Fiduciary Relationships
Extract 1 : Fiduciary
Relationships
Extract 2 : The beginnings
of the rule
Extract 3 : Paid fiduciaries
Extract 4 : Regal (Hastings)
Ltd v Gulliver
Extract 5 : Cases following
Regal Hastings
Extract 6 : The mitigation
of the rule
"It is an inflexible rule of Equity that a person in a fiduciary position is not, unless expressly provided, entitled to make a profit; he is not allowed to put himself in a position where his interest and duty conflict." This principle is one of Equity's oldest and most rigid doctrines, and it is often said that trustee's have a duty not to make an unauthorised profit. However it is felt that the rigorous application of the rule can inflict considerable hardship, often in cases where it may seem somewhat unjust to do so. That said, Equity is a continually evolving branch of the law and the question is whether it has developed in such a manner as to mitigate the potential harshness of the rule.
Before an analysis can be embarked upon with regard to the decisions discussed below, a key question needs to be answered, that is; what exactly does 'fiduciary relationship' mean?
In a linguistic sense fiduciary means simply, held in trust, or a person who holds anything in trust but in a legal sense it has come to have a wider meaning referring to a variety of situations, allowing one person, or group, to bring another to account on the basis of their fiduciary relationship. The first and most important category of fiduciary relationship is trustee to beneficiary, but other relationships considered fiduciary in nature include; certain agents to principals , solicitors to clients , company directors to the company , Partnerships , confidential employees to their employers , pawnbroker and pawner , and certain bailees . This list is not a closed one and as it was said in Reading v Attorney General 'the status of a fiduciary may… easily be acquired.'
Despite the wealth of case law on the matter the courts have not yet given us satisfactory definition of fiduciary relationship, and therefore it falls to us to try to create our own definition from the evidence available. For example it could be said that a fiduciary relationship is found where one party reasonably places his trust and reliance in another party to act in a loyal manner conducive to his best interests. However, useful though that definition could prove, Jill Martin may be being more realistic where she says that 'it may sometimes appear that the defendant may classified as a fiduciary, or not, in order to achieve the desired result.' As such the judiciary's approach to the fiduciary relationship might be best understood as an example of a purposive approach to the law where they have attempted to give effect to the spirit of the law as opposed to any strict definition.
This is further borne out by the decision in Swain v The Law Society . The case involved a compulsory insurance scheme for solicitors; this scheme was run by the law society who negotiated the insurance premiums for all solicitors with the insurers. The law society also kept all the commission made from the premiums and applied it for the general purposes of the profession. Swain was a solicitor who objected to the scheme, and he argued that as the law society kept the commission from the scheme, it was in their interest to negotiate a high premium with the insurers, which was a clear conflict of interest with its fiduciary position as regulator of the solicitor's profession, whose best interest would be served by a low premium. The courts held that as the Law Society was under a statutory obligation to ensure that solicitors were ensured, it was acting in its public capacity and as such, private law concepts like fiduciary accountability did not apply.
The basic rule that fiduciary is not allowed to make an
unauthorised profit was established in the case of Keech
v Sandford where there was a dispute over the equitable
interest in a lease. In this case a trustee held the lease
on trust for a beneficiary, the lease then expired, the
trustee then got a new lease in his own name. The court
held that the Trustee had to hold the renewed lease on trust
for the beneficiary despite the fact there was no question
of fraud or dishonesty in the case.
At the time Lord King L.C. said:
'I do not say there is fraud in this case, yet he should rather have let I run out than had the lease to himself. This may seem hard that the trustee is the only person in of all mankind who might not have the lease but it is proper should be strictly pursued.'
However a contrasting decision was given in the case of Re Biss . Here a lessor had refused to renew a 7 year lease on some business premises but allowed the lessee to remain as the tenant on a year to year basis, the lessee then died leaving a wife (also his administratrix) and two sons who continued the business under the lease. The lessor decided to terminate the lease, but granted one of the two sons a new 3 year lease which the son kept for his own benefit. The court held that:
'where the person renewing the lease does not clearly occupy a fiduciary position, he is only held to be a constructive trustee of the renewed lease if, in respect of the old lease he occupied some special position and owed by virtue of that position a duty to the other persons interested.'
