S2.2. Duties of trustees and remedies for breach Flashcards

Question

Cowan v Scargill

Answer 1

**Facts:** The case involved a mineworkers' pension fund. Half of the trustees were appointed by the union and they refused to accept an investment plan prepared by experts on the basis of union policy. Union policy = Basically they required amendments so that there were no overseas investments and no investment in energies in direct competition with coal. Issue: whether trustees could take into account their own personal views or the personal views of the beneficiaries when choosing the investments. Held: breach of duty to refuse to not accept this, they could not on the facts take these views in the account. “If investments of this type would be more beneficial to the beneficiaries than other investments, the trustees must not refrain from making the investments” – Megarry V-C **Exception:** one case where Megarry V-C thought might be exceptional and where ethical consideraitons could legitimately sway the decision of the trustees was where all the beneficies were adults who shared the same moral values who thought that it would be better to receivve less monery rather than from: "evil and tained sources"

Answer 2

Trustees of a charitable trust are equally under a duty to get the maximum financial return consistent with commercial prudence but in limited circumstances they can refuse to make certain investments even though there may be a risk of financial detriment There are limited circumstances, where trustees can refuse. The court did not give a comprehensive list of what circumstances might justify such a decision but did give some examples, for example: trustees could refuse investments which would 1. Conflict with the very aims of the charity 1. Example: if a charity is for cancer research, the trustees can justifiably refuse to invest in tobacco companies. 2. If it would hamper the work of the charity, 1. Example: if they make recipients of the benefits from the charity unwilling to be helped or it might alienate those who might donate to the charities funds. But those risks need to be weighed against any risk of financial detriment. But subject to such limited exceptions, it is the same approach as in C v S, financial criteria prevails, the objection of anyone – trustees/beneficiaries/donors, will be relevant only if there is no risk of financial detriment.

Answer 3

yes - s5 This obligation will depend on particular investment proposed, might need an art expert, financial adviser etc. It could be one of the trustees who is that expert. There is an exception to the need for advice in subsection (3), if they conclude it is unnecessary or inappropriate. It might be unnecessary if the trustee himself has expertise. It might be unnecessary or inappropriate if the proposed investment is very small so that actually, there is no money to pay for advice and therefore the most appropriate thing is to put the money in a bank account. Although a trustee is under an obligation to take advice, he should not follow it blindly, he needs to still make his own decision as to the investment, so he could with good reason refuse to follow it but if the advice is from an appropriate source, and the trustee relies on it, he is unlikely to be in breach of duty.

Answer 4

He has a duty in retention of investment and must make **periodic review of investments.** ## Footnote Provided that the trustee does this: reviews the investment, takes advice (unless exception applies), if trustee then retains the investment, honestly believing that it is in the best interest of the trust, then he will not be liable should it not be in the best interest of the trust.

Answer 5

applies), if trustee then retains the investment, honestly believing that it is in the best interest of the trust, then he will not be liable should it not be in the best interest of the trust. **No liability for mere errors of judgment:**There is only liability for willful fault. They will not be liable because it can be seen, with the benefit of hindsight that it is a mistake. The trustees invested, the value of land fell placing their security at risk but the trustees nevertheless decided to retain them hoping that the market would improved. Instead, land value fell still further.

Answer 6

**Trust owns a controlling interest in a private company** Additional obligation imposed on trustees where trust owns a controlling interest **_Obligation to receive the information they would have received if they were on the board of directors:_**

Answer 7

FACTS: The company managed real property and embarked on a programme of hazardous and, as it turned out, disastrous property development. The trust company took little notice and simply relied on the company directors. They only received such information as was available at AGMs. The question was whether in such a case, the trustees or representative ought to be on the Board of Directors of that private company. Held: this was not necessary, but the trustees should receive all the information that they would have received had they been on the Board of Directors so they must be looking at what the directors are doing, cannot rely on the directors running the company properly, they must be checking for anything that looks suspicious and must be prepared the act. This is arguably a high burden on trustees. **Judgment:** * The prudent man of business would act in such a manner as is necessary to safeguard his investment. If facts become known, or he is put on inquiry, he will take appropriate action. Appropriate action might involve consultation with the direcots or replacement of the direcote. * Since he has the power to do so, he will see that there is sufficient information to enable him to make responsible decisions. **Held: i**t was not proper for the bank to confine itself to AGM meetings etc, but they needed more frequent information so it would have been able to step in and stop.

Answer 8

The beneficiary must prove that he has suffered loss because of investment decisions that cannot be justified. It is not enough that a trustee has made an investment for an inappropriate reason because if the decision can be justified for some other reason, no action can be brought.

Answer 9

Facts: T was a corporate trustee which had undoubtedly made some bad mistakes: it had failed to understand the width of the investment clause in the trust deed and took no legal advice and had also failed to comply with the obligation to review investments. The fund was worth £50,000 in 1922 and £270,000 in 1986. Had the fund maintained its real value it would have been worth £1 million. Had it kept pace with the average increase in the value of shares it would have been worth £1.8 million. Leggatt LJ went so far as to say that no-one would choose this bank for effective management of his investment. Held: But it could not be shown that no trustee would have made the same decisions, it could not be shown that decisions of the trustees were totally unjustifiable. Clearly it makes it difficult to show a breach of trust. Decision: must show that the choices of the trustees (decisions) were not justifiable and that no reasonable or prudent trustee would have made the same decision. _Good example about how unfair the rule is._

Answer 10

There is an obligation to elect between inconsistent remedies after judgment to prevent double recovery for a loss.

