Chapter 12: The Fiduciary Relationship

Question 1

Fiduciary relationships

Answer 1

The trustee-beneficiary relationship is fiduciary in nature. The distinguishing feature of such relationships is that they involve one party owing a duty of single-minded loyalty to the other. There is no set list of fiduciary relationships. They arise in a range of situations, often where there is an imbalance in power within the relationship (eg a trustee has legal title to the trust property, and all the powers of legal owner, meaning the beneficiary is reliant on the trustee to act on their
behalf)

Question 2

Core Examples of Fiduciary Relationships

Answer 2

• Solicitor-client
• Company director-company
• Agent-principal
  Although this module primarily focuses on the law of trusts, you are expected to recognise other
  fiduciary relationships and apply the law in this chapter to them.

Question 3

Fiduciary Duties

Answer 3

There are two key fiduciary duties, each stemming from the core obligation of the fiduciary being
one of single-minded loyalty to their principal:
(a) No-conflict: A fiduciary must not put themselves in a position where their personal interests
conflict with their duties to their principal.
(b) No-profit: A 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 4

The No Conflict Rule

Answer 4

Example: Conflict between duty and self-interest
Consider the following example:
* A trustee works for a private equity fund which is performing well. They think it would be a
good idea to invest trust money in the fund.
* The trustee obtains independent financial advice which confirms that the private equity fund would be a suitable investment for the trust.

Question 5

Should the trustee invest the trust money in the private equity fund?

Answer 5

The trustee appears to be trying to act in the best interests of the beneficiaries. They have
complied with their trustee duties by seeking proper advice as to the investment.
If the trustee were not employed by the private equity fund, there would not appear to be
anything preventing them making the investment. But there is a clear conflict here which is not
negated by the trustee’s apparent good intentions. The trustee has a personal interest in the
private equity fund receiving investment. They should not put themselves in this position.

Question 6

Conflict: Self-dealing

Answer 6

The purpose of the no conflict rule is to ensure that the fiduciary is thinking only of their principal.
If the fiduciary is tempted to act in their own interests, they may not be doing the best for their
principal. Perhaps the best example of a conflict in the case of a trust relationship is the situation
known as ‘self-dealing’ (a term coined in Tito v Waddell (No 2) [1977] Ch 106).

Question 7

Self-Dealing (Selling or purchasing assets to the trust)

Answer 7

Self-dealing involves a trustee purchasing assets from the trust or selling assets to the trust. There
is a clear conflict as a buyer will always be seeking the lowest price and a seller will always be seeking the highest price. Therefore a trustee who holds the legal title is prevented from selling to
themselves and for the same reason is prevented from buying trust property (subject to anything
in the trust instrument authorising such a transaction). If the trustee does enter into an unauthorised self-dealing transaction, the transaction will be voidable, meaning the beneficiaries
can seek to rescind it (ie unwind the sale)

Question 8

Could a trustee get around this rule by incorporating a company and then selling trust property
to that company?

Answer 8

The answer to the question above is clearly ‘no’. There remains an obvious conflict of interest in a
situation where the trustee uses a wholly owned company to transact with the trust. This transaction will be voidable in the same way as if the trustee had personally entered into the transaction.

Question 9

What about a situation where a trustee buys from or sells to a company in which the trustee
holds shares but is not the sole shareholder?

Answer 9

This situation is more nuanced and will require a more careful look at the facts to determine the
substance of the transaction rather than its form. Broadly, the position is likely depend upon whether the trustee has a controlling shareholding in the company. If so, the transaction may still be treated as self-dealing and the beneficiaries could seek rescission.

Question 10

What about a situation where a trustee buys from or sells to a company in which the trustee
holds shares but is not the sole shareholder?

Answer 10

If the trustee does not have control of the company, the transaction is unlikely to be treated as
self-dealing but it will still clearly involve a breach of the no-conflict rule (because the trustee has
a personal interest in the company).

