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
Justification for no conflict rule
- A very strict rule that does not leave room for bona fide fiduciaries to say they did not do any wrong
- Risk factors that make the fiduciary relationship more prone to abuse than other private law relationships (mainly contracts)
Justification for no conflict rule
TEMPTATION
- Whichcote v Lawrence: “where a trustee has a prospect of advantage to himself, it is a great temptation to him to be negligent”
- The principals are particularly disadvantaged: very limited ability to monitor and detect exploitation
- Potential profit + easy escape = temptation
- Easy escape because the fiduciary is the expert
- Look at the prospect of advantage
Justification for no conglict rule
DISCRETION
- The dynamic setting of fiduciary relationships inhibits any precise explication of fiduciary duties
- The duties are framed so as to leave wide room for the discretion and flexibility
- The fiduciary is granted a great deal of power to translate general open-ended duties to specific actions
- Whenever the decision is not clear cut, people have a strong tendency to serve their own interests and hide it even from themselves (self-deception and rationalisation)
Justification for no conflict rule
EXCEPTION: authorised conflicts
-
The principal can authorise any transaction that involves conflict of interest
- There will be a lot of situations where there will be a conflict of interest
- S29 Trustee Act: if the trust instrument is silent on this point, a professional trustee is entitled to “reasonable remuneration”
- In the 19th century most trustees were not being paid
- Blank authorisation of payment
-
Cradock v Piper: a solicitor trustee is automatically allowed to charge the trust for a litigation work at the normal rates
- Equity is sensitive to the needs of the market and gives lawyers the right to charge (and put themselves in a conflict of interest)
- The court has an inherent jurisdiction to allow remuneration
Self-dealing rule
- Any transaction in which the trustee purchases trusts property or sells her own property to it is voidable, i.e. the beneficiary can set it aside even if it is absolutely fair
- Rationale - the trustee acts as both vendor and purchaser and the conflict is inherent and obvious
Exception to the self-dealing rule
- Holder v Holder*: the purchaser of trust property in an auction was a fiduciary in a technical sense
- CA: the sale will not be set aside as the fiduciary bought the farm in an auction in which he was never involved as a seller
The fair dealing rule
Tito v Waddell: “if a trustee purchases his beneficiary’s beneficial interest, the beneficiary may have the sail set aside unless the trustee can establish the propriety of the transaction, showing that he had taken no advantage of his position and that the beneficiary was fully informed and received full value” per Maggary V-C
Third parties: since the transaction is voidable rather than void, an innocent purchaser takes a good title before the transaction is voided
Reasons for strict liability on the rules
- The calls to relax the severity of the loyalty duty have been resisted by the courts of equity
-
Deterrence: always a consideration of distributive justice
- “By this strictness the temptation to embark in what must always be a doubtful transaction is removed [De Bussche v Alt]”
- The majority of breaches of royalty are not detected because it the fiduciary is in the know and the fiduciary cannot find out
- Lionel Smith: not a worthy goal for private law
- Evidentiary complexity: this Court, is not entitled, in my judgment, to receive evidence, or suggestion, or argument as to whether the principal did or did not suffer any injury in fact by reason of the dealing of the agent; for the safety of mankind requires that no agent shall be able to put his principal to the danger of such an inquiry as that.’.
- The principal is not in the know
- How can they supply evidence that they have lost money because of the liability?