Answer 11

**Facts:** Joint venture for the development of land: D provided the land; C provided the money for the development. Agreement D would transfer a number of houses to C when built. Effect of agreement that D held property on trust and the failure to transfer was a breach of trust. D rented properties out. C’s loss was the rent that C should have been getting from the property had they been transferred to him. C claimed: (a) an account of the profits made by D on the basis they were unauthorised profits in breach of fiduciary duty as he rented them out; and (b) damages for loss caused by the breach of trust i.e. the rents C could have obtained from the properties if he had owned them. Clearly, these are different ways of achieving compensation for the same loss. C ultimately wants to achieve rent from these properties. Once judgment was given in C’s favour, C then had to choose which claim to persue.

Answer 12

Not if the trustee has not created a loss. But the But For test will be used to measure the liability

Answer 13

The But For test is applicable to breach of trust and breach of fiduciariy duty. HL here established the but for test that beneficiaries are entitled to compensation for any loss they would not have suffered but for the breach. The use of the but for test has recently been confirmed by the SC in AIB Group. There must be a causal link. The defendant will avoid liability if he can show the claimant would have suffered the loss anyway. The claimant is entitled to be put back into the position he would have been had there been no breach, so compensation is assessed at the date of judgment. In many cases there is a requirement to pay a sum of money into the trust fund. But if the trust is now at an end, then there will be a payment of compensation to the beneficiaries directly. This was the case in Target Holdings v Redferns.

Answer 14

The SC confirmed that the but for test applies for ALL breaches of trust. There was an argument put forward in this case following on from academic writing by lord Millett that tried to distinguish between different types of breaches, and tried to argue that the breach only applied to some of them. SC said that there was no distinction, for all types of breaches, the but for test applies.

Answer 15

But for test also applies where compensation is required for breach of fiduciary duty. There are comments in Swindle v Harrison that suggests that in a case of fraud by trustee or fiduciary, causation will be assumed and need not be proved. Causation of loss.

Answer 16

**Facts:**

Answer 17

**Facts:** Mrs Harrison had entered into a contract to buy a restaurant. She had already raised some finance by means of a loan of £180,000 secured on her house (although the house was only worth £175,000). She had used about £75,000 of this, partly to pay the deposit and for some work on the property. She could not raise the extra money needed for the purchase and thus risked losing her deposit and being liable for breach of contract as well as being unable to make repayments on the loan without income from the restaurant business. Swindle, her solicitor, offered her a bridging loan, which she accepted. He was in breach of fiduciary duty in failing to disclose certain information to her, including the fact that his firm was making a hidden profit on the loan. The breach of duty was only the failure of disclose this profit, the actual making of the loan was not in breach of any duty. The restaurant business was unsuccessful and H lost her home. She claimed from Swindle the lost equity in her home. Her claim: if he had not offered the bridging loan, she still had money from original loan so she could have repaid that bit, and she would have had to pay the rest from the proceeds of sale of her home but she would be left with a significant sum and significant value of her home too. Because she took the bridging loan and went ahead with the purchase, she lost everythingthe failure to disclose would have enabled her to set aside the bridging loan, but she did not claim that. She claimed her consequent loss, and the CA were of the view that even if full disclosure had been made to her, she still would have gone ahead and because she would have gone ahead anyway, the breach of duty did not cause her loss. Her loss was caused by her decision to go ahead and buy the restaurant, so her claim failed and she was not entitled to compensation.

Answer 18

**Facts:** A company agreed to sell properties to company B owned by Mr K and Mr M for less than £1million . Mr K and M arranged for the purchase to be made through two intermediately companies they owned, so that it appeared that the sale to Company B was for a consideration of £2 million. Company B applied for a loan from Target Holdings, and employed Redferns as their solicitor. Target holdings paid the loan into Redfearn's client account (without any express instructions as to release the funds). Redferns then transferred the funds even though at this stage the contract for the purchase of the properties had not been entered yet. The value of the properties then dropped sharply and Target sought to recover the loss. Target sought to recover its loss from Redferns. The transfer of funds before the contracts for sale had been entered into was a breach of trust. **Held:** The action was not a final determination of the issue, only if there was an arguable case would it go to trial. The HL held: the solicitors would only be liable for the losses if it could be shown that the mortgage fraud would not have gone ahead without the early release of the money. Question: whether the purchase by the first company in the chain was dependant on that money. If the fraud could have gone ahead, even if the money had not been released early, then the breach would not have caused the loss. The case was sent back for trial on that basis. This is a good illustration of correctly identifying the breach of trust because the breach of trust which claim was based was the early release of money in breach of trust. But on the facts there is an alternative possible breach of duty, it could be argued that the solicitors should have told the lenders of the deceitful chain of purchasers. Undoubtedly, if the lenders had known about that chain of purchasers, they would not have lent the money so if that had been identified as the breach, undoubtedly it caused the loss.