Question 11

Conflict: Fair-dealing (Transacting directly with beneficiary)

Answer 11

There is another, related rule (also recognised in Tito v Waddell (No 2)) known as the ‘fair-dealing’
rule. In this case, the transaction does not involve the trustee buying or selling trust property.
Instead, it involves the trustee directly transacting with the beneficiary to buy their beneficial
interest under the trust.

Question 12

Beneficiary personally involved in transaction

Answer 12

The rules here are not as stringent as those involving self-dealing, because the beneficiary is
personally involved in the transaction. However, because the relationship is fiduciary in nature,
and the trustee is likely to be in a stronger bargaining position, the trustee must be able to
demonstrate that the transaction was conducted fairly.

Question 13

Voidable unless full disclosure

Answer 13

As is the case with self-dealing, the transaction is voidable unless the trustee can demonstrate
that they made full disclosure to the beneficiary, acted honestly and fairly and did not take
advantage of their beneficiary.

Question 14

Conflicting Duties

Answer 14

The no-conflict rule also extends to situations in which a fiduciary’s duties to one principal conflicts with their duties to another principal. Again, this comes back to the core obligation of single-minded loyalty to a principal. It is not possible to act entirely in the interests of both principals where their interests conflict.

Question 15

Example of Conflicts of Interest

Answer 15

A is a trustee and wants to buy a house for occupation by their beneficiary, B.
* A is also an estate agent and has been instructed by C to sell their house. A thinks that this
would be the perfect house for B.
There is a clear and direct conflict between A’s duties to B and C. Their duty to C is to secure
the highest possible price for the house. But their duty to B is to pay the lowest possible price

Question 16

Conflict: Consent and Consequences

Answer 16

In cases involving a potential conflict, the fiduciaries can proceed if the transaction is authorised
by the instrument creating the fiduciary relationship (eg a settlor may have authorised particular
types of conflict in a trust deed). If the conflict is unauthorised, the fiduciary must obtain the fully
informed consent of their principals. Without authorisation or consent, the fiduciaries will commit
a breach of fiduciary duty.

Question 17

Consequences depend on nature of breach

Answer 17

If there is a breach, the consequences depend on the nature of the breach:
* If the breach causes a loss to the principal, they can sue the fiduciary personally for breach of
fiduciary duty. The fiduciary would be liable to compensate the principal

Question 18

Recission

Answer 18

As we have already seen, breach of the self-dealing rule and fair-dealing rules result in the transaction being voidable. The beneficiaries may seek rescission.

Question 19

Ending the fiduciary relationship

Answer 19

• If the breach results in a profit to the principal, they may not require a remedy although they
  may wish to end the fiduciary relationship. If it also results in a profit to the fiduciary, the
  principal can recover the profit from the fiduciary.

Question 20

No Profit Rule

Answer 20

As we have already seen, the essence of the role of the fiduciary is the requirement to act with
single-minded loyalty towards the principal. A fiduciary must not put themselves in a position
where they might be tempted to act in their own interests. If they do act in their own interests, and
profit from doing so, there are very strict rules which apply to prevent them from retaining that
profit.

Question 21

Types of No Profit Rule

Answer 21

There are a number of broad ways in which a fiduciary might breach the no-profit rule:
(a) Directly using the property of their principal to make a personal profit
(b) Indirectly profiting from their role as a fiduciary
(c) Exploiting an opportunity which has come to them as a result of their fiduciary position
(d) Receiving a bribe or secret commission to influence the way in which they perform their role
as fiduciary

Question 22

Direct breach of no profit rule

Answer 22

In the example above, it would be a clear breach of the no-profit rule for the solicitor to retain the
interest. It is income which has been made directly out of their principal’s property and therefore
belongs to the principal. See Brown v IRC [1965] AC 244 for an example involving a solicitor who
invested client funds in this way. There are also specific rules set out in the Solicitors’ Code of
Conduct which deal with what solicitors must do when holding client money.