This may seem a perverse decision given the strict application of the rule in Keech v Sandford, but some light may be shed on it by comments made in Bray v Ford (quoted above), which described the decision Keech v Sandford as an inflexible rule of equity:
'I am satisfied that it might be departed from in many cases, without any breach of morality, without any wrong doing being inflicted, and without any consciousness of wrongdoing. Indeed, it is obvious that it might sometimes be to the advantage of the beneficiaries that their trustee should act for them professionally rather than a stranger, even though the trustee were paid for his services.'
Under the rule in Keech v Sandford it is assumed that a fiduciary acts voluntarily and cannot charge for their time and trouble , but the law has long recognised that some fiduciary relationships require remuneration of some sort and it would be naïve to suppose otherwise. In Robinson v Pett it was held that if a fiduciary could show a specific entitlement to remuneration they would receive it and similarly a fiduciary will receive any out of pocket expenses incurred doing business in their fiduciary capacity . If in a trust situation the beneficiaries are all sui juris and there is no possibility of undue influence they may agree to the trustee being paid. Under s29 of the Trustee Act 2000 a trust corporation is entitled to receive reasonable remuneration if there is nothing specifying otherwise, and a professional trustee who is neither the sole trustee, nor a corporation, may also receive such remuneration if all the other trustees consent in writing. The court also has an inherent jurisdiction to order payment of fiduciaries if it feels that such payment is reasonable, in O'Sullivan v Management Agency and Music Ltd , this power was used to pay a performers agent as they had significantly contributed to that individual's success, despite the fact that the contract between the two parties was actually set aside because of undue influence. In most fiduciary relationships where remuneration is involved there will be an express clause, either in the trust instrument (which professional trustees can insert following the Trustee Act 2000), the articles by through which one party becomes a fiduciary, or in the contract of employment as in the case of a solicitor, thus circumventing the rule that a fiduciary may not make a profit.
Regal (Hastings) Ltd v Gulliver
The decision in Keech v Sandford was taken to its logical if somewhat conclusion in Regal Hastings, and it is worth briefly outlining the facts of that case before trying to ascertain whether the rule can inflict similar levels of hardship today.
In this case a company, Regal (Hastings) Ltd (R Ltd), set up a subsidiary company (A Ltd) in order to gain the leaseholds on 2 cinemas. A Ltd was floated with some 5000 £1 shares, the owner of the cinema informed A Ltd that he would only grant the leasehold if all of their shares were subscribed for. This was somewhat problematic as R Ltd could only afford 2,000 of the shares, as a result it was resolved that R Ltd's directors would buy the remaining shares themselves thus allowing A Ltd to take up the lease. At a later date R Ltd was transferred to new controllers and the directors who had bought shares in A Ltd made a profit on those shares as a result of the transfer. The company's new controllers then sued the directors for the profit they had made on the basis that they had profited as a result of their fiduciary capacity, and had effectively put themselves in a position where their duty and interest conflicted. The court held that the directors were liable to account for their profit even though they had acted bona fide throughout. Indeed it was said that liability 'in no way depends on fraud, or absence of bona fide.' So following this decision it was transparent that a company director or indeed any other fiduciary could be held liable to account for a profit even in situations where there is no suggestion of fraud, dishonesty or even negligence, instead they would seemingly be held liable for any profit made as the result of their fiduciary capacity.
The decision in Regal (Hastings) was certainly not an unusual one in the 1940's and a very similar verdict was reached in Re Macadam . In this case the trustee's had power under the articles given to them by virtue of their office to appoint two directors of a company and they decided to appoint themselves. At court it was said that:
'The root of the matter really is: Did [the trustee] acquire the position in which he drew remuneration by virtue of his position as trustee?'