Answer 19

Canadian case which was discussed by approval in the HL in Target Holdings.The claimant had bought property. His solicitors were in breach of fiduciary duty in failing to disclose an improper profit being made by the sellers. The claimant built a building which was defective due to the negligence of the builders and engineers. It was claimed that the solicitors were liable to pay compensation for the defective building on the grounds that if there had been no breach of duty the claimant would not have bought the land and consequently would not have built the building so would not end up with a defective building. Claim failed, the court said the solicitors were only liable for such losses as occur on a “common sense of causation” of the result of the breach. If the loss had been because of a fall of property values, this would have been caused by the breach, but here the loss was caused by the negligence of the builders and engineers so no liability.

Answer 20

Suggestion that the common law rules of causation, remoteness and measure of damages may apply to breach of the equitable duty of care: This But For test is said to apply for measuring compensation for breach of trust and fiduciary duty. Another test where measure of damages might be applied is the breach of equitable duty of care. If we looked at the HL in Target Holdings – the view taken was that the but for test is taken when assessing equitable compensation and it is different when assessing common law damages. Therefore, on the face of it, if there is a breach of the equitable duty of care, this would be a claim for compensation, so you would think the but for test would apply. However, the CA in Bristol and West was decided at the same time as Target Holdings, and the view was expressed by Millett LJ that where equitable compensation is for the breach of duty of care and skill then it resembles common law damages and there is no reason in principle why you cannot therefore in principle use the common law rules of causation, remoteness and measure of damages.

Answer 21

What if, in acting in breach of trust or fiduciary duty, a trustee causes a loss for the trust funds with one of his actions but with another action actually creates a profit for the trust – can the trustee set this profit off against the loss, thereby reducing the amount of compensation payable? The basic rule: no set off is possible **Justification:** profit belongs to the beneficiaries, the loss must be compensated for. The justification: otherwise trustees might be encouraged to speculate, that a trustee who has made a loss might be encouraged to try and make a profit. Thus there is logic behind the rule, but it is harsh

Answer 22

Exception where the profit and loss can be said to arise from the same transaction or breach of trust: Fletcher v Green

Answer 23

Exception to Dimes v Scott where the profit and loss can be said to arise from the same transaction or breach of trust. **Facts:** Trustees had made an unauthorised investment, sold it at a loss, the proceeds were paid into court and invested and a gain was made. The court said that the trustee could set that profit/gain against the loss – no reason was given by court in Fletcher v Green but the case has later been explained as involving a continuing breach of trust relating to the same property.

Answer 24

It is difficult to reconcile the exception with the facts of Dimes v Scott itself. ## Footnote **Facts:** The trustee failed to sell an unauthorised investment when required. The income was higher than it would have been from the authorised investment. All of it was paid to the life tenant. Trustee sued by the beneficiaries entitled to capital. They had also benefited from the breach of trust: the trustee had been able to buy more of the authorised investment than he could have done had he sold the unauthorised investment when required. The life tenant obtained too much income. Held: trustee had to pay to the trust the excess income which had been paid to the life beneficiary. Looking at the facts, the remainderman had benefited from the breach of trust because if the trustee had sold the investment when he should have done, he would have been able to buy less of the authorised investment than ultimately he was able to, so the trust ended up with more of the authorised investment than otherwise so the remainderman benefited. However, this was irrelevant, the fact they profited could not be set against the loss. It seems, both the profit and loss was caused by the same wrongful action. So, we might have a basic rule and exception, the application is difficult. It is difficult to say whether or not the profit or loss arises from the same breach.

Answer 25

**Facts:** The breach of trust was failing to supervise the directors of a private company in which the trust had a controlling interest. The company had invested in two property development schemes: one was a great success the profit from the first one was used to develop another scheme; the other was a disaster because there was no planning permission. Held: where trust property includes a majority share in a private company, then the trustees need the same amount of information as the directors. So breach of trust was failing to supervise the directors. Held: the profit on the first transaction could be set against the loss on the second transaction. **There were two separate transactions but there was a link in that profit from the first were invested in the second and that they were both an example of the same speculative investment approach of the company. Nevertheless, it was a generous approach.**

Answer 26

Yes ## Footnote They are joint and several liability so, beneficiaries can sue any one of them for full compensation. What if one trustee is sued for the full amount of compensation but another trustee is also guilty of a breach which led to that loss? The trustee who ends up paying that compensation, can claim a contribution from a trustee under s1(1) CLCA 1978. How much co-trustee will be required to contribute, is at the discretion of the court.

