FIDUCIARY RELATIONSHIPS

Question 1

Definition

Answer 1

A fiduciary relationship is a special relationship recognised in equity as imposing certain negative obligations (i.e. things which the fiduciary is not allowed to do)

Where you have a fiduciary relationships, the fiduciary has a duty of loyalty to their principal.
They cannot act solely in their own interests
They cannot make an unauthorised profit out of their position

Fiduciary duties apply to, but are not limited to, trustees

The potential scope for a breach of fiduciary duty is therefore wider than that for a breach of trust

Question 2

Bristol & West Building Society v Mothew

Fiduciary duty

Answer 2

“The expression “fiduciary duty” is properly confined to those duties which are peculiar to fiduciaries and the breach of which attracts legal consequences differing from those consequent upon the breach of other duties. “ per Millet LJ

Fiduciary relationships impose specific obligations that may coincide and be concurrent with other duties, but the fiduciary duties are narrower and are linked to the specialness of the relationship

Question 3

Staechelin v ACLBDD Holdings

FACTS

Answer 3

The agent selling a painting argued that he was entitled to a commission of $10m. The agent failed to pass on some information (not dishonestly) to the vendors and so they wanted to refuse to pay his commission. The CA said that the failure to disclose was not a breach of fiduciary duties because these obligations do not force the fiduciary to be right all the time. Because it was not dishonest, the court ruled that he should not be deprived of his commission

Question 4

Staechelin v ACLBDD Holdings

HELD

Answer 4

The CA said that the failure to disclose was not a breach of fiduciary duties because these obligations do not force the fiduciary to be right all the time. Because it was not dishonest, the court ruled that he should not be deprived of his commission

Question 5

Al Nehayan v Kent

When do fiduciary duties arise?

Answer 5

Fiduciary duties typically arise where one person undertakes and is entrusted with authority to manage the property or affairs of another and to make discretionary decisions on behalf of that person.

The essential idea is that a person in such a position is not permitted to use their position for their own private advantage but is required to act unselfishly in what they perceive to be the best interests of their principal

Question 6

Why a fiduciary obligation can be imposed

Answer 6

Consent

Undertaking

Imposed by law

Status

Fusion

Question 7

Why a fiduciary obligation can be imposed

Consent

Answer 7

If a solicitor choses to enter into this kind of relationship, they consent to the obligations

Question 8

Why a fiduciary obligation can be imposed

Undertaking

Answer 8

A voluntary undertaking of obligations from the position you are accepting is a justification

Question 9

Why a fiduciary obligation can be imposed

Status

Answer 9

Equity recognises the distinctiveness of certain offices which are fiduciary, and because of a variety of moral and legal considerations, we are justified in imposing these extra burdens on a fiduciary

Equity elevates certain relationships by regarding them as fiduciary and imposing this obligation to not act in your own self-interests and to instead act in the best interests of your principal

Question 10

Why a fiduciary obligation can be imposed

Imposed by law

Answer 10

Because of the imbalance of power between a fiduciary and their principal results in the scope for taking advantage of the other party’s vulnerability becoming very wide

Question 11

Cullen Investments v Brown

Answer 11

There was a break down in a business relationship

If there are 2 commercial actors engaging, it is much harder for commercial organisations to subordinate their own interests for those of another company, mainly because you do not have control over their affairs

If you are expecting someone to owe duty to you, this can be problematic: “it is normally inappropriate to expect a commercial party to subordinate their own interests to those of another commercial party”

Question 12

Fiduciary duties in commercial situations

Answer 12

In most fiduciary relationships, there is an imbalance of power and expertise, so we place a responsibility on the party with more power to not act in their own interest

Dealing with two equally sophisticated actors means that this relationships is not the same.

If the circumstances suggest that the parties cannot subordinate their own best interests, it might suggest that fiduciary obligations are not owed on the facts

Question 13

Basic standard of liability

Answer 13

Strict liability

There is no requirement of fault in the sense of moral blameworthiness - disregard the character of the fiduciary regarding fault

Question 14

Why is it strict liability regarding the breach of fiduciary duties?

Answer 14

“Equity adopts a prophylactic approach in relation to trustees and others in a trustee-like position … A fiduciary will often see an opportunity for personal profit arising in relation to the beneficiary’s affairs” P Birks, Introduction to the Law of Restitution

Opportunities may arise that should be for the principal, and the risks of temptation is such that equity seeks to prevent you from being tempted and by taking this approach

Equity is concerned with temptation in relation to fiduciaries because the nature of these situations gives the opportunity to give into temptation

There is a duty not to pursue your own interests if in doing so you might be tempted to set aside the best interests of the

Question 15

Royal Hastings v Gulliver

RATIO

Answer 15

“The liability arises from the mere fact of a profit having … been made. the profiteer … cannot escape the risk of being called upon to account”

It is enough that you had a duty to not make a profit and then made an unauthorised profit

Question 16

Content of fiduciary duties and standard of liability

General rule

Answer 16

A fiduciary must not profit from their position or have conflicting interests or duties unless the principal has given informed consent (or it is otherwise authorised, e.g. by statute or the court)

The priority is to balance the imbalance of power in the relationship

An advantage of this strictness is certainty

Question 17

Content of fiduciary duties and standard of liability

Bray v Ford

Answer 17

We are not concerned with the morality of the situation

Question 18

Content of fiduciary duties and standard of liability

Stevens v Premium Real Estate

Answer 18

“If someone puts himself in a position of having two irreconcilable duties, it is his own fault”