In this case the trustees had clearly done just that, and in the absence of a clause in the trust instrument allowing self-appointment they were held liable to account for the money they received in their position as directors. Again in this case there was no real suggestion of any genuine wrongdoing, rather a misunderstanding as to the nature of their powers.
Cases following Regal Hastings
If we are to establish whether the fiduciary's can still be made to face such a heavy burden then we inevitably have to look to the more recent case law on the matter.
The most notable case to follow Regal (Hastings) is Boardman v Phipps , a highly a controversial case the result of which could scarcely described as 'equitable'. Boardman was a solicitor who administered a business in which the trust had an interest, and as a result of some information he received while working for the trustees he bought shares in that business himself. Boardman notified the trustees and the beneficiaries that he intended to do this, and the trust was in position to buy the shares itself. There was no question of bad faith or any apparent conflict of interest, and yet despite all of that Boardman was a majority (3:2) verdict held that he was liable as a constructive trustee for the profit made on the shares. Lord Cohen said of Boardman and another defendant 'that information and opportunity owed to their representing themselves as agents of the 8000 shares held by the trustees.' But as Lord Upjohn speaking for the minority said:
'Tough they portrayed themselves representing the Phipps trust, it is quite clear the offer was made by these two personally.'
Essentially Lord Upjohn was arguing that Boardman did not buy the shares in his fiduciary capacity nor did was the profit he made based upon trust property. It is in fact rather difficult to ascertain who Boardman was a fiduciary too, as although he initially acted as the agent for the trustees it was the beneficiaries of the trust who took action against him, and to whom he owed no apparent duty. Even their Lordships seemed rather vague on this point speaking 'rather ambiguously of his being a fiduciary to the trust. That this decision has been controversial is no surprise, a Jill Martin puts it:
'A windfall has been received through the actions of the fiduciary, the beneficiary has risked nothing, and lost nothing, should he be entitled to the profit? Boardman v Phipps answers this question in the affirmative.'
If anything the decision in Boardman v Phipps seems like a more onerous application of the rule against an unauthorised profit than that in Regal Hastings, all that is apparently required for a fiduciary to be liable is that ' a reasonable man looking at the relevant facts would think there was a real possibility of conflict.'
Moreover the decision in Boardman in Phipps does not stand-alone. In IDC v Cooley , Cooley a director/general manager of a company received information in a personal capacity that could have been exploited by his company (IDC) if the gas board, to whom the information related, were willing to use them as a contractor. However, the Gas board decided against using IDC, as it had a general policy of not using developers. Instead the gas board offered the Cooley himself the task of heading up a developmental team, as he was a distinguished architect in the field. Cooley accepted the offer and feigned illness to secure his release from IDC. Upon discovering this IDC sued Cooley for the profits he was making as head of this team. He posed two arguments firstly, that he had not received the information in his fiduciary capacity, and secondly he did not decide who the contract had gone to the Gas Board did so there was no conflict of interest. The court rejected these arguments and held him liable to account, as the company relied upon him to secure that kind of information, and moreover the absence of bona fides in this case was clear. Following IDC v Cooley it is clear 'that the prohibition on exploiting a corporate opportunity applies also to an opportunity which was presented to the director personally and not in his capacity with the company.'
The decisions in Boardman v Phipps, and IDC v Cooley have been followed in more recent cases such as Guinness plc v Saunders . Here a company director was held liable for £5.2 million pounds he made on a commission basis for brokering an agreement. Similarly in CMS Dolphin Ltd v Simonet a company director had to account for exploiting a business opportunity he discovered while still at the company, despite the fact he had resigned. Prima facie it would appear that the rule against making a profit out a fiduciary capacity is still very capable of imposing a heavy burden on defendants, especially when it is taken into consideration that many of these cases take place in the commercial world where opportunities have to be taken quickly or risk being lost. However, there have also been recent cases where the potential harshness of the rule has been mitigated a little and these are discussed below.