Answer 27

Yes where: 1. Where one trustee is guilty of fraud. 2. Where a trustee is a solicitor and has a controlling influence: *Head v Gould* [1898] 2 Ch 250. 1. This is limited to a solicitor, does not extend to a barrister or accountant and looking at a solicitor with controlling influence over the trustees 3. Where a trustee has exclusively benefited from the breach of trust. 4. Where a trustee is a beneficiary and his interest is capable of being impounded: Chillingworth v Chambers

Answer 28

A beneficiary who participates in or consents to a breach of trust with knowledge will not be able to sue. If we look for consent, it must be effective – adult beneficiary who is fully medically competent and not under any undue influence, it must be genuine consent. The reference to knowledge: the beneficiary must know the facts and fully understand what actions he is consenting to. But need not know that he is consenting to a breach of trust. There may be other beneficiaries who can sue, but if all beneficiaries participate or consent then no action can be brought.

Answer 29

If an action can be brought, and a beneficiary can sue then we move onto position where it might be possible to impound the interest of a beneficiary who was involved in the breach. Impounding the interest of a beneficiary: that beneficial interest is used first to pay compensation to other beneficiaries and thereafter the trustee is liable.

Answer 30

1. Jurisdiction of the High Court 2. s62

Answer 31

Under the inherent jurisdiction of the High Court where: * the beneficiary instigated, requested or consented to the breach * with knowledge and * with _the motive of getting a personal benefit_ (and actually getting a benefit if he simply consented). The idea of knowledge is simply knowing of the facts need not know it is a breach of trust.

Answer 32

Where a trustee commits a breach of trust at the instigation or request or with the consent **in writing** of a beneficiary, * There needs to be consent by writing BUT instigation or request do not need to be in writing. S62 differs from the High Court as there is no requirement that the beneficiary has a motive for benefiting or actually benefits from the breach, but the power of the court under s62 is discretionary and it is likely that a motive of benefitting and actual benefit will be very important when exercising that discretion. This is because this action not only stops the beneficiary from suing, but also makes them primarily liable for the loss (liable before the trustee). Therefore, need very strong reason for saying the beneficiary is more liable than the trustee.

Answer 33

**(c) Indemnity** Any trustee ending up paying compensation can seek a full indemnity from a co-trustee. This arises in a range of circumstances. * Where a trustee is a solicitor and has a controlling influence: *Head v Gould* [1898] 2 Ch 250. * This is limited to a solicitor, does not extend to a barrister or accountant and looking at a solicitor with controlling influence over the trustees

Answer 34

Any trustee ending up paying compensation can seek a full indemnity from a co-trustee. This arises in a range of circumstances. * Where a trustee is a beneficiary and his interest is capable of being impounded: *Chillingworth v Chambers* [1896] 1 Ch 685. * He need not have been a beneficiary at the time of the breach, only look at whether he is a beneficiary at the time of the action. * If it sometime possible to impound the interest of the beneficiary. If the trustee is a beneficiary and if his interest can be impounded, then that trustee’s beneficial interest will be used by way of compensation. After this beneficial interest has been used, then liability between the trustees will be shares.

Answer 35

**Exemption clauses can exclude liability for all but dishonesty/wilful fraud** Millett held that there was an irreducible minimum core set of values It is strongly argued that this seems wrong because exemption clauses are usually used by professional trustees. Argument against exemption clauses where non-professional trustees, but at the least they ought to be liable for gross negligence. In reaching his decision in Armitage., **LJ Millett said he thought exemption clauses had gone too far but it was not for him to change the law, but parliament. The law commission looked into changing exemption clauses but abandoned the exercise.**

Answer 36

They might be able to rely on statutory relief under s61 TA 1925

Answer 37

The court has a discretion to relieve a trustee from liability wholly or in part, the trustee has to satisfy the court on all three criteria: 1. acted honestly 2. reasonably 3. ought fairly to be excused. In exercising its discretion the court will bear in mind the fact that if they excuse the trustee, the beneficiaries will suffer a loss. Whether the beneficiaries will be compensated in any other way for the loss such as insurance, the courts seem reluctant to excuse paid trustee from liability.

Answer 38

The limitation period is usually 6 years, but the period may be longer in the case of fraud or where a proprietary claim rather than personal claim is brought.

Answer 39

The Fiduciary Duty of loyalty. This duty includes a negative obligation whereby fiduciaries are restricted from acting in a way that they would prefer their own interests over the interests of the beneficiaries or their principals

Answer 40

Millett LJ - “A fiduciary is someone who has undertaken to act for or on behalf of another...which give rise to a relationship of trust and confidence.”

Answer 41

The **PRINCIPAL -** WITH AN AL NOT LE

Answer 42

It has been suggested that the courts may be prepared to find a fiduciary relationship in order to give a remedy: **Facts:** R was a staff sergeant in the British Army stationed in Cairo. He was paid by Egyptian smugglers to sit in lorries carrying contraband goods wearing his uniform. The fact that he was there meant that the lorries were simply waved through civil police checkpoints without being searched. The British authorities seized some of the money he had been paid and he brought an action for its return. Unsurprisingly he failed, the HL was prepared to hold that Reading was in a fiduciary relationship with the crown. Therefore, he was under a duty to account for the profit he had wrongfully made by exploiting his position.

Answer 43

Basic definition of the duty of loyalty Millett LJ - A fiduciary must 1. act in good **faith**; 2. he must not make a **profit** out of his trust; 3. he must not place himself in a position where his duty and his interest may **conflict**; 4. 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, but it is sufficient to indicate the nature of fiduciary obligations.

