supplier did not disclose the commission to the Club.

The Supplier’s defence

The supply contract stated that the Club agreed to pay any fee payable to a broker (or other introducer or agent) engaged by it and agreed that the Supplier may pass such fee through to the Club by means of an increase in the charges.

The broker was not acting as agent for the Club.

The broker did not and was not required to play a part in the decision making process or exercise independent judgment or exercise any influence over the Club’s decision making with regard to energy procurement.

The Club was aware that the broker may receive a commission from the Supplier and that it (the Club) was not paying the broker for its services.

The Club did not rely on trust and confidence in the broker. The Club was a financially sophisticated commercial entity.

The Club’s evidence

The Club was a micro business.

Mr Palmer was responsible for finding the cheapest energy.  When a contract was coming towards its end he would check whether there were any cheaper deals than the current contract.

He stated that had no specific or detailed knowledge as to energy contracts and that he believed a broker could source better prices than he could given that lack of expertise.

He then added that had he known the broker was

“…charging them for what they were doing, I never would have engaged with (the broker) as it was something I could have done myself. I assumed (the broker) would be paid a direct commission by the Supplier they were securing the contract on behalf of.

I had only ever dealt with brokers previously when securing my car insurance, and this was before we could use comparison websites online. I never paid the car insurance broker a fee, they got their payment from the insurance company direct. I thought that this was how brokers were paid.”

When signing the contract Mr Palmer had not read that document’s terms and conditions.

He had trusted the broker, but accepted that the terms and conditions were binding and that a clause within the referred to fees payable to a broker.

However that clause did not clearly explain the payment would be a commission.

The Supplier’s evidence

Normally the broker would be paid by the Supplier.   That is a common and standard practice in the energy supply industry and is recognised by Ofgem and is referred to in its 2015 advice guidance. The fact that broker received a commission from the Supplier was not a secret.

The Suppliers accepted that its terms and conditions did not refer to a commission being paid and the acceptance checklist by which the Supplier monitored the broker’s actions did not include any reference to commission charges or information that the Club was aware of those charges.

The law

The payment of commission by a supplier to an agent of a customer may be a “bribe” giving rise to a breach of duty owed by the broker to the customer. If the Supplier knew of the agency and failed to disclose to the Club that it is making the commission payment, then this claim may succeed.

Whether there has been sufficient disclosure for the Club to give its informed consent depends on the facts of each case. In general, where the Club leaves the broker to look to the Supplier for its remuneration or knows that the broker will receive something from the Supplier the Club cannot object on the ground that he did not know the exact amount.

One critical factor is the nature of the Club.

For a fiduciary duty to be owed the broker doesn’t need to be the Club’s agent.

In this court decision the judge referred to two other court decisions.  Firstly, The Dark Blue Pig: the LOA given to the broker was similar to that which was given in this case.  In The Dark Blue Pig it was not a fully secret commission.

The judge in that case then decided what level of disclosure was necessary in order for informed consent to be given.

He held that the customer in that case was not vulnerable or unsophisticated (taking into account that it was a small business with no particular knowledge of the energy market) and that someone who runs a small business could be expected to consider their own interests and to be on their guard when instructing an agent whose services they knew would be paid by commission of an undisclosed amount paid by a supplier.

Secondly, The Roman Catholic Diocese of Hexham and Newcastle v Select Consulting & Admin Services Ltd (t/a The Energy Procurement Organisation). The claim was brought against the broker rather than the supplier.

Although the evidence for the customer came from a Father Brown, the judge found that he had no evidence to justify a finding that the customer was unsophisticated or vulnerable and therefore decided that sufficient disclosure had been given by the broker.

Each decision is fact sensitive.

Legal Partners

Summary of the law

  1. 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. A broker must not act for its own benefit without the informed consent of the customer.
  2. Although a person acting as a broker on behalf of a customer is likely to be an agent, that is not conclusive of the question as to whether the broker is a fiduciary.
  3. Where a broker has the power to change the legal position of the customer the law imposes on the broker duties of a fiduciary nature
  4. A customer that engages a broker can expect the broker to get the best possible deal.
  5. A broker who receives commission without the informed consent of the customer will be in breach of fiduciary duty. A supplier paying commission knowing of the agency will be an accessory to such a breach.
  6. Where the customer does not know that that commission is payable at all the commission is fully-secret.
  7. Informed consent: where the customer knows that the broker will look to the supplier for payment it cannot object on the ground that it didn’t know the exact amount.