Question 23

Indirect Profit

Answer 23

A fiduciary must also avoid making an unauthorised personal profit which arises from the performance of their role. A good example is the situation where a trust holds shares in a company and, in order to better monitor that company, a trustee is appointed as a director.

In such cases, the directorship may come with an entitlement to remuneration. Because the
trustee takes on the directorship in their capacity as trustee, they receive the remuneration in this
capacity too and must therefore pay it into the trust fund instead of accepting it personally (Re
Macadam [1946] Ch 73).

Question 24

Obtained directorship as a result of being a trustee

Answer 24

Note that this rule will only apply where the trustee has obtained the directorship as a result of being a trustee. It does not apply if they are independently appointed as director (eg if they became a director before taking on the trustee role or if they could have been appointed as director even without the votes attached to the company shares)

Question 25

Retain remuneration

Answer 25

The rule is also subject to anything in the trust instrument which allows the trustee to retain the
remuneration (Re Llewellin’s Will Trusts [1949] Ch 225). Alternatively, the trustee could seek the
fully informed consent of all the beneficiaries

Question 26

Exploiting opportunities

Answer 26

A fiduciary is not entitled to keep a profit that they made as a result of an opportunity that comes
to them in the course of performing their fiduciary duties. This rule is very strict, as demonstrated
by the seminal case of Keech v Sandford (1726) Sel Cas 61

Question 27

Key case: Keech v Sandford (1726) Sel Cas 61

Answer 27

Facts: A trustee held a commercial lease on the terms of a testamentary trust for a minor
beneficiary. When the lease came to an end, the trustee attempted to renegotiate it on behalf of
the beneficiary but the lessor was not willing to re-let the property to the trustee in that capacity
because the beneficiary was a minor. The landlord was, however, willing to grant the lease to the
trustee personally and did so

Question 28

Key case: Keech v Sandford (1726) Sel Cas 61

Answer 28

Held: The beneficiary made a successful claim for breach of fiduciary duty. The trustee had
exploited an opportunity which came to them as a result of their position. The rules are so strict
that the trustee was held to be the ‘one person in the whole of mankind’ who was not entitled to
the renewed lease. The trustee was therefore required to assign the lease to the beneficiary and
account for the profits made

Question 29

Best Solution

Answer 29

They attempted to negotiate the lease for the beneficiary before doing so on their own behalf. So
you may question where the harm is in what the trustee did. But can you ever be sure that a
trustee in such circumstances will absolutely exhaust all avenues of negotiation on behalf of the
beneficiary if there remains a possibility that they could profit personally if those negotiations are
unsuccessful?
The only way to ensure that the trustee does everything in their power for their beneficiary is to
absolutely prohibit them acting in their own interest.

Question 30

Key case: Boardman v Phipps [1967] 2 AC 46

Answer 30

The first is that it demonstrates that fiduciary relationships are a matter of fact, and can arise in any circumstances which have given rise to a relationship of trust and confidence.

Question 31

Key case: Boardman v Phipps [1967] 2 AC 46

Answer 31

Boardman was clearly in a fiduciary position by virtue of his role as a solicitor but TP was one of
the beneficiaries. However, by taking on this burden of attempting to improve the fortunes of the
company, he had put himself into a position whereby he was acting as an agent of the trust and
therefore owed fiduciary duties to the other beneficiaries

Question 32

Key case: Boardman v Phipps [1967] 2 AC 46

Answer 32

Neither TP nor Boardman had successfully obtained consent to make a personal profit. TP had
sought the authorisation of the trustees, but they cannot provide consent. It must come from the
beneficiaries. Although Boardman had attempted to obtain the consent of the beneficiaries (and
genuinely believed he had done so) it was found on the facts that he had not provided them with
sufcient information about what he was doing in order for them to be able to give fully informed
consent. He therefore also had no defence.