Answer 44

A fiduciary who is acting outside the scope of his fiduciary duties cannot be liable for breach of duty. One crucial factor in deciding whether a fiduciary’s actions are in breach of the fiduciary duty or not, is to consider the scope of the fiduciary relationship – not all fiduciaries owe the same duties, it depends on the scope. If a fiduciary acts outside the scope of the relationship, there can be no liability: Boardman v Phipps.

Answer 45

It is very strict. 1. The law could take a strict deterrent approach: that the law is about preventing any possible abuse of position so there is always liability. 1. A fiduciary can never regardless of the circumstances make a profit out of his position. 2. This is clear cut, simple, do not need to consider issues of dishonesty, but is inflexible. This is the present law – the very strict deterrent approach that the fiduciary can never benefit from his position, unless he is authorised.

Answer 46

Originally, when the rules were first produced, the devices to get evidence was not as good as today, so it was considered that it was not possible to discover the motives of the fiduciaries.

Answer 47

Basic rule: they act voluntarily and not entitled to be remunerated because they are trustees and should not benefit from the trust profit. There is a potential for conflict of interest. But there are exceptions

Answer 48

* Where the trust instrument so provides. * This will always be the case where a professional trustee is appointed. * Where authorised by statute. * S29 Trustee Act allows the court to reward remuneration in certain circumstances. * Where the beneficiaries agree. * It is not common because all beneficiaries must be of full age/capacity and they must all agree and there can be a pressure of undue influence. * Where authorised by the court. * Both for past/future work and to increase the amount payable to the trustee. But it has been made clear that the court will only do this in exceptional circumstances where the trustee has done work of substantial benefit to the trust and if the trustee did not do it, someone else would have had to have been paid to do it.

Answer 49

HL said remuneration will never be awarded where it might encourage a trustee to put himself in a position of conflict of interest and duty.

Answer 50

There is an exception to a trustee not being allowed remuneration and this applies: In a solicitor-trustee relationship - he will then be entitled to remuneration. This is odd.

Answer 51

A solicitor to a family trust was awarded remuneration for his skill and labour when he was required to disgorge a profit he made from investing in shares. He had acted honestly and in the best interests of the trust at all times and had made a profit for the trust. Remuneration was awarded to a solicitor – the merits were overwhelming.

Answer 52

If a trust has property and a trustee wanted to buy it, he would buy it for himself because the trustee would have legal title to trust property – this has potential for abuse. As seller, the duty of the trustee is to get the best possible price. But as purchaser personally, the trustee will want to pay the lowest possible price.

Answer 53

Basic rule: a trustee cannot buy trust property. It is a blanket inflexible rule – the circumstances are totally irrelevant, it does not matter that price was fair, or sale was by auction. The ban is because of the trustees’ position, not because of his conduct – he cannot buy trust property.

Answer 54

It is to have a deterrent effect. It is the fact that there is a potential conflict of duty. There are many ways a trustee could favour himself: price, timing, method etc. It has been suggested that the reason for the rule is that it would not have been possible to prove if the trustee deliberately took advantage of the situation.

Answer 55

if a trustee purchases trust property, this is voidable within a reasonable time. The beneficiaries can claim the property back or demand it is resold again.

Answer 56

A trustee cannot buy trust property (*Ex p Lacey* (1802) 6 Ves 625) unless the purchase is authorised by: * the trust instrument * the court * the beneficiaries

Answer 57

One case which is different to the rule that a trustee cannot purchase trust property, it does not introduce flexibility into the law, but is an exceptional exception to the basic rule. * Tried to renouce executorship (but ineffective) * Beneficiaries knew H wanted to buy, so did not look to him for protection * He paid a good price * The special knowledge of property was not acquired through his position but the fact he was a tenant at the farm. **Facts:** Purchase of a farm by an executor (H). He had purported to renounce the executorship but that was ineffective because he had already acted in that capacity. He carried out no further acts. A sale at auction was organised by the other executors only. They and the beneficiaries knew H wanted to buy and the beneficiaries were consequently not looking to H for protection. H paid a good price at the auction. Although he had special knowledge of the property it was not acquired through his position but through the fact that he was the tenant of the farm. Exceptional circumstances where in reality he was only the purchaser and not the seller of the property.

Answer 58

Where the trustee buys the interest of the beneficiary. NOT TRUST PROPERTY **Here there is no absolute ban. It will be voidable not void.** A purchase from the principal will be voidable unless the fiduciary can show that he did not abuse his position, that he acted honestly and fairly and he made full disclosure to his principal. Look for a fiduciary to have: 1. paid full value 2. principal had independent legal advice (ideally) Cannot avoid the rule by setting up a company to buy or getting a friend to buy an passing it to you as you know the reality of the situation.

Answer 59

A fiduciary will be liable in respect of all secret or incidental profits. The profits may arise simply because of fiduciary position, they may arise because of an opportunity that arises out of the fiduciary position, or knowledge which is acquired through the fiduciary position, or they may be prohibited because of a conflict of interest of a duty.

