breach of fiduciary duty

Question 1

what are the two overarching types of duties of trustees?

Answer 1

trustee duties and fidicuary duties

Question 2

what are the trustee duties? (there are 2)

Answer 2

• primary duty to comply with terms of the trust (distribute trust property only in accordance with those terms and a custodial duty over property in the meantime)
• duties to exercise their functions as trustees in accordance with prescribed standards of care and skill, which are aimed at safeguarding the trust fund

Question 3

what are the two key fiduciary duties of a trustee? (there are 2)

Answer 3

• no conflict (personal interests cannot conflict with duties to the principal)
• no profit (not obtain unauthorised benefit as a result of their position as a fiduciary either for themselves or third party)

Question 4

is a trustee and beneficiary duty fiduciary in nature?

Answer 4

yes it is, as it involves one part owing a duty of single-minded loyalty to the other (an imbalance of power within the relationship)

Question 5

what does the no conflict rule mean (fiduciary duties for trustees)?

Answer 5

fiduciary must not put themselves in a position where their personal interests conflict with their duties to their principle

Question 6

what does the no profit rule mean (fiduciary duties for trustees)?

Answer 6

fiduciary must not obtain an unauthorised benefit as a result of their position as a fiduciary either for themselves or for a third party.

Question 7

what does ‘self-dealing’ mean?

Answer 7

self-dealing involves trustee purchasing assets from trust or selling assets to the trust. trustee cannot sell themselves trust property

Question 8

if a trustee does enter an unauthorised self-dealing transaction = what is the result?

Answer 8

transaction will be voidable meaning beneficiaries can seek to rescind it

Question 9

what happens if a trustee buys from or sells to a company in which the trustee holds shares (not the sole shareholder)?

Answer 9

depends on if they have controlling shareholding in the company

controlling shareholder = treated as self-dealing

not controlling shareholder = not treated as self-dealing

Question 10

what is the fair-dealing rule?

Answer 10

involves trustee directly transacting with the beneficiary to buy their beneficial interest under the trust

Question 11

what happens if there is a fair-dealing? (is the transaction voidable)

Answer 11

transaction is voidable unless trustee can demonstrate they made full disclosure to beneficiary and acted honestly and fairly and didn’t take advantage of their beneficiary

Question 12

what does it mean conflict between principals?

Answer 12

idea that situations where fiduciary’s duties to one principal conflict with their duty to another principal

Question 13

if there is an issue of potential conflict - how can the fiduciaries proceed with the transaction?

Answer 13

can proceed if fiduciaries get the transaction authorised by instrument creating the fiduciary relationship.

Question 14

what happens if there is a conflict and it is unauthorised?

Answer 14

if conflict is unauthorised, fiduciary must obtain the fully informed consent of their principals. without authorisation or consent, fiduciaries will commit a breach of fiduciary duty.

Question 15

what is the consequence if the breach causes a loss to the principal?

Answer 15

principal can sue fiduciary personally for breach of fiduciary duty. fiduciary is liable to compensate

Question 16

what is the consequence if breach results in profit to the principal?

Answer 16

principal may not require a remedy although they may wish to end the fiduciary relationship.

Question 17

what is the consequence if the breach results in a profit to the fiduciary?

Answer 17

principal can recover the profit from the fiduciary

Question 18

what are the 4 ways that a fiduciary might breach the no-profit rule?

Answer 18

1. directly using property of their principal to make a personal profit
2. idirectly profiting from their role as a fiduciary
3. exploiting an opportunity which has come to them as a result of their fiduciary duty
4. receiving a bribe or secret commission to influence the way in which they perform their role as fiduciary

Question 19

what are the two key claims which can be made when there is a breach of no-profit rule (FHR v Cedar Capital)?

Answer 19

1. an account of profits (personal claim requiring trustee to pay principal an amount equivalent to the profit they have made)
2. constructive trust

Question 20

why would a principal want a remedy as a constructive trust for claims for breach of no-profit rule?

Answer 20

constructive trust provides protection against insolvency of the fiduciary. (principal is able to identify an asset over which they have rights which rank over other creditors)
constructive trust allows principal to trace into any subsequent profits made by the fiduciary