Breach Of Fiduciary Duties

Question 1

Boardman v Phipps (HL)

Answer 1

Strict liability for breach of fiduciary duty

Facts: 27% of the shares in a company were held on trust for the testator’s widow and children. Three trustees (2 + the senile widow).

C (one of the sons) and Ds (solicitor and brother). Ds were unhappy about the way that the trust was managed, so after a meeting they decided to buy out the company’s shares in their own names and rearrange the trust, making it more profitable. This greatly benefitted the trust.

HL 3:2 majority held that Ds were in a breach of fiduciary trust (solicitor fiduciary, D fiduciary de son tort)

Lord Guest & Hodson: information about shares obtained under their capacity of fiduciaries. No profit rule infringed.

Lord Cohen: information did not amount to property, but breach of no conflict rule.

Minority (Lord Upjohn and Viscount Dilhorne) no breach of conflict, they improved the trust.

This goes to show that had the Ds obtained the consent of the beneficiaries litigation could have been averted. The facts that the Ds got the trustees consent did not matter. Fiduciary duty owed to beneficiaries and not trustees.

Question 2

Lister v Stubbs (CA)

Answer 2

S employed to buy office supplies for company L where he worked. He bought goods from another company based on secret commissions. The profit made from secret commissions was invested in property.

CA bribes did not belong to the claimant, because the relationship was one of debtor-creditor and not trustee-beneficiary. Reasoning was so to protect the unsecured creditors.

Question 3

AG of Hong Kong v Reid (PC)

Answer 3

D fiduciary had a number of offices in HK including director of prosecutions. He took several bribes concerning the prosecution of criminals, with which he bought a house in NZ. Claimant claimed that he had an equitable interest in the land.

PC disproved Lister:

• principal wrongdoer should not profit from his wrong.
• equity sees as done what ought to be done - but Wilberforce J did not explain why equity saw as done CT

Gummow: proprietary restitution can only be justified if it rests on a proprietary base. Bribes lack this base because F’s obligation is only to pay a sum equal to the bribe received.

Question 4

Sinclair v Versailles (CA)

Answer 4

C company financed V company of which C was a director (defendant) C fraudulently applied the funds making it look like V company had high profits. C owned shares in V once they increased (because of his fraudulent behaviour) he sold them at a high profit.

This was not a bribe or a secret commission, but it was treated like once because C made unauthorized profits from his position as director.

CA: breach of fiduciary duty did not give rise to a proprietary interest to company V

Lord Neuberger’s rationale for rejecting Lister:

(A) Authority

• Ca held that Lister should be followed instead of Reid because of a constitutional point: CA should not follow the decision of a PC over CA unless if there are English authorities that showed Lister of doubtful reliability. There is no such authority.

(B) Principle

Drew a fundamental distinction between;

1. Cases where the fiduciary enriched herself by depriving the principal of an asset or opportunity that was hers.

Here the property would go CT because it should be treated as the principal’s property.

2. Where the fiduciary enriched herself by doing something wrong to the principal.
   - this would be a personal liability to account for the property received
   - bribes fall under this: because fiduciary is under no duty to obtain the bribe for the principal - so principal has no proprietary right.

Applying Sinclair, C was under no duty to obtain from the profits from the sale to C company - so could not be held of CT

(C) Policy

Two policy in Reid unconvincing;

1. Unfair if the claims of the unsecured creditor could be defeated because of the CT for the principal.
   - unsecured creditors give value and suffer loss if not paid c.f. Principal
2. Issues about the fiduciary benefiting from wrongdoing could be dealt with the court ordering the fiduciary to disgorge all benefits
   - principal would not have priority over fiduciary’ other creditors

Question 5

FHR v Cedar 2014 SC

Answer 5

D was acting on behalf of C as an agent to negotiate the purchase of a company’s shares. Without notifying the D C accepted 10m € inducement from the vendor.

First instance Simon J: found against D but refuse to give C a proprietary remedy because he was bound by Sinclair

SC: overruled Sinclair and held that the rule where a principal owns any benefit acquired by the fiduciary should apply to bribes and secret commissions.

Worrying - Sinclair overturned in 3 years only
- clarified when P will have a proprietary claim, Sinclair made it factually hard to determine.

But is it fully clarified?
Banerjee: court did not expressly overrule 2 tests in Sinclair so the law remains uncertain.

Consequence of this decision is harsh against the unsecured creditor
- Hayton: this reinforces the fiduciary duty of an agent having undivided loyalty to the principal.

FHR and Reid serves as deterrents for agents breaching their fiduciary duties.

Gummow: court took the easy way out - the court did not fully explain why the rules now apply to bribes and secret commissions.

Question 6

Bray v Ford

Answer 6

Key obligation in a fiduciary duty: loyalty of the fiduciary to the principal

Two fundamental duties: no profit rule and no conflict rule