Answer 60

A fiduciary cannot keep any profits by using the property of his principal, it is a breach of his fiduciary duty to use this to make a profit. Example: trustee uses some of the trust fund in his business, makes a profit that is a breach of the duty of loyalty. Trust property includes confidential information.

Answer 61

_Purchase from a third party._ **_Facts:_** Trustee held a lease of the profits of Romford market. He requested a renewal of the lease for the benefit of the trust but the landlord refused. Trustee consequently took a renewal of the lease in his personal capacity. Held: breach of duty, he could not keep the renewable of the lease for his personal benefit, so he held it on constructive trust for the beneficiaries. It was said that the circumstances were irrelevant - it is a strict rule to prevent possible abuse. Keech v Sandford initially established the strict deterrent rule. **There was a potential breach of conflict here.**

Answer 62

It could be argued: if the landlord was not prepared to grant it and it was not something the trust could never receive, why should the trustee not be entitled to it personally? On the other hand, one can see the potential for abuse in this situation, a trustee might be tempted to persuade the landlord to refuse a renewal in favour of the trust. Can also argue that the only reason that the trustee had the opportunity to acquire the renewal of the lease was because he was the trustee so had dealings with the landlord.

Answer 63

The rule in Keech v Sandford was extended by the CA in this case - applying it to a freehold reversion of a lease. Both cases involved trustees, it may apply to other fiduciaries, but it will depend on the scope of the relationship and whether the fiduciary held duties in relation to the leasehold.

Answer 64

Prohibition on keeping remuneration a trustee might receive as director of a company in which the trust has shares. The trust property may include shares in a company. Therefore, trustees as legal owners of the shares will have certain voting rights as shareholders and therefore will have voting rights in connection with the appointment of directors. It would be the case that if the shares of the trust do not affect the voting so that the trustee would have been appointed as director even if the trust voted against, the trustee will be able to keep the remuneration. As with other situations, it is a ban only on unauthorised profits, if authorised by the trust deed or court or beneficiaries he can keep the remuneration.

Answer 65

Trustees who use these shares to appoint themselves as directors of a company in which the trust has shares cannot keep any remuneration received as director

Answer 66

But this ban on keeping remuneration only applies where the trustee has become a director because of his position as trustee **Facts:** the trustee was already a director of a company before being appointed as trustee. Therefore, the rule did not apply.

Answer 67

Undoubtedly it deals with the situation where the opportunity arises from the fiduciary’s position, and it can be argued that there is a possible conflict of interest in duty. The trustee may not be the best person to become director of the company.

Answer 68

Trustee was a clerk at a firm of stockbrokers. He appointed this firm to act for the trust. He was entitled to commission from the firm for introducing new business. Held: that a fiduciary who receives any commission from a third party as a consequence of acts done in his fiduciary duty will not be able to keep this commission. Even though he acted in good faith it was held that he could not keep this commission.

Answer 69

One can argue that the trustee only received the commission because of his fiduciary position, it was because he was a trustee that he could bring in business. There is a potential conflict of interest in duty because that firm of stockbrokers might not have been the best. Although this trustee apparently acted in good faith, another trustee might decide to give business to his own firm because he would therefore get commission.

Answer 70

A fiduciary will be in breach of duty if he receives any bribes or secret commissions in the context of his fiduciary role. This was the solider sitting in smugglers lorries and receiving a bribe to do so.

Answer 71

A fiduciary will be in breach of duty if he receives any bribes or secret commissions in the context of his fiduciary role. **Facts:** secret commission from a supplier to persuade the fiduciary to order from that supplier. These are justifiable because here a fiduciary is deliberately abusing his/her position. As a matter of principle, it is arguable that the fiduciary should not be able to profit in such a way.

Answer 72

Competition. Executors were directed to carry on the testator's business as a yacht broker. One of the executors was prevented from setting up his own business of the same. There was emphasises on the fact that the executor was setting up his own business - there would have been no problem if he already had this business when he became an executor. Of **importance was that the business of a yacht broker – this is specialised and very sensitive to completion,** so it is possible that the court would come to a different conclusion where the business is something different. Prohibition is on setting up a conflicting business, if the business is different, there is no problem

Answer 73

Competition ## Footnote iduciary was a partner in a firm of shipbrokers. He was then involved in setting up and running a ship building company. This was not in competition, it was a different business. **Not liable because it was a different line of business!**

Answer 74

Where a fiduciary seeks to take or exploit an opportunity for his own benefit and this opportunity has only arisen only because of the fiduciary’s position. A fiduciary cannot exploit such an opportunity unless he has the consent of his principal and this is so, even if the principal event though he does not want the opportunity or cannot take up the opportunity.

Answer 75

**Facts:** **HL** A company set up a subsidiary to acquire the leases of two cinemas. The subsidiary had to be fully subscribed for the purchases to go ahead (subscribed = all shares in subsidiary company had to be acquired by someone before the purchase could go ahead). The company had not got the resources to purchase all the shares in the subsidiary and therefore the directors bought them in their personal capacity. The directors made a profit when the company and the subsidiary were sold. The new owners claimed the profits from the directors. Held: the directors had to account to the company for the profits that they had made. Important summery of the law is within judgment of Lord Russell. It was a House of Lords decisions.