Murad v Al-Saraj
FACTS
Concerns a joint venture, in which Mr Al-Saraj lied and breached his fiduciary duty
Murad v Al-Saraj
OBITER
- In obiter, the CoA said it was time to relax the strictness of the fiduciary duty by shifting the burden of proof and say that the fiduciary has to show that their decision did not harm the principal
- The rule should be relaxed
- Equity, which cares about intention and morality of the parties, should never resort to strict responsibility
- Strict responsibility should not feature anywhere in equity
- Allow the fiduciary to prove that the conflict of interests did not harm the principal à the principal is protected by switching the burden of proof
Murad v Al-Saraj
Reasoning behind obiter
Deterrence: shifting the burden unto the fiduciary to prove their bone-fides will be enough of a deterrence [per Arden LJ]
Evidential complexity: “it may be said that commercial conduct which in 1874 was thought to imperil the safety of mankind may not necessarily be regarded nowadays with the same depth of concern [per Parker LJ]”
Evidential complexity + strict liability
- Principals should not be exposed to the risk of a complicated and inevitably expensive litigation about hypothetical scenarios and internal states of mind
- It is still notoriously difficult to bring evidence about internal states of mind
- The principal will have to show that the fiduciary knew at least that he was acting in conflict of interest and that he knew that the course of action that was taken was worse than the other course of action
- The control which trustees enjoy over the trust account make it very easy for them to ‘seed’ evidence that would misdirect even the most sophisticated fact-finding mechanisms that courts can now employ
- Lionel Smith: the fiduciary would break her duty if she puts the principal in a situation where he has to prove that a potential conflict indeed materialised
- The trial itself is a breach of fiduciary duty because the fiduciary has to promote their own interests
Pre-authorisation + strict liability
“Once established … consent is a complete answer to a claim of breach [per R Flannigan]”
You have the strict duty of loyalty walking with authorisation
Whenever you are in doubt, ask for authorisation – that should deal with any issues
Freestanding duty of loyalty
Conaglen
No; there are no positive duties that are particular to fiduciaries
- “The concept of fiduciary ‘loyalty’ is an encapsulation of a subsidiary and prophylactic form of protection for non-fiduciary duties which enhances the chance that those non-fiduciary duties will be properly performed”
- Prophylactic protection – offering protection that runs all the time that is much wider is actually needed because there are faults that you cannot catch with specific treatment
- The duty of loyalty, although it is much wider than necessary, it ensures that the other duties of care and good faith, etc are fulfilled because we cannot tackle them individually because there are too many
Free standing duty of loyalyu
Smith
Yes, you can capture the duty of loyalty in one sentence
- “The duty of loyalty is a requirement to exercise judgment in what the fiduciary perceives to be the best interests of the beneficiary”
- An obligation to be selfless – the core of the fiduciary duty
FHR European Ventures LLP v Mankarious
FACTS
The fiduciary (Cedar) were the estate agent, and they represented both the hotel owners and the investors. The hotel owner promised Cedar €10mil commission if the sale went through, which made them biased towards the sale going ahead and in severe breach of the fiduciary duty.
Once the sale goes ahead and the buyer finds out about the secret commission, what happens to the money?
FHR European Ventures LLP v Mankarious
HELD per Simon J
the investors are not entitled to a proprietary remedy against Cedar; but were only entitled to the personal remedy of an account in equity
Applying the test in European Ventures
Etherton MR
- Does the commission fall into category 1 – was it the property of the beneficiary?
- No. the money paid to Cedar (F) was not ‘beneficially the property’ of the investors
- Category 2 – did the buyer have the opportunity that was lost by the fact that there was a secret commission?
- Yes. Cedar diverted from the Investor Group the opportunity to acquire the hotel for up to €10 million less than the Investor Group in fact paid
Applying the test in European Ventures
Lord Neuberger
- The authorities are mixed – there is not one absolutely right answer
- Therefore, we should ask which answer will lead to more certainty – the simple one – all profits are held on trust
- Accepts that the principal’s position is likely to have been worse off as a result of the bribe / secret commission
- Creditors of the principals are also not entitled to enjoy bribes
Authorities for proprietary
-
A-G for Hong Kong v Reid
- FACTS: Reid, a general attorney, took bribed. He invested them successfully, and the value of the property inflated
- HELD, per Lord Templemann: as a fiduciary to the crown he has to account for the moneys. The false fiduciary held the bribe on constructive trust for the person injured
- Australia – unanimous HC in Grimaldi v Chameleon Mining NL
- Due to remedial constructive trust
-
Boardman v Phipps
- Etherton in European Ventures: the order was for CT
Sinclair v Versailles
TEST
- “A bribe paid to a fiduciary could not possible be said to be an asset which the fiduciary was under a duty to take for the beneficiary. There can thus be said to be a fundamental distinction between (i) a fiduciary enriching himself by depriving a claimant of an asset and (ii) a fiduciary enriching himself by doing a wrong to the claimant”
-
“A beneficiary of a fiduciary’s duties cannot claim a proprietary interest … unless the asset or money:
- Is or has been beneficially the property of the beneficiary
- Or the trustee acquired the asset or money by taking advantage of an opportunity or right which was properly that of the beneficiary
- In all other cases, the remedy will be personal”
Per Lord Neuberger
Lister & Co v Stubs
FACTS
Stubs, a foreman employed by Lister & Co, a firm of textile manufacturers, was entrusted with the task of buying dyestuffs at market prices. He placed large orders with Varley & Co who paid him a secret commission per order. Stubbs invested part of the commission in property in York because of the secret commission
Lister & Co v Stubs
HELD
The fiduciary “is liable to account for [the commissions money] the moment he gets it. it is an obligation to pay and account … but the relation between them is that of debtor and creditor; it is not that of trustee and cestui que trust [per Lindley LJ]”
