EQUITY AND TRUSTS
TRUSTEES 3
FIDUCIARY DUTIES
Trustees as fiduciaries
• The nature of the trustee’s duty is
fiduciary
• Trusteeship one of number of fiduciary
relationships
• Trustees subject to Fiduciary duties.
Who is a fiduciary?
• Classic statement is from Finn:
“someone who undertakes to act for or on
behalf of another in some particular matter or
matters”. Finn, Fiduciary Obligations (1977).
• Bristol and West Building Society v Mothew
[1996] Ch. 1, per Millett LJ, “…in a particular
matter in circumstances which give rise to a
relationship of trust and confidence.”
Fiduciary Duties & Regulatory
Rules L.C. 236, (1995)
“ …a fiduciary relationship is one in
which a person undertakes to act on
behalf of or for the benefit of another,
often as an intermediary with a
discretion or power which affects the
interests of the other who depends on
the fiduciary for information and
advice.” (para. 1.3).
Who is a fiduciary?
Another definition comes from Professor
Hayton:
“The relationship of trustee and beneficiary is
the original fiduciary relationship and provides
the guidelines for determining when other
persons are in a fiduciary relationship to each
other by virtue of the position and power of
one in respect of the other and the latter’s
reasonably induced expectation that the
former will act exclusively in the interests of
the latter...
continued …
Trustees are persons who are under a duty to
act exclusively in the interests of the trust
beneficiaries who are vulnerable if the
trustees seek to abuse their position,
because trustees have rights and powers that
are capable of being exercised so as
detrimentally to affect the beneficiaries. Thus,
if such aspects are present in other
relationships these are treated as fiduciary
relationships as a matter of law…”
Who is a fiduciary?
• Fiduciaries are those able unilaterally to
alter either practically or legally the
position of their principal/beneficiary
• Key point – the power to affect the
practical or legal interests of another.
Examples of fiduciary
relationships
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First: status based relationships I.e. those that arise as a matter
of law from status:
Personal representatives and beneficiaries of deceased’s estate
(Re Diplock [1948] Ch 465)
Solicitor and client (Re Hallett’s Estate (1880)13 Ch D 696 CA)
Partner and partner (Featherstonhaugh v Fenwick (1810) )
Principal and agent (De Bussche v Alt (1878) 8 Ch D 286)
Employment relationship – can be fiduciary if more than
contractual (AG v Blake [2000] 4 All Er 385)
Commercial relationship – ordinary commercial relational not
fiduciary (Re Goldcorp Exchange Ltd [1995] 1 AC 74).
Examples of relationships
Concept has been extended to cover
situations outside the normal scope of
fiduciary relations
i.e. “fact based fiduciaries” imposed in
interests of justice because of claimant’s
particular vulnerability of claimant to
defendant upon whom he is relying.
See Reading v AG [1951] AC 507 HL.
Who is a fiduciary?
• Is this class of relationships a closed
category?
• It is undefined
• Fiduciary relations can easily be found
to suit the circumstances/desired
remedy.
Who is a fiduciary?
“I do not think that the categories of fiduciary
relationships … should be regarded as falling into
a limited number of straight-jackets or as being
necessarily closed. They are, after all, no more
than formulae for equitable relief.”
per Slade J, English Dedham Vale Properties Ltd
[1978] 1 WLR 93 at 110.
• Class is not yet closed. Problem: what is the
extent of the rule implying fiduciary relations?
What are the fiduciary
obligations?
For useful summary see: Bristol & West BS v Mothew, per Millett LJ:
• The distinguishing obligation of the fiduciary is the obligation of loyalty.
The principal is entitled to the single minded loyalty of his fiduciary this
core liability has several facets:
• Must act in good faith
• must not profit from the trust
• Must not place self in position where duty and interest no conflict
• May not act for own/third party benefit without informed consent of
principal
• Must prove any transaction with principal was fair + full disclosure
• “Breach of fiduciary obligation connotes disloyalty or infidelity.”
Self Dealing Rule
• Trustees must not be purchasers unless
authorised. Why? Because trustee is then in
conflict with beneficiaries interests.
• exceptions to the rule:
(i) trust may authorise a purchase
(ii) Court can authorise
(iii) Bens can agree but must be sui juris
• Effect of rule – transaction is voidable at
instance of beneficiary.
Fair Dealing Rule
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Refers to trustee purchasing beneficiary’s
interest rather than the trust property
Less strict
Justification more like real sale
Ay purchase provided can show transaction
has to be fair – i.e. full value and beneficiary
had all information prior to the sale
Trustee cannot circumvent rule by dealing
through a third party?
