FIDUCIARY DUTIES Flashcards
Who is a fiduciary?
- In a fiduciary relationship one person, in a position of vulnerability, justifiably vests confidence, good faith, reliance and trust in another whose aid, advice or protection is sought in some matter
- Where there is vulnerability, equity is likely to intervene
- Finn – “the term ‘fiduciary’ is a veil behind which individual rules and principles have been developed… these rules are everything. The description ‘fiduciary’ nothing”
- We can do good analysis to find what is common between fiduciary duties, which is the reason we can apply it to new situations
- Core examples: company directors, trustees, solicitors
- Important because of the unusual content of the duty + particularly stern remedies for breach
- In the context of the financial sector, the thinking that there is something in fiduciary duties that there is a very important remedy for the severe trust
- This is because the content of the duty is different from other duties in the area, and so are the remedies
What is expected of a fiduciary?
- Act in a disinterested way
- Millet LJ in B & W BS v Mothew: “the distinguishing obligation of a fiduciary is the obligation of loyalty … breach of fiduciary obligation, therefore, connotes disloyalty … mere incompetence is not enough”
- Cardozo in Mainhard v Salmon: “a trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honour the most sensitive, is then the standard of behaviour” – US
Boundaries of the fiduciary duty
- Millet LJ in Mothew: “a fiduciary is someone who has _undertaken to act for or on the behalf of another_ in a particular matter in circumstances which give rise to relationship of trust and confidence”
- One person is taking part of the autonomy of another and is making decisions on their behalf – common in fiduciary relationships
- Paul Miller: in a fiduciary relationship, “one party (the fiduciary) exercises discretionary power over the significant practical interest of another (the principal)”
- Transfer of power from fiduciary to principal
- Discretion – the fiduciary can make decisions and there is no way of knowing what kind of decisions they will take. It must be a relationship of trust
- This definition does not capture doctors or parents
- It is hard to capture all of the cases in a single definition
B & W BS v Mothew
FACTS
- A two-stage contract to buy land which initiates a resulting trust (the first stage is a contract, and the second stage transfers the title). The period between exchange of contract and transfer of title is problematic. Here, the property market went down and the mortgage was worth more than the house. The lawyer forgot to tell the building society that the borrowers had an overdraft and they were looking to take a second and larger mortgage.
- The fact that there is a second mortgage does not undermine the security of the first mortgage. The first mortgage has priority, and what is left is the security for the second mortgage.
- But there is a danger that the borrower cannot stop the difference between the prices they are paying the seller and the mortgage they are selling
- It is the right of the first mortgagee to know that a second mortgage is being applied
- The borrowers defaulted on their mortgage, and when the building society possessed, they lost money
B & W BS v Mothew
HELD
There was no breach of fiduciary duty
B & W BS v Mothew
MISAPPLICATION OF TRUST MONEY
- (allows to falsify the account) – The lawyer is holding the mortgage money on trust for the building society with a mandate to transfer the mortgage money to the buyer. If they transfer the mortgage money to the buyer against the conditions of the mandate, they misapply the trust money.
- This did not happen here because the transfer was according to the mandate. Transfer the mortgage money on the condition that they registration goes ahead
- If this had been the case, the lawyer would be responsible
B & W BS v Mothew
NEGLIGENCE
- Applies, as by not informing B & W about the second mortgage M was negligence (and probably in breach of contract)
- The lawyer did not tell the building society about the second mortgage and the overdraft
- It would not really have made a difference. Even if he had told them (the overdraft was very small and the second mortgage is not that important), the market failure was so extreme that they would have gone ahead with the mortgage – causation is broken
B & W BS v Mothew
BREACH OF FIDUCIARY DUTY OF LOYALTY
- Does not apply, as there was no conflict of interests or bad faith, and hence no breach of loyalty
- It is not that the borrower told the lawyer not to tell the building society about the overdraft and the second mortgage (if that happened it would have been a conflict of duty)
- The lawyer simply forgot
- In order to show that there is a breach of fiduciary duty, there must be conflict of interest
The core duty
- “This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict, he may not act for his own benefit or the benefit of a third person without the informed consent of his principal. This is not intended to be an exhaustive list” [Millett LJ]
- Lionel Smith: the core duty is negative in nature
- When a fiduciary exercises her discretion she must refrain from taking into account anyone else’s interest accepts of the principles
- Refrain from conflict of interest whenever making decisions about the affairs of your principal
No conflict rule
- A fiduciary must not place themselves in a position where their own interests might conflict with those of their principal
- Completely different to the duties of contracting parties – contracting parties always act in their own interests
- Contracts allow people to work for themselves within a framework of cooperation
-
Fiduciary question: am I going to serve myself in anyway given my fiduciary duties
- If the answer is yes, the decision cannot be taken
Keech v Sandford
FACTS
T holds a lease for a minor beneficiary. The lessor refuses to renew the lease for the minor. T renews the lease for himself
There is nothing the fiduciary could do for his principal
Keech v Sandford
HELD
per King LC
- T breached his FD and he therefore holds the lease on trust for the minor
- Given the relationship between them, there was a conflict of interest
- “This may seem hard, that the trustee is the only person of all mankind who might have the lease; but it is very proper that the [no conflict] rule should be strictly pursued, and not in the least relaxed”
Disgorgement remedy
- Damages remedy the expectation interest – it would put you back where you would have been without the contract
- The F is stripped of any gains accrued from a position of conflict
- You may end up in a better position than before the contract, because any profits that the trustee has made as a result of the decision must go to the beneficiary
- Vyse v Foster: “if an executor or trustee makes profit by an improper dealing with the assets or the trust fund, that profit he must give up to the trust” [per James LJ]
- The disgorgement remedy is not punitive
- The fiduciary is acting on the behalf of the trustee, so whatever decision they make / whatever profit they make is done so for the trustee
- It is an expression of the duty which the fiduciary took upon herself – to act so as to benefit only her principal (equity sees as done what ought to be done)
Boardman v Phipps
FACTS
B, a solicitor, tried to get the trustees, his clients, to buy more shares in a struggling company in which it was already invested. The trustees refused and he buys the shares for himself
Boardman v Phipps
HELD
- B has to account for all his profits (2:3)
- Lord Cohen: “the no conflict rule … 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 done to the plaintiff … or whether the plaintiff has in fact been damaged or benefited by his action”
- B was awarded significant remuneration for his efforts
- The disgorgement remedy has nothing to do with punishment
- The solicitor was remunerated for the work that he did