Fiduciary Duty

"The courts are constantly being asked to characterise a defendant's actions or omissions as a breach of fiduciary duty, because the consequences of characterising them in this way are so desirable for the claimant, but they must resist the pressure is the fiduciary concept is to retain its function and meaning."

Discuss :

It is essential to first understand the meaning of a fiduciary duty, before its function and remit within the current legal system, can be understood. There is a distinction between law-based fiduciaries and fact-based fiduciaries. These categories are not closed and therefore, remain open for further clarification and expansion. law-based fiduciaries covers the traditional trustee-beneficiary paradigm, but this also includes PRs, solicitor and client, principal and agent, partners, directors and their companies, and management level employees. In contrast, fact-based fiduciary duties are imposed in appropriate circumstances, such as where the claimant is vulnerable and thereby relies reasonably on the defendant's loyalty.

Clearly, the issue in contention here is that dealing with the fact-based fiduciary duty. It must be noted that recent attempts to extend the fiduciary liability to exploit the generous equitable rules in this area, especially in regard to disgorging profits and tracing, have largely been rejected. Therefore, these factors suggest that there is a conflict between the need to keep the remit of fiduciary duties open to extension, as opposed to limiting its uses to areas where the claimant is not taken advantage of. Indeed, public policy tries to maintain integrity, credibility and the utility of such duties, which is vital, if the fiduciary is to serve the best interests of his/her beneficiaries. However, it is debatable the extent to which in practice, this public policy aim is efficiently implemented. Although, there are many advantages that this doctrine provides, especially the diverse remedies that it offers a claimant. Consequently, the courts may in fact try to stretch its remit, as was recognised by Gummow J in Equity, Trusts and Fiduciary Relationships, thereby naming this process as an 'accordion term'.
The traditional trustee-beneficiary relationship has established a group of rules that has been extended to cover other fiduciaries also. Those acting in a fiduciary capacity are expected to not make a profit out of his position, he/she must act honestly/impartially towards the beneficiaries and he/she must not place themselves in a position where their self-interest and fiduciary duty may conflict. In fact, these requirements were specified in Boardman v. Phipps [1967], which is a leading case in this area. Furthermore, Breen v. Williams [1996] suggests that Equity imposes prospective and not prescriptive duties upon a fiduciary. Alternatively, where the fiduciary omits to uphold these obligations, he is guilty of breach of trust.

As a result, this allows far more flexibility in what could potentially be classified as a fiduciary duty, as opposed to imposing rigid directions on what qualifies as such. As mentioned earlier, this open category issue has both positive and negative attributes. Positively, it means that each case can be decided upon its unique facts and merits. In opposition, negatively, this can lead to inconsistency and uncertainty in this area of the law.

Fiduciary duties can be defined by establishing what the nature and scope of the relationship is. As such, a fiduciary cannot be held liable to account for profits made outside the scope of the plaintiff's business and therefore, he is not obliged to prefer the claimant's interest over his own. In light of this, surely, this factor shows that a fiduciary duty is not always imposed just to appease the claimant, as is purported by the contentious statement above and an attempt is made to protect the defendant's rights also. For instance, a director is considered to be a fiduciary to the company, as established by Regal (Hastings) Ltd v. Gulliver [1967], but not in relation to any shareholder, as established by Percival v. Wright [1902]. Consequently, this shows that the courts do not arbitrarily create a fiduciary duty in favour of the claimant merely because it is practical, but rather it takes account of the actual commercial context present.

However, the very nature of fiduciary duties is such that there is arguably a temptation to extend fiduciary situations. Indeed, Penner believes that this is justified in the solicitor and client relationship and similar cases of advice giving. This is because although a solicitor does not have true legal powers to affect his client, the latter will undoubtedly be influenced by this and act accordingly.
Clearly, this is fair if the solicitor advised a client to settle an action against a company that he had a personal interest in, which indicates a breach of fiduciary duty. However, it is unfair to extend this to the situation where a fiduciary has committed a legal wrong and this can also be characterised by an abuse of fiduciary loyalty. For instance, in Reading v. AG (1951) there was a very tenuous rationale that Reading represented the Crown in Egypt because of his uniform had the practical power to affect the Crown's actions and was therefore, a fiduciary. A more sensible approach is to suggest that the terminology of the fiduciary was inappropriately applied to Reading, so that his dishonestly obtained property was confiscated. Just as a fiduciary would be required to give their beneficiaries any profits unfairly made. In fact, Jones (1968) suggested that Reading's behaviour should have been decided on the basis of unjust enrichment, which would deny him the gain that he made.