Answer 76

* NO (in favour of the directors (that they should not have been liable)) * They acted in good faith – their actions enabled the company to purchase the two leases of cinemas, which is what the company wanted to do and it would seem that the company did not have the resources to carry out those actions without the help of the directors. Therefore, the profit that the directors made on those shares could not have been made by the company because the company could not have brought those shares. * Yes (against the directors (that directors should have been banned)) * The directors could have brought the shares in the subsidiary? It was the directors who decided this. * The directors were only able to buy the shares because of their position. * Although these particular directors appeared to have acted honestly, it was clearly a situation where they could have abused their position.

Answer 77

It is not entirely clear what was decided - there are different interpretations of the judgments. This is a very controversal case - it was a case which arguably the fiduciaries should not have been held to have been in breach of duty. **Facts:** B was the solicitor to a family trust. There were 3 trustees, one of whom was senile. The trust had a minority holding in a private company which was badly managed. The view was taken that something had to be done. B and one of the testator's sons, Tom, decided to try and get control of the company by purchasing shares, having failed to get a representative of the trust on the board of the company. They had the consent of 2 of the trustees (not the one who was senile). Although they thought that they had the consent of the beneficiaries, it was held (at 1st instance, no appeal) that there had been insufficient disclosure to them. Therefore, there was not an effective consent. B acquired information from the company relevant to the intended purchase by purporting to act on behalf of the trust. This was information not available to the general public which showed that a purchase would be profitable. It also seems to have been the view of the court that the opportunity of buying shares arose because of his position. Not only did B get knowledge but opportunity of buying shares arose because of his position because it was a private company he could not buy shares in this, he got contact (networking) B and Tom purchased shares and as a result, they and the trust made a substantial profit through a capital distribution by the company (non-profit making assets were sold; the shares remained at the same value). An action was brought by one of the beneficiaries. There seemed to be no doubt that B and Tom had acted honestly throughout. It was also said that the trust did not have the money to buy any more shares; even if it had, it did not have the power to buy these shares and would have had to apply to the court for an extension of its powers of investment; and the only active trustee said that the trust did not want to purchase any more shares and would not have done so even if it had the powers. **Held:** In this situation, the HL by a bare majority nevertheless held that B and T were in a fiduciary relationship to the trust and could not keep the profits that they had made. The court did award them a liberal remuneration for their work and skill. But receiving the profits was a breach of loyalty so they could not keep them. The case was discussed in relation to B only, never any indication that T should be treated differently.

Answer 78

"The liability arises from the mere fact of a profit having, in the stated circumstances, been made. The profiteer, however honest and well-intentioned, cannot escape the risk of being called upon to account.” Clearly he is emphasising how strict this rule is: the only question is: did the fiduciary make a profit from his position. If he did, he is liable to account. The circumstances are totally irrelevant

Answer 79

Lord Hodson and Lord Guest and Lord Cohen.

Answer 80

Two members of the majority were Hodson and Guest and they clearly stated that there is a strict rule that a fiduciary must account for any profit he makes through his fiduciary position. They expanded on this, saying that a profit may be acquired knowledge gained through the position or an opportunity acquired through the position. They said it was totally irrelevant whether the principal could have taken advantage of the knowledge or opportunity and for this they relied on *Keech v Sandford* and *Regal v Gulliver*. There the only exception to strict rule of liability: where fiduciary has the fully informed consent of his principal.

Answer 81

Lord Cohen was the third member of the majority and his judgment was similar to Hodson and Guest’s – that B was strictly liable because the opportunity to buy the shares came from his fiduciary position. Purportedly, Lord Cohen was deaf and had he heard what was going on, he would have decided the other way (unclear if this is true).

Answer 82

There is a very strict rule as the fiduciary is liable for any profit made from his position, so the only question is that needs to be asked is whether the profit was made from his position. Did the fiduciary make the profit because of knowledge acquired or available because of his fiduciary position? On that strict approach, it was irrelevant that Boardman was honest, or that he acted in good faith, in the best interests of the trust, or that the actions of B created a profit for the trust or that the trust itself could not have brought the shares and made the profit that B did, or that B used his own money in order to assist the trust. It could be argued that this outcome, on those facts were not particularly fair, but could only justify this on the basis of a strict deterrent in the law.

Answer 83

Having decided on the basis of this strict rule – liability for any profit arising out of the fiduciary position, the two member of the majority (**Hodson and Cohen) went on to say that on the facts there was a possible conflict of interest in duty and this possible conflict was that B might have been asked for advice by the trust in relation to powers of investment. It is not clear from the judgments why they referred to this possible conflict of interest in duty. They did not seem to be saying that in order to establish liability, there must be a possible conflict of duty, they just applied the strict rule.**

Answer 84

The majority would allow for an exception where the fiduciary has the fully informed consent of his principal. The only other exception where there would not be liability under the majority’s approach is if the actions of the fiduciary are outside the scope of his duties and the majority approved the case of Aas v Benham.