Surprisingly the seeds were sown for the mitigation of the rule in Boardman v Phipps, where the court held that although Boardman was liable as a constructive trustee, he was entitled to be awarded remuneration for his hard work and skill using the courts inherent discretion to do so. More importantly it was said that:
'Rules of Equity have to be applied to such a great diversity of circumstances that they may be stated only most general terms and applied with particular attention to the exact circumstances of each case.'
Furthermore:
'It does not necessarily follow that because an agent acquired information and opportunity while acting in a fiduciary capacity he is accountable to his principals for any profit that comes his way as the result of the use that he makes of that information and opportunity. His liability depends on the facts of the case…the rule if applied inflexibly may impose an impossible burden.'
This of course is true it would be almost impossible for solicitors acting for a client in one case not to use information acquired during the course of that case at a later date, similarly a company director who leaves one company is inevitably going to bring his or her knowledge of the market place so on to whichever company they join. What is important is that fiduciary's do not place themselves in a situation where duty an interest conflict, so in the solicitor example it would be ensuring that you do not use information acquired in the course of working for one client, for another client whose interests run contrary to the original client.
In the case of Queensland Mines Ltd v Hudson , the possibility of striking a balance was recognised. Hudson was director of a mining company that got offered licences to develop a mining operation. However, the company did not have the money to take up the offer of the licences and rejected the opportunity. Hudson then resigned as director and took up the licences himself, which the company was fully aware he was going to do. When the company later tried to sue him for the profits that he made the court held that; firstly the company had rejected the licences thus the opportunity came to Hudson outside his fiduciary duty, and secondly they had full knowledge of his enterprise and had therefore effectively consented.
A similar decision was taken in Island Export Finance Ltd v Umunna and Another , on this occasion a company were awarded the contract for installing postal caller boxes in the Cameroons. Subsequently one of their directors resigned in dissatisfaction at the manner in which the company was being run. The company decided against pursuing its interest in the postal caller boxes any further, but the former director took up two personal contracts for the installation of further boxes. Once again the company sued, and but the director was not liable as there was no conflict of interest with the company having already withdrawn it attentions.
Conclusions
It would seem to be the case that following the rather
harsh decisions in Regal Hastings and Boardman v Phipps
the courts are willing to use a little more discretion in
applying the rule. This ought mean that fiduciaries are
able to operate without quite such a great burden on their
shoulders. However, one final point to note is that even
where an unauthorised profit is made it is not clear exactly
what remedy the claimant will receive. In Boardman v Phipps
the court suggested that Boardman was holding the profit
from his shares on constructive trust for the beneficiaries,
but the normal remedy for a breach of fiduciary obligation
is a personal action against the fiduciary in question.
The distinction is important, as the aim of a personal action
is to compensate the party who has been hurt by the breach
of obligation and place them back in their original position,
normally by assessing the cost of the breach and then adding
1% to the value. However, in such cases a fiduciary will
only liable where the breach has caused a loss and obviously
in cases like Boardman no such loss has been incurred. In
contrast a constructive trust is used where there has been
an appropriation of trust property itself, and therefore
if that property increases in value that increase still
belongs to the trust itself. It was by classifying confidential
information as trust property that the majority in Boardman
v Phipps were able to award a constructive trust of the
profits, and this approach has since been confirmed in Thomas
Marshall (Exports Limited) . Confidential information is
classed as that information which the owner believes to
be injurious to him or advantageous to his rivals, and the
information must be information that the owner reasonably
believes to be confidential, with reasonableness being judged
in the light of that industry or field. Such a definition
is likely to be of little use in situations where on party
claims the information to have been confidential and the
other denies it, and if the courts prove as willing to stretch
the definition as far as they did in Boardman, then the
constructive trust could yet prove to be a heavier burden
than those fiduciaries faced in the past.
