Fiduciary Duties

Question 1

Who qualifies as a fiduciary, and under what conditions is a fiduciary relationship established?

Answer 1

A fiduciary is someone who has undertaken to act on behalf of another person in circumstances that create a relationship of trust and confidence (Bristol and West Building Society v Mothew [1998] Ch 1).

Examples of fiduciaries:
1. Trustees: Owe fiduciary duties to beneficiaries, ensuring trust property is managed solely in their interest.

2. Company Directors: Owe duties to act in the company’s best interest, as codified under the Companies Act 2006.
3. Business Partners: Must act in good faith and prioritize the partnership’s interest.
4. Agents: Represent the principal and avoid self-dealing or conflicts of interest.
5. Senior Employees: Owe duties to employers, especially when accessing confidential information.
6. Solicitors: Must act loyally and in the best interests of their clients.

Establishing a fiduciary relationship:

• There must be reliance on the fiduciary to act on behalf of the principal.
• There is an expectation of loyalty and avoidance of self-interest.

Question 2

What are the main objectives of fiduciary relationships, and what key principles govern them?

Answer 2

1. Prevent abuse: Ensure fiduciaries do not exploit their position for personal gain.
2. Promote loyalty: Fiduciaries must act exclusively in the principal’s interest.
3. Deterrence: By imposing strict liability, fiduciaries are discouraged from risking breaches.

Key Principles:

1. No Conflict Rule: Fiduciaries must avoid situations where their interests conflict with their duty.
   Example: A trustee cannot buy trust property for personal gain (Ex parte Lacey [1802]).
2. No Profit Rule: Fiduciaries cannot profit from their position unless authorized.
   Case: Keech v Sandford [1726] – A trustee who renewed a lease for personal benefit was required to transfer the lease to the trust.
3. Strict Liability: Honesty, effort, or fairness is irrelevant; liability is imposed strictly to safeguard the principal’s interests.

Case Reference:
In Bray v Ford [1896] AC 44, Lord Herschell noted that strict rules exist because fiduciaries might be swayed by self-interest, jeopardizing the principal’s rights.

Question 3

What are some common breaches of fiduciary duty, and how do these breaches arise?

Answer 3

Fiduciary breaches occur when a fiduciary acts contrary to their duty of loyalty or gains an unauthorized benefit. Below are detailed examples of breaches, their mechanisms, and implications:

1. Self-Dealing

• Definition: Self-dealing occurs when a fiduciary transacts with the trust, effectively acting on both sides of the transaction (e.g., buying or selling trust property to themselves). This creates a conflict of interest because the fiduciary’s interests as buyer conflict with their duty as trustee to act in the best interest of the beneficiaries.
• Key Points:
• Even if the transaction is fair or the fiduciary acts honestly, the beneficiaries can set aside the transaction within a reasonable time.
• The court applies strict liability; fairness or good faith is irrelevant.
• Case Example:
  Jane’s Purchase of Trust Property:
• Facts: Jane, a trustee, purchased a trust property valued at £275,000 for £180,000 because there was no market interest. Shortly after the purchase, the property’s value increased due to a planned tramline.
• Breach: Jane engaged in self-dealing by purchasing trust property at an undervalued price while acting in her own interest.
• Remedy: Beneficiaries (including Luke, who is under 18) can rescind the transaction, requiring Jane to reconvey the property to the trust. The trust would refund her £180,000 but benefit from the property’s increased value.
• Rule: The self-dealing rule ensures fiduciaries avoid conflicts between personal and trust interests.

2. Competition with the Trust
   * Definition: If a fiduciary competes with the trust (e.g., running a rival business), they breach their duty of loyalty.

• Key Points:
• Beneficiaries can seek an injunction to prevent the competing business.
• Fiduciaries are also liable to account for profits earned through competition.
• Example:
  Competing Business
• Facts: A trustee managing a trust-owned bakery establishes their own bakery in the same town, diverting clients from the trust’s business.
• Breach: The trustee violated the duty of loyalty by competing directly with the trust.
• Remedy: The court can order the trustee to pay over the profits earned from their competing business.

3. Unauthorized Remuneration

• Definition: Fiduciaries cannot claim payment for their services unless authorized by:

1. The trust deed.
2. Beneficiary consent (all beneficiaries must be 18+, informed, and consent freely).
3. Court order (granted if it benefits the trust).
4. Statutory authorization under the Trustee Act 2000 (TA 2000) for professional trustees.

• Key Points:
• If a fiduciary charges fees without proper authorization, beneficiaries can challenge the payment and seek reimbursement.
• Case Example:
  Mark and Naoko’s Fees
• Facts: Mark, a financial adviser and trustee, sought to charge fees for managing trust investments. Naoko, a co-trustee, could not charge fees because she was not acting in a professional capacity.
• Rule: Mark can charge fees under the TA 2000 if Naoko consents in writing. Naoko, lacking professional status, requires beneficiary consent.
• Breach: If either trustee charges fees without proper authorization, the beneficiaries can set aside the remuneration agreement.

4. Misuse of Confidential Information

• Definition: Using information gained through the fiduciary position for personal gain breaches the fiduciary duty of loyalty.
• Case Example:
  Boardman v Phipps [1967] 2 AC 46
• Facts: Mr. Boardman, a solicitor for a family trust, used confidential information about a company (partially owned by the trust) to buy additional shares personally. He later turned the company around, making a profit for himself and the trust.
• Breach: The court held that Mr. Boardman misused trust information to profit personally. Although he acted honestly and the trust benefited, he breached the no conflict rule and had to surrender his profits.
• Remedy: The court awarded Mr. Boardman remuneration for his efforts but required him to account for his personal profits to the trust.