Due to the fact that once this relationship is established, it provides a wide variety of potential equitable remedies that can be utilised. For example, a transaction with the fiduciary can be avoided, as illustrated by Wright v. Morgan [1926] or an equitable compensation for loss caused by the defendant's breach of fiduciary duty is available, as demonstrated by Swindle v. Harrison [1997]. In terms of profits made, the courts can impose a personal liability upon the defendant to account for this, which was seen in Gulliver [1967] or a proprietary constructive trust of the profits and their traceable product will be enforced, as was the case in Boardman [1967].

Moreover, in the case of Queensland Mines Ltd v. Hudson [1978], it was decided that the business undertaken was outside the scope of the fiduciary duty. However, this case can be criticised in that the board does not constitute the company and as such, the shareholders should have been consulted too, which goes to show that in certain circumstances, perhaps the courts should stretch the capacity of a fiduciary position. Resulting in justice, in a situation like this one, where the shareholders are not respected, which could not be said to compromise the function of this doctrine. In contrast, the case of A-G Hong Kong v. Reid [1993] held that there was a breach of fiduciary duty, thereby imposing a proprietary constructive trust upon the defendant. However, this decision was criticised by academics such as Jill Martin who feel that the decision represented 'proprietary overkill' because the plaintiff's claim takes priority over the other creditors. Therefore, the Queensland case is an example where the doctrine of fiduciary duty could be fairly stretched, whereas the Reid case displays an example of the doctrine being unfairly stretched, which does compromise its efficiency and fairness.

Furthermore, there are a number of advantages in suing in equity, as opposed to at law. Fundamentally, it provides a strict deterrent liability for profits that is established by equity and equity also provides the benefit of prospective assessment of losses incurred, whilst ignoring contributory negligence. Notably, however, the courts have rejected any claims that attempt to treat a breach of fiduciary obligations in the same way as a breach of fiduciary duty. Indeed, Millett J stated in Bristol and West B. S. Mothew [1998] that the distinguishing feature between both is that the former covers loyalty, which means that the onus is placed upon the fiduciary to prove that any transactions made were done fairly, which supports the argument that the claimants' desires are fulfilled. Therefore, the breach of a fiduciary obligation requires disloyalty or infidelity, and "mere incompetence is not enough". Alternatively, this could be argued to the contrary, in that a breach is strictly qualified and is not proven by the claimant's whim alone.

Today, there is an accounting remedy that is available in exceptional circumstances, where by a breach of contract and tracing rules are used to identify substituted assets. As a result, this supports legal and equitable claims within this area, as is further illustrated by the recent case of Foskett v. McKeown [2000]. Due to these new procedures there may be less pressure to enforce a fiduciary relationship just for the sake of fulfilling the claimant's desire.

Evidently, there are many conflicting views as to whether the doctrine of fiduciary duties is efficiently dispersed. It is true to say that the law generally does not favour either the claimant or the defendant, as it must remain neutral and assess the matter based on the facts. However, in practice, the onus is usually on the defendant to disprove the claim (Boardman), thereby perhaps giving them a subservient position in proceedings. Agreeably, it is suggested that this concept should not be inappropriately applied, however, there may be certain cases, where this would not jeopardise its function and meaning, such as in the Queensland situation. In contrast, there are odd cases like Reading where there is an irrational application of fiduciary duty, which illustrates why the courts are sensible when they choose not to illogically apply this doctrine.

On these grounds, it would be fair to agree with the above statement in terms of the wide expansion of the concept but not in suggestion that there is a bias towards the claimant. However, this issue is partially solved by Hayton's belief that there is now less need to stretch the circumstances giving rise to a fiduciary obligation, so it remains to be seen whether or not this view point will be implemented in the future.

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