fiduciary relationship Related Essay

Law Essay Title

The utility and the extent of fiduciary obligations and the remedies for breach thereof are such that claimants and courts are tempted to stretch the concept of fiduciary relationships as if they were an "accordion term" (DJ Hayton, Hayton and Marshall Commentary on Case's on the Law of Trusts and Equitable Remedies p357)
Discuss, using relevant case law.

Linguistically, a fiduciary relationship involves a duty of loyalty owed by one party to another. A person who becomes a fiduciary in a legal sense is prohibited from allowing his personal interest to conflict with his duty. Fiduciary obligations are onerous and far-reaching. As a general rule, a fiduciary is prohibited from gaining a benefit for himself as a result of his position. Applying this standard, the House of Lords in Boardman v Phipps held an agent to be in breach of his fiduciary obligation. This was so ‘even though [the fiduciary] acted honestly and in the principal’s best interest, even though his principal benefited as well as he from his conduct, even though his principal could not otherwise have obtained the benefit and even though the benefit was obtained through the use of the fiduciary’s own assets and in consequence of his personal skill and judgment.’

By law certain individuals are ‘debarred from keeping a personal advantage derived directly or indirectly out of [their] fiduciary or quasi-fiduciary position.’ These include trustees, personal representatives and agents. With other categories of individuals, the court will look to whether the benefit has derived as a result of a fiduciary duty owed or independently thereof. This is the approach towards company directors, solicitors and partners, among others.

Keeping the categories of fact-based fiduciaries open is sound public policy. Finding that a fiduciary relationship exists in some factual situations may be ‘appropriate in the interests of justice because of the claimant’s particular vulnerability to being taken advantage of by the defendant upon whose loyalty he is reasonably relying.’ As a result, determining which factual circumstances give rise to a fiduciary obligation is not always easy. This uncertainty has been seized upon by claimants wishing to take advantage of the generous equitable remedies triggered by a breach of fiduciary obligations. The courts have occasionally responded by stretching the concept of the fiduciary almost to breaking point when they felt this would produce a just result.

One such example is the case of Reading v A-G. Reading was a sergeant in the British army based in Cairo. He accepted a large amount of money in bribes in return for allowing contraband goods to pass through army checkpoints. He argued that the British Government should not be allowed to take the money, even though he had gained it wrongfully. It was held that as a result of his position in the army he was in a fiduciary relation to the Crown. He was therefore made to account for the profits he had made. Goff and Jones note that in light of this decision ‘the status of a fiduciary may … be easily acquired.’ Martin is critical of what she perceives as a remedies-driven approach: ‘it may sometimes appear that the defendant may be classified as a fiduciary, or not, in order to achieve the desired result.’ Gareth Jones argued as far back as 1968 that it was unnecessary to impose the fiction of a fiduciary relationship in Reading in order to make him account for the profits; the case is best understood as one of unjust enrichment. The courts have since come to accept unjust enrichment as an independent cause of action giving rise to restitution, with the result that modern courts are less likely to stretch the concept of the fiduciary to the extent the House of Lords did in Reading.

The existence of a fiduciary relationship has long been a requirement of equitable tracing. Claimants eager to benefit from equitable tracing rules to locate and preserve their property have therefore also argued for the imposition of fact-based fiduciary relationships. Pressure on the courts to find such relationships, merely as a way of allowing claimants to benefit from equitable tracing rules, has eased somewhat since the decision in Foskett v McKeown. It was held here that although a fiduciary relationship may be relevant to whether a claimant should be allowed to trace in equity, it should not be a prerequisite.

Indeed, it is far from clear what sort of remedy a claimant is entitled to once a breach of a fiduciary obligation has been established. In Boardman the court held that the fiduciary held the profits he had made in this capacity as a constructive trustee (a proprietary remedy), but also talked of him ‘accounting for the profits’ (a personal remedy). The distinction is important, especially when the fiduciary is bankrupt, or when he has invested assets profitably. In Lister v Stubbs the Court of Appeal held that when a fiduciary accepted a bribe, the claimant’s remedy against him was personal. It would follow that if the fiduciary had made a profit from investing the bribe money, he could keep this profit once he had accounted for the value of the bribe (thus placing him in a more favourable position than the honest fiduciary in Boardman).

Lister was disapproved of by the Privy Council in A-G for Hong Kong v Reid. This decision has been welcomed to the extent that it prevents the unjust enrichment of a dishonest fiduciary. However, it has been criticised as amounting to ‘proprietary overkill,’ giving the claimant priority over the defendant’s unsecured creditors and a cash windfall if the invested bribe yields a return. If Reid finds its way into English law it will surely lead to an increase in claims from those seeking to benefit from this uniquely generous remedy (Birks and Swadling note that wrongs other than bribery do not trigger a proprietary response ).

This last example provides a good illustration of the way the courts have employed the concept of the fiduciary. The image of an accordion, expanding and contracting, would appear apposite in light of what we have discussed. The tension between the desire to allow the categories of fiduciary relationships to remain open and the concern with not allowing the concept of the fiduciary to be stretched to the point where it loses its integrity and usefulness will continue to shape this area of law.

BIBLIOGRAPHY

Reference works:

Birks P An Introduction to the Law of Restitution (rev ed Oxford: Clarendon 1989).

Goff R and Jones G The Law of Restitution (5th ed London: Sweet & Maxwell 1998).

Hayton D Hayton and Marshall Commentary and Cases on the Law of Trusts and Equitable Remedies (11th ed London: Sweet & Maxwell 2001).

Martin J Hanbury and Martin Modern Equity (16th ed London: Sweet & Maxwell 2001).

Case law:

A-G for Hong Kong v Reid [1994] 1 AC 324.

Boardman v Phipps [1967] 2 AC 46.

Bray v Ford [1896] AC 44.

Foskett v McKeown [2000] 2 WLR 1299.

Keech v Sandford (1726) Sel Cas Ch 61.

Lister v Stubbs (1890) 45 ChD 1.

Re Biss [1903] 2 Ch 40, 56.

Re Diplock [1948] Ch 465.

Reading v A-G [1951] AC 507.

Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669.

Journal articles:

Birks P and Swadling W All ER Rev 1998, 415.

Crilley D ‘A Case of Proprietary Overkill’ [1994] 2 RLR 57.

Jones G ‘Unjust Enrichment and the Fiduciary’s Duty of Loyalty’ (1968) 84 LQR 472.

Please note: The above essays and dissertations were written by students and then submitted to us to display and help others. Thanks to all the students who have submitted their work to us.

Please note: The above essays and dissertations were written by students and then submitted to us to display and help others. Thanks to all the students who have submitted their work to us.