The Judge repeats every case is decided on its facts and as regards oral evidence: “the best approach for a judge to adopt in the trial of a commercial case is, in my view, to place little if any reliance at all on witnesses’ recollections of what was said in meetings and conversations.”

Brokers charge for their services. Payments were generally made to brokers made as set out in the Ofgem and CAB guidance 2015 either by the payment of a direct payment or indirectly by a payment from the supplier, which is then added to the customer’s bill.

Summary of the law continued

  1. In this case the engagement by the Club of the broker under the LOA dated 10 March 2017 gave rise to a fiduciary relationship between them:
    1. The Club was authorising the broker to negotiate a contract on its behalf;
    2. The Club was relying upon the skill and expertise of the broker in dealing with the Suppliers in circumstances where the Club would not be speaking directly to the Suppliers and specifically said they held all trust in the broker. The Club was reposing trust and confidence in the broker to negotiate the best deal it could on its behalf;
    3. The broker assumed a duty to obtain the best quotations in the market which it could on behalf of the Club, and
    4. The broker was negotiating to be paid a commission in circumstances where the Club was not being made aware of the amount of that commission.

    The broker owed fiduciary duties to the Club. The question is then whether the Club gave informed consent to the payment of commission.

    As to whether informed consent was given consider all facts of the case and in particular:

    1. the nature of the contract being entered into;
    2. the reasons why the broker is being engaged, including the circumstances of the Club and any inequality of bargaining power;
    3. whether the Club is vulnerable or unsophisticated. This includes the nature of the Club itself and any personal vulnerability or lack of sophistication; and
    4. the nature of the commission being paid by the Supplier and how ascertainable that in is in fact for the Club.

Final Thoughts From Our Legal Director

Here the Club expected that the broker might secure a better deal than they might be able to secure on their own. The Club was not under any pressure to enter into a new contract either in terms of time (the existing contract still had five months to run) or financially.

Whilst the Club would not want to pay more than it needed to, there was no financial imperative or reason to enter a new contract at that moment.

That position of the Club here is to be contrasted with the court decisions quoted by claims companies that concern applications for loans where the borrower is unable to secure lending from traditional sources such as banks and may be under pressure of time or personal circumstances to take out a particular type of loan.

The Club was not vulnerable or unsophisticated, nor was Mr Palmer.

Whilst the judge had no evidence as to commission rates in the market generally at the time or whether individual businesses would be able to negotiate cheaper rates without using a broker he commented that it was unlikely that an individual customer would be able to get a price as good as a broker could arrange.

His reasons for that view included that a customer wouldn’t require the same volume of consumption as a broker who can introduce many customers.

Also dealing with an individual customer may also add to the time and attention which the Supplier would need to devote to that case.

Here the Club could have checked the Ofgem website about remuneration of brokers. it could have asked the broker or even the Supplier.  It chose not do so in this case not because of any vulnerability or lack of sophistication but because it seemed to it that what they were doing benefitted the Club.

In fact, here the Club simply did not consider the question of how the broker was paid even though it acknowledged that it ought to have known that broker would be remunerated.

“Those who run clubs and small businesses have to be on their guard and should be alive to the possibility of a conflict of interest in these circumstances.”

It was not necessary for the broker to disclose the amount of the commission which it was to be paid and the broker was not in breach of duty in failing to do so.

Conclusion

In closing, Stephen Wiles, our Legal Director, has provided his thoughts on the complexities of the Leicester Indoor Bowls Club v Drax case, highlighting the critical legal considerations surrounding broker commissions .

As the energy brokering industry continues to evolve, staying informed about such legal nuances is paramount for businesses seeking to navigate this landscape successfully.

We hope this blog has provided valuable insights into this pivotal court decision, and we encourage you to reach out to us with any legal queries or concerns you may have in this domain.

Our legal Director, Stephen, Is always on hand to support our clients.

Work With PreAction

We provide a complete debt resolution and revenue recovery service for defaulted agreements as far back as six years.  We support 100+ utility businesses with specialist operational support. Our debt resolution service has proven to be an invaluable source of cash flow for brokers. 

We are visiting sites and conducting teams calls with several new clients this month. See what our clients have to say.

If you would like to find out how PreAction can support your business with a range of services, including debt resolution, give us a call at 0191 5807231, drop us an email at enquiries@preaction.co.uk

We support energy brokers across the UK to collect & protect their revenue

Most energy brokers have encountered the frustration of contracts not going live, leading to revenue losses. PreAction can recover those losses on your behalf.

We support energy brokers across the UK to collect & protect their revenue

Most energy brokers have encountered the frustration of contracts not going live, leading to revenue losses. PreAction can recover those losses on your behalf.