5. Incidental Profits
   * Definition: Fiduciaries cannot profit indirectly from their position unless authorized.

• Examples of Incidental Profits:
  a. Commission Payments:
• If a fiduciary receives a commission for placing trust business, they must account for it unless authorized by the trust deed.
• Case: Williams v Barton [1927] 2 Ch 9 – A trustee earned a commission from referring trust business to a firm. The court required him to surrender the commission.
  b. Director’s Salary:
• If a trustee becomes a director due to trust-held shares, any salary earned must be surrendered to the trust unless authorized.
• Case: Re Macadam [1946] Ch 73 – A trustee who became a director using trust votes had to surrender their salary.

6. Misappropriation of Trust Opportunities

• Definition: Exploiting opportunities arising from the fiduciary relationship for personal benefit breaches fiduciary duties.
• Case Example:
  Peter’s Share Purchase
• Facts: Peter, a trustee, learned about shares in Silky Swirls Ltd through the trust’s financial adviser. When the other trustees declined to invest, Peter sought permission to buy the shares personally. Six months later, he sold them for double the purchase price.
• Breach: Peter misused trust information and exploited an opportunity that arose due to his fiduciary position. Even with trustee consent, he required beneficiary authorization to retain the profit.
• Remedy: Peter must surrender the profit to the trust.

Question 4

What defenses can a fiduciary rely on when accused of breaching their duty?

Answer 4

A fiduciary may defend themselves if they can demonstrate:

1. Authorization:

• The fiduciary obtained permission to act from one of the following:

a. Trust deed: Explicitly permits the fiduciary’s actions.

b. Beneficiaries: Consent must come from all beneficiaries, who must be aged 18+ and fully informed.

c. Court order: Judicial approval to act in the trust’s interest.

2. Good Faith and Full Disclosure:
   * If beneficiaries were made aware of the fiduciary’s actions and gave informed consent.
3. No Conflict or Profit:

• The fiduciary might argue that no actual conflict of interest or unauthorized profit occurred.
  Example: If a trustee acted entirely in the trust’s interest, with no personal benefit, they may defend their actions.

Question 5

What remedies are available for a breach of fiduciary duty?

Answer 5

1. Personal Claim:
   
   • Beneficiaries can demand the fiduciary to surrender unauthorized profits, even if the trust suffered no loss.
     Example: A trustee receiving a commission for placing trust business with a firm must return the commission.
2. Proprietary Claim:
   
   • Beneficiaries can recover property bought with unauthorized profits, including any increases in its value.
     Example: A fiduciary buys shares using trust funds that later appreciate. Beneficiaries can claim the shares.
3. Injunctions:
   
   • Courts can prevent ongoing or imminent breaches, such as stopping a fiduciary from setting up a competing business.
4. Equitable Compensation:
   
   • Fiduciaries may be ordered to compensate for losses suffered by the trust.

Question 6

What is the self-dealing rule, and what are the implications of breaching it?

Answer 6

The self-dealing rule prohibits fiduciaries from acting on both sides of a transaction involving the trust.

Implications:
* Transactions can be set aside by beneficiaries, even if the fiduciary acted honestly.

Case Example: Jane, a trustee, purchased trust property below market value for £180,000. Beneficiaries can rescind the sale to benefit from the property’s true market value.

Question 7

What happens if a fiduciary misuses trust information or opportunities for personal gain?

Answer 7

Fiduciaries are liable for any profits derived from:

1. Using trust information.
2. Exploiting opportunities arising from their fiduciary role.

Case Example: Boardman v Phipps [1967]:
* A solicitor used confidential information to profit from shares. Despite acting honestly and benefiting the trust, the solicitor was required to surrender his profits.

Question 8

Under what conditions can fiduciaries retain incidental profits or remuneration?

Answer 8

Fiduciaries can retain profits or remuneration if:

1. Authorized by the trust deed.
2. Approved by all beneficiaries (aged 18+, informed, and consenting).
3. Sanctioned by a court order.

Example:
Mark, a professional financial adviser and trustee, can charge fees if authorized by the trust deed or with co-trustee consent.
Naoko, a non-professional trustee, requires beneficiary consent to charge fees.

Question 9

What is the flow of analysis for determining a breach of fiduciary duty by a trustee, and what are the possible defenses and remedies?

Answer 9

1. Determine Fiduciary Status:
   * Check if the defendant is a fiduciary.
2. Core Fiduciary Duties:
   * Fiduciaries must:
   * Avoid making unauthorized personal profits.
   * Avoid conflicts between personal interests and the principal’s interests.
3. Examples of Breach of Fiduciary Duty:
   * Purchase of Trust Property: Self-dealing or undervalued transactions.

• Unauthorised Remuneration: Demanding fees without authorization.
• Incidental Profits: Gaining commissions or salaries related to the fiduciary position.
• Exploitation of Trust Opportunity/Information: Using trust assets, opportunities, or confidential information for personal benefit.

4. Defenses Available:
   * Personal profit is permissible if authorized by:

• The trust deed.
• The beneficiaries (if all are aged 18+ and fully informed).
• A court order or statutory provision.

5. Remedies for Breach:
   If unauthorized, beneficiaries can:
   * Bring a personal claim for an account of profits.
   * File a proprietary claim to recover replacement property or profits derived from trust property.