- Pearce and Steven's, 3rd edition, Butterworths Law, London 2002, p756 referring to Bray v Ford
- The Chambers dictionary, Chambers, Edinburgh 1994, p623
- De Busche v Alt (1878) 8 Ch D
- Brown v IRC [1965] A.C. 244
- Industrial Development Consultants Ltd v Cooley [1972] 1 W.L.R 443
- Clegg v Fishwick (1849) 1 MA C& G 294
- Attorney General v Guardian Newspapers Ltd (No.2) [1990] 1 A.C. 109
- Matthew v T.M. Sutton [1994] a W.L.R 1455
- Re Andrabell Ltd (in Liquidation) [1984] 3 ALL ER 407
- English v Dedham Vale properties Ltd [1978] 1 W.L.R
- [1951] A.C. 407
- J.E. Martin, Hanbury & Martin, Modern Equity 16th edition, Sweet & Maxwell, London 2001, p614
- [1983] A.C. 598.
- Pearce and Steven's, 3rd edition Butterworths Law, London 2002 p757 referring to Keech v Sandford
- [1903] 2 Ch. 40
- ibid.,
- Barret v Hartlett (1866)
- (1734) 3P. WMS
- s30(2) Trustee Act 1925
- [1985] 2 A.C. 46
- [1942] 1 ALL ER 379
- [1942] 1 ALL ER 379
- [1946] Ch. 73
- ibid.,
- [1967] 2 A.C. 46
- ibid.,
- ibid.,
- J.E. Martin, Hanbury & Martin, Modern Equity 16th edition, Sweet & Maxwell, London 2001, p622
- op cit, p623
- Boardman v Phipps, [1967] 2 A.C. 46
- [1972] 1 WLR 443
- IDC v Cooley (1973) 89 L.Q.R
- [1990] 2 A.C. 663
- 2001 2 B.C.L.C 704
- Boardman v Phipps, [1967] 2 A.C. 46
- ibid.,
- [1978] 18 ALR
- [1981] BCLC 460
- Target Holdings v Redferns [1996] HL
- [1979] Ch227
BIBLIOGARPHY
Books
- The Chambers dictionary, Chambers, Edinburgh 1994, p623
- J. Dine - Company Law, 4th Edition, Palgrave, Basingstoke 2001
- J.E. Martin, Hanbury & Martin, Modern Equity 16th edition, Sweet & Maxwell, London 2001
- Pearce and Steven's, 3rd edition Butterworths Law, London 2002
- A. Sydenham, Nutshells: Equity and Trusts Fifth Edition, Sweet 7 Maxwell, London 2000
Articles
A. Sinha, Directors Duties- Breach of Fiduciary Duties in International Company and Commercial Law Review 13(7) p266-268
Cases
- Attorney General v Guardian Newspapers Ltd (No.2) [1990] 1 A.C. 109
- Barret v Hartlett (1866)
- Boardman v Phipps, [1967] 2 A.C. 46
- Brown v IRC [1965] A.C. 244
- Clegg v Fishwick (1849) 1 MA C& G 294
- De Busche v Alt (1878) 8 Ch D
- English v Dedham Vale properties Ltd [1978] 1 W.L.R
- Industrial Development Consultants Ltd v Cooley [1972] 1 W.L.R 443
- IDC v Cooley (1973) 89 L.Q.R
- Island Export Finance Ltd v Umunna and Another[1981] BCLC 460
- Matthew v T.M. Sutton [1994] a W.L.R 1455
- O'Sullivan v Management Agency and Music Ltd [1985] 2 A.C. 46
- Queensland Mines Ltd v Hudson [1978] 18 ALR
- Re Andrabell Ltd (in Liquidation) [1984] 3 ALL ER 407
- Re Biss [1903] 2 Ch. 40
- Reading v Attorney General [1951] A.C. 407
- Regal (Hastings) Ltd v Gulliver [1942] 1 ALL ER 379
- Robinson v Pett (1734) 3P. WMS
- Swain v The Law Society [1983] A.C. 598.
Legislation
- Trustee Act 1925
- Trustee Act 2000
- Thomas Marshall (Exports Limited) [1979] Ch227
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