Incidental profits
Most significant fiduciary obligation is not to profit
from the trust
• Bray v Ford [1896] per Lord Hershell: “it is an
inflexible rule of equity that a person in a fiduciary
potion is not … entitled to make a profit. He is not
allowed to put himself in a position where his interest
and duty conflict.”
• Rationale – conflict between duty of loyalty and self
interest. Trustees cannot keep profits but must pay
over to principal. Only where profit is authorised fully
informed prior consent or ratification of principal can
profit be kept.
• Compare authorised profits.
Rule on not profiting is very strict
Even where no real prospect of conflict rule is designed to
prevent even v remotest possibility of conflict
• Irrelevant:
that principal suffers no loss / or even a gain i
that profit was gained using fiduciary’s own assets/skills/own
risk
That fiduciary acted in good faith
• All that needs to be shown is a link between profit and position
• Is the duty not to profit an application of the no conflict rule? See
Bristol and West BS v Mothew (supra). So – two separate
principles, arguably this means not necessary to go further in
such cases to show conflict of interest.
Rule extends to all
fiduciaries
NB - No profit without authority extends
to all fiduciaries. Although we are
concerned with trustees many of the
examples we will look at are of e.g.
company directors. But these are
authoritative on the position of trustees.
Trustees
Rule derives from continuous application of
Keech v Sanford (1726) 2 Eq Cas Abr 741.
Case concerned a lease of market held on
trust for infant beneficiary. The trustee tried
unsuccessfully to obtain a renewal of the
lease for the trust and then took lease in his
own right.
Court: Trustee held lease on trust for the
minor beneficiary.
Trustees
Trustees as using voting rights in company to
obtain appointment as directors.
See Re Macadam [1946] Ch 73 where
trustees once appointed received fees.
Trustees held liable to account for the
remuneration Per Cohen J. the question is
“Did the trustee acquire the position in which
he drew the remuneration by virtue of his
position as trustee?”
Trustees as company
directors
Remuneration will not be accountable to trust
where trustee has already become director
before becoming trustee Re Dover Coalfield
Extension Ltd. [1908] 1 Ch 65
• Or where trustee became director
independently of votes of shares of trust Re
Gee [1948] Ch 284
• Or as in Re Lewis [1910] 103 LT 495 by
independent bargain.
Other profits
Trustees can receive money in various ways:
• Fees for introducing business
• Bribes/commissions as inducement or reward
Regardless of method, any payments
received as a result of the trustee’s position
belong to the trust
Other fiduciaries
• Bray v Ford (supra) no profit rule
applies to any fiduciary
• Company directors – cannot profit
from their office without authority
e.g. articles of association / consent
of shareholders.
Company directors
Leading case HL in Regal Hastings v Gulliver [1967] 2 AC 134:
R. could only purchase £2000 worth of shares in a subsidiary
company set up for investment purposes. Directors agreed to
purchase the remainder. Profit made when business transferred to
new owners. Directors having acquired the shares by virtue of their
fiduciary position were held liable to account for the profits made out
of them.
Lord Russell: “ The rule of equity which insists on those, who by use of a
fiduciary position make a profit, being liable to account for that profit, in no
way depends on fraud or absence of bona fides; or upon such questions
or considerations as whether the profit would or should otherwise have gone
to the plaintiff, or whether the profiteer was under a duty to obtain the source
of the profit for the plaintiff, or whether he took a risk or acted as he did for
the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or
benefited by his action. The liability arises from the mere fact of a profit
having, in the stated circumstances, been made.”
Regal Hastings v Gulliver
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Points to note from the case:
Irrelevant that the directors had acted in good faith but as
Russell made clear – liability to account does not depend on
fraud or absence of good faith
The company lost nothing (indeed it had gained from the
directors’ actions) – this was irrelevant. New owners obtained a
windfall as company was cheaper.
Liability arises simply from link between position and profit. It
made no difference that the company could not take up the
opportunity itself for lack of finance
See no conflict rule (Bray v Ford (supra)) duty and interest must
not conflict
A conflict apparent? Possibly not since company could not
purchase shares themselves. But decision that led to profit was
made by directors.
Company Directors
Clearer case is that of Guinness v Saunders [1990] 2 AC
663
• Ward (a director) was paid £5.2 million for assisting in the
takeover of Distillers by Guinness. Decision was made by
Saunders but not the board. Wards fee dependant on the
amount of the takeover bid. Guinness claimed repayment
of this fee
• HL held Ward not entitled because contract with directors
void – should have reached agreement with board. Ward =
constructive trustee of the money
• Clear case of conflict – duty to negotiate good price in
conflict with his interest in enhancing his own fee.