Question 19

Content of fiduciary duties and standard of liability

Keech v Sandford

Answer 19

The rule must be strictly pursued and not in the least relaxed. The risk of conflict justifies the strictness of the approach, even though in reality there is and will not be any conflict

Question 20

Content of fiduciary duties and standard of liability

Loyalty

Answer 20

“The application of the rules governing fiduciaries is not about ensuring loyalty. The rule addresses the fact that where an exercise of a power is taken in cases where the trustee’s judgment is impaired, that exercise can be set aside” J Equity, James Penner

If you are in a position to act in a way that is not in the best interests of the principal, it is hard to not make an unbiased decision. This rule protects you from yourself

Positions of conflict do not depend on any fault, but rather from breaching a duty owed

Question 21

Bristol & West Building Soc v Mothew

Answer 21

No breach of trust – authority to use money not revoked and not conditional on compliance with instructions

No breach of fiduciary trust – contract which ins in breach of this duty need not be dishonest but it must be intentional. An unconscious omission which happens to benefit one principal at the expense of the other does not constitute a breach of fiduciary duty, though it may constitute a breach of the duty of skill and care
 Unauthorised profits
 Fair dealing
 Self-dealing

Question 22

Boardman v Phipps

FACTS

Answer 22

A testamentary trust for widow and 3 children was set up

Boardman obtained approval from Fox and Noble for plan to buy shares personally, he did not seek approval from the widow

Question 23

Boardman v Phipps

Breach of a fiduciary relationship

Answer 23

Acquired information as agents of the trustees
or
Used information to make profit for themselves
or
Acted honestly and in good faith for benefit of trust

But did not have consent of all three trustees

Question 24

Boardman v Phipps

Relevance of motives

Answer 24

Your motives are irrelevant to whether it is a breach of fiduciary duty or not. It is enough that there is a mere possibility of conflict even if on the facts there was no possibility

“Even if the possibility of conflict is present between personal interest and the fiduciary position the rule of equity must be applied” Lord Hodson

Question 25

Boardman v Phipps

Dissenting judgment

Answer 25

It is only a breach if there is a real possibility of a conflict, not if there is a chance of a conflict

Question 26

Self-dealing rule

Answer 26

If the trustee sells trust properties to themselves, we are concerned about the risk of potential for exploitation. In this situation, the transaction is voidable (it can be set aside if a beneficiary seeks it) regardless of how fair the transaction was

When a company is involved, self-dealing may look like fair dealing

It is self-dealing if a fiduciary is involved in making decisions on both sides of the transaction

Tito v Waddell: “the self-dealing rule is that if a trustee sells the trust property to himself, the sale is voidable by any beneficiary ex debito justitiae, however fair the transaction”

Question 27

Fair dealing rule

Answer 27

The transaction can be set aside (not automatically) only if the trustee can show that they have taken no advantage of their position and has made full disclosure to the principal

If you purchase the beneficial interest as a beneficiary, the court will look at the character of that transaction

It is up to the trustee to show that they have not taken advantage of that position

Tito v Waddell: “the fair-dealing rule is that if a trustee purchases the beneficial interest of any of his beneficiaries, the transaction is not voidable ex debito justitiae, but can be set aside by the beneficiary unless the trustee can show that he has taken no advantage of his position and has made full disclosure to the beneficiary, and that the transaction is fair and honest”

Question 28

Remedies for breach of fiduciary duty

Answer 28

Account of profits: the gains you make as an unauthorised profiteer must be handed over to the principal

Constructive trust: the principal has a proprietary interest in the money or assets

Rescission of transaction

Equitable compensation: a requirement to make good to the trust fund

Such claims will have the advantage of the avoidance of limitation periods

Question 29

Equity in business

Lord Briggs, The Denning Society Annual Lecture

Answer 29

The problem about having such a broad principle of equity is that it “can only be expressed at such a high level of generality that it provides little useful guidance” (Lord Walker in Cobbe v Yeoman’s Row)

The growing role of professional fiduciaries in an economy focussed on services coincides with the need to impose higher standards of conduct on them that has not been met by regulation. Thus, equity has become the dominant source of relevant law, as regulation has not provided a satisfactory alternative

Question 30

Equity in business

Rectification before Chartbrook v Persimmon Homes

Answer 30

Rectification required a common (or unilateral) mistake as to the drafting of the parties agreements

The reference to common and continuing intention was to the parties’ true (subjective) intention, which was usually proved and tested by what they had previously written, said or done

A defendant to a rectification claim could therefore succeed by showing that the concluded agreement reflected their intention, as long as they had not acted unconscionably

Question 31

Equity in business

Rectification after Chartbrook v Persimmon Homes

Answer 31

Lord Hoffmann changed this

Parties can now obtain rectification where they were never truly ad idem about the matter in issue

Prof Paul Davies and Marcus Smith have suggested that the Chartbrook approach will lead to more, rather than less, contracts being rectified. In order to avoid this, we construe contracts objectively, and exclude evidence of the parties’ negotiations

The adoption of an objective approach to the identification of the prior common intention did not exclude the pleading and forensic analysis of the parties’ subjective beliefs and intentions, because the claimant still needs to show