Question 33

Key case: Boardman v Phipps [1967] 2 AC 46

Answer 33

The House of Lords decided (3:2) that there had been a breach of fiduciary duty in this case (with
the minority concluding that there was no real conflict on the facts because the defendants
having acted at all times with the interests of the beneficiaries at heart).

Question 34

Key case: Boardman v Phipps [1967] 2 AC 46

Answer 34

Although the majority difered in their reasoning as to the nature of the profit, the case is clear
authority for the proposition that a fiduciary will be liable for profit that they make by exploiting
an opportunity that has come to them as a result of their fiduciary position, whether or not their
principal would (or even could) have exploited that opportunity if the fiduciary had not done so.

Question 35

Bribes and secret commissions

Answer 35

Perhaps the most egregious form of breach of fiduciary duty is the case where a fiduciary accepts money from a third party in return for performing their fiduciary role in a particular way.
It is clearly contrary to public policy for a fiduciary to be susceptible to bribes, and the clear consequence is for the profit to be stripped from them. Attorney General for Hong Kong v Reid[1994] 1 AC 324 is a good example. It is also worth noting that such actions are likely to constitute an offence under the Bribery Act 2010.

Question 36

Extended to cases where fiduciary receives a secret commission

Answer 36

This principle has been extended to cases where a fiduciary receives a secret commission in the
course of carrying out their role. The best example is the Supreme Court decision in FHR European
Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45.

Question 37

Key case: FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45

Answer 37

In FHR, the defendant had acted as the claimant’s agent in the purchase of company shares.
Unknown to the claimant, the defendant had an existing contract with the seller of the shares,
under which the seller would pay the defendant a commission upon completion of the sale.
Receipt of the commission was found to be a breach of the defendant’s fiduciary obligations to
the claimant. The case is particularly significant because it settles the position as to the remedy
available for breach of the no-profit rule.

Question 38

Remedies for the breach of the non-profit rule

Answer 38

Breach of the no-profit rule will result in the fiduciary being stripped of their profits. Although
earlier case law indicated that the available claim would depend on the nature of the breach, it is
now clear from FHR v Cedar Capital that a beneficiary may elect between the following remedies
in all cases involving breach of the no-profit rule:

Question 39

Account of Profits

Answer 39

(a) An account of profits: This is a personal claim which requires the trustee to pay the principal
an amount equivalent to the profit they have made.

Question 40

A constructive trust

Answer 40

A constructive trust: A principal may wish to argue that the profit made by the fiduciary is held on constructive trust for the principal. There are two primary reasons why the principal may want a proprietary claim:
- A constructive trust provides protection against the insolvency of the fiduciary. The principal is able to identify an asset over which they have rights which rank above other
creditors.
- A constructive trust also allows the principal to trace into any assets acquired with the profit. (Attorney General for Hong Kong v Reid provides a good example of this.)

Question 41

Summary

Answer 41

• A fiduciary relationship is typified by an obligation of single-minded loyalty to the principal.
• There is no set list of fiduciary relationships. They are determined on the facts.
• Fiduciary duties are proscriptive in nature. They determine what a fiduciary cannot do.
• The no-conflict rule prevents a fiduciary putting themselves in a position where their personal
  interest conflicts with their duties to their principal.
• Fiduciaries must also avoid a conflict of duties to different principals.

Question 42

Summary

Answer 42

• Self-dealing is a specific type of conflict involving a trustee personally buying from or selling to
  the trust. Such a transaction is voidable. Fair-dealing involves the trustee buying the beneficiary’s interest. It is voidable unless the trustee can prove they acted honestly and fairly, having made full disclosure to the beneficiary.
• Fiduciaries must also avoid making an unauthorised profit from their position, whether directly or indirectly. If they breach the no-profit rule, their profit will be stripped from them. Beneficiaries can elect for an account or profits or a constructive trust.