Industrial Development Consultants Ltd V
Cooley [1972] 1 WLR 443
• D = director of the claimant company that provided industrial
design services, attempting to obtain a contract with the
Eastern Gas Board. But EGB was not prepared to deal with
the company. Afterwards D was offered the contract in his
private capacity. He did so by falsely claiming that he was ill.
Then accepted offer from EGB.
D held liable to account for the profit.
• At time he obtained the contract he was director of company
and therefore under fiduciary duty to pass on information in
this capacity.
• NB The company lost nothing; EGB would not deal with the
company and indeed it gained only as a result of D’s breach
of fiduciary duty.
Queensland Mines Ltd v Hudson
(1978) 18 ALR 1
• Company had obtained mining licences but were unable to
proceed.
• D resigned as managing director and then developed the mines
with knowledge of the board successfully developed the mines;
• Board then claimed the profit
• Privy Council held that opportunity came to D as director and
therefore liable in principle to account for the profit (Regal
Hastings) However, consent of Board was sufficient consent
• Consistent with Regal Hastings – board took part in the
transaction but still liable to account?
• Difficulty – only shareholders and not board could consent? But
both shareholders were on board.
Crown Dilmun & Or v Sutton & Or
[2004] AER (D) 222 Jan.
• Director rejected an investment
opportunity on the company’s behalf
• Subsequently took the opportunity for
himself
• D in breach of his fiduciary duty
• Liable to account
The honest fiduciary
Honest fiduciaries maybe awarded
allowance for the work involved
Contrast Boardman v Phipps (See next
section) and Guinness v Saunders
Boardman & Or v Phipps
[1967] 2 AC 46
One of the most important cases:
• Phipps trust had minority shareholding in under performing
company. Boardman and a trustee suggest acquiring
majority shareholding. Suggested to other trustees but
they said trust had no powers to purchase more shares. B
& T decided to acquire shares themselves. Negotiations
with the company where B said he represented the trust
/attended AGM and obtained information on share
prices/value of company’s assets. B and T purchased
shares and obtained control. Re-organised company;
trust, B and T made profit of £75k.
• J Phipps –a beneficiary claimed B and T = constructive
trustees.
Boardman & Or v Phipps
By 3 to 2 majority HL held information came
through B acting on behalf of trustees:
• “…as both the information... and opportunity
for [the shares] came to B and P as a result
of B acting or purporting to act on behalf of
the trustees…, B and P were constructive
trustees…of the shares in the company for
the respondent and were liable to account to
him for the profit thereon accordingly.”
Boardman v Phipps
It made no difference that:
• Both acted honestly throughout
• The trust had lost nothing
• The trust was unable or unwilling to
make the purchases.
Boardman v Phipps
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Some confusion over the ratio of the case because of different
judgments
Lords Hodson and Guest thought information was trust property.
Having used trust property they were liable. With Lord Cohen
they thought B’s interests and duties might have conflicted. As
solicitor to trust not able to give impartial advice e.g. when they
might have obtained wider investment powers to achieve the
same result for themselves.
Lord Upjohn considered there was no conflict.
Outcome for Boardman – had to account but awarded payment.
A similar allowance was not paid to Ward in Guinness v
Saunders (supra). HL said inappropriate because agreed fee
placed him in conflict with his duty.
Other fiduciaries
• Employees can be fiduciaries
• See Reading v AG [1951] army sergeant benefited from use of
uniform
• More significant: AG for Hong Kong v Reid [1994]. Public
prosecutor took bribes to buy houses abroad. Profits from
houses were traceable proceeds and held on trust for Crown.
Lister v Stubbs (1890) had established only liable to account for
bribe received so only original sum payable back. But AG HK v
Reid held Lister wrongly decided.
“If a fiduciary acting honestly in good faith and making a profit
which his principal could not make for himself becomes a
trustee of that profit, then a fiduciary acting dishonestly who
accepts a bribe must also be a constructive trustee.”
Is AG for HK v Reid to be
followed?
Before Reid inconsistency in the treatment of bribes
and other profits was unsupportable. Personal liability
to account only; no constructive trust for the principal.
Courts seemingly treated dishonest fiduciaries more
favourably than honest. See Boardman. Reid (as PC
case) is only persuasive not binding. In AG v Blake
[1997] Lister was said to be binding. As a precedent
is questionable. In recent case: Daraydan Holdings
Ltd & Ors v Solland Int & Ors [2004] EWHC 622 (Ch.)
Reid to be followed - policy reasons – fiduciaries
should not gain in this way. H/L affirmation?
Remedies
• What is the remedy for fiduciary who has obtained an
unauthorised profit?
• Is it personal (liability to account) or proprietary (CT)
• Important where F is insolvent or where acquired
assets have increased in value. CT here would
favour principal.
• Courts inconsistent in approach (e.g. bribes).
Sometimes awarding an account of profit, on others a
CT.
• See effect of AG for HK v Reid (supra) where bribe
was held on CT.
The question of remuneration
• General principle: no profit from position. Should a trustee
benefit then is liable to account
• Follows from rule that trustees receive no remuneration –
gratuitous office. Two reasons for this rule; trustee must
not benefit from trust property + conflict of interest and
duty
• However, there are specific instances where equity will
authorise payment, the most common being where the
trust instrument contains an express charging clause (see
egg. Trust Deed clause 11 and other fiduciaries by e.g.
contract/articles of the company/partnership deed etc.)
• Further, the advent of the TA 2000 has seen a change in
the law’s stance.
Authorised remuneration
• In addition to TA 2000 some other statutes authorise
fees usual;y where statutory trustee appointed e.g.
Public Trustee Act 1906, s.9
• Court has inherent jurisdiction to authorise
remuneration both retrospective/future remuneration
and to increase payment beyond that in trust
instrument see Re Duke of Norfolk’s ST [1982]
• Power also applied to fiduciaries in breach of
fiduciary duty see Boardman v Phipps (supra) and in
O’Sullivan v Management Agency Ltd. [1985] a case
of undue influence.
Authorised remuneration
• Trustees can obtain agreement of the
beneficiaries to pay. Bens must be sui
juris and there is always possibility of
undue influence.
• Trustee can also be paid under the rule
in Cradock v Piper (1850) for work done
by solicitor-trustee in litigious matter.
Trustee Act 2000
• Trustee has right to reimbursement of
expenses under TA 2000, s31
• Powers of court to reward remuneration,
and of bens to agree it still apply. But will
be rarely used in light of TA 2000. Rule in
Craddock (supra) now obsolete.
Remuneration under the Trustee
Act 2000
• TA 2000 has changed position:
• Where there is an express professional charging clause
within the trust instrument, the Act provides for new rules of
construction of the clause:
• Trustee can charge for services which lay trustee could
provide (s.28(2)) - express clause necessary previously
• Remuneration is not a gift for the purposes of s.15 Wills Act
1837 (s.28(4)) This means that a trustee may witness the
will (s.28(4)) without the risk of invalidating the benefit
he/she receives under the will. Such a provision is
particularly useful to solicitors who may have drawn up the
will and are appointed as trustees with the benefit of a
charging clause.
Remuneration under the
Trustee Act 2000
Under s29(2) a trustee is entitled to
“reasonable remuneration” for any
services that he provides to the trust.
Remuneration under the
Trustee Act 2000
• Ss 3 – what is “reasonable remuneration” : such
remuneration that is reasonable in the
circumstances for the provision of those services
• The right to remuneration applies only to a trust
corporation or to a trustee who acts in a
professional capacity (s29(2))
• s28(5) defines “professional capacity” profession or business which consists of/includes
the administration/management of trusts.
Remuneration under the
Trustee Act 2000
• In the case of a professional trustee (defined
S28(5)) trustee must obtain agreement in
writing from each other trustee (subs 2)
• The right to remuneration does not apply to a
sole trustee, nor to charity trustees see ss.30
s.29(1) & (2)
• Section 29 thus provides a statutory default
power of remuneration and reverses the
common law rule against remuneration.
Section 29 Trustee Act
2000
• Provides statutory default power of
remuneration
• Section therefore reverses the rule
against remuneration see Robinson v
Pett (supra).
Fiduciary duties of trustees
(conclusion)
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We have considered the following:
Who is a fiduciary?
What are the characteristics of a fiduciary relationship making it
fiduciary e.g. company directors, principals and agents.
Importance of fiduciary obligations see Bristol and West BS v
Mothew (supra): core obligation of loyalty being developed into
particular duties – in particular duty not to profit and duty not to
place in conflict with the duty
Rationale: designed to deter fiduciaries but all that all that is
required to be liable is to profit whether or not a conflict exists
Also the issue of trustees’ remuneration -when they are eligible
for payment for work for the trust.