Answer 85

**Facts:** ## Footnote The case concerned a partner in a firm. Partner acquired information through his fiduciary position, but the CA said that the use of this information would not lead to liability if it was used for purposes wholly outside the scope of the partnership business. This goes back to first point: it depends on what the scope of the particular fiduciary duties are and the view of majority in Boardman v Phipps was that Boardman’s fiduciary position was one of unlimited scope. Although the majority of the HL took a strict approach, the dissent in the case has since the decision of Boardman v Phipps been given more importance than the view of the majority. The dissent came from Upjohn, who took a much more flexible approach to liability. Upjohn stated that the duty not to profit from your position is part of a wider rule that a fiduciary cannot be in a position where he is in conflict.

Answer 86

the dissent in the case has since the decision of Boardman v Phipps been given more importance than the view of the majority. The dissent came from Upjohn, who took a much more flexible approach to liability. Upjohn stated that the duty not to profit from your position is part of a wider rule that a fiduciary cannot be in a position where he is in conflict. Lord Upjohn in Boardman (having considered authorities to the effect that a fiduciary cannot put himself in a position where his interest and duty conflict or where they possibly may conflict) said: - "“The phrase `possibly may conflict’ requires consideration. [this means].... was **a real sensible possibility of conflict"** In Upjohn’s view a fiduciary will only be liable where he is acting within the scope of his duties and has put himself in a position where his interest in duty actually do conflict or there is a real sensible possibility that his interest and duty conflicts. There was no conflict of interest on the facts because the trust did not want to buy any more shares. Upjohn distinguished the facts of Boardman v Phipps in Keech v Sandford, his view was that the distinction in Boardman v Phipps and Gulliver was that the principal had actually contemplated the purchase in question. In Boardman v Phipps the trust had never contemplated purchasing the extra shares. Viscount Dilhorne took a similar approach, saying that there is only liability where there is a conflict or possible conflict of interest in duty, and there was no conflict on the facts for the same reason – the only active trustee did not want to buy any more shares. He went on the say that the use of information obtained in a fiduciary position is only a breach of duty if it could only be used for the benefit of the trust and it is in fact used to the prejudice of the trust.

Answer 87

**Judge cited extensively from Lord Upjohn, also stating that he dissented on the facts not the law (but this was not true)** **Facts:** Cooley was a employed as managing director of Industrial Development Consultants. The Gas Board had a lucrative prodect and told C that they wanted to contract with him personally and not a firm. They offered him (Cooley) a profitable contract in his personal capacity. He took this and in order to fulfil it he falsely told the company that he was ill. Held: he was liable to account to the company for the profits made even though there was no chance of IDC getting the contract, if they had been told they would not have released him. So he was held accountableThere was lack of good faith, but this was not relied upon by the judge. The judge took the view that it did not matter that this opportunity was not available to the company, that the fact the board had said that they would not use the company because it was the type of contract that C should have been acquiring for the company and the view of the judge was that he should have passed this information on to the company and he did not. Justification: he did abuse his position and there is clearly scope for abuse of position.

Answer 88

An allowance may be awarded for work and skill even if in breach of the trust. **Facts:** But because his work and skill had contributed to the profits made, he was give a percentage. Although the courts made it clear that the percentage was less than he would have gotten had he been completely honest. A profit element was included to recognise the contribution that the company had made, but this was less than the profit they might have had if the contract was properly negotiated in the first place.

Answer 89

It prevents fiduciaries from doing anything that might personally benefit them, and this seems to be too harsh in a commercial sphere. That it mitigates against an entrepreneurial approach. Why should a fiduciary put in extra effort in order to benefit his principal if he himself will not be able to personally benefit? Boardman risked his own money to benefit the trust, why would anyone do that if they are not going to benefit? However, it is argued that adopting the minority approach in Boardman V Phipps would still provide many advantages of the present law but would also introduce an element of fairness because under Lord Upjohn’s approach, it is still and objective test, it is nothing to do with the actual motives of the fiduciary – we ask objectively whether there was a real possibility of conflict. There would still be a deterrent effect and arguably the results would be fairer. Of course the law would be slightly less certain because in any case we would need to decide whether there was a conflict of interest and duty and whether there was a real sense of conflict of interest and duty.

Answer 90

* Clear deterrent effect, * It is certain and predictable. We do not have to try and look into the mind of the fiduciary and try and discover his motives. A fiduciary can always seek the consent of the principal.

Answer 91

the many cases where judges have cited extensively from Lord Upjohn. The courts have referred saying that he dissented on the facts not the law (not true but that it what was said).

Answer 92

CA expressed the view that the SC should revisit the rule and introduce more flexibility, and made the point that the strict rule was originally established at a time when it was difficult to find evidence as to the motives of the fiduciary as to whether the beneficiaries would have wanted to profit, to take the opportunity. Today with so much information out there, it is likely to be much more easy to find that information.

Answer 93

This was to permit the concept to evolve in ways which might be constrained were a definition to be given.

Answer 94

No. Trustees are not under an absolute obligation to ensure that the capital value of the fund is maintained.

Answer 95

* They are held personally liable * If a trustee dies, his personal liability continues against his estate * Trustees are liable only for their own breaches of trust and not co-trustees * However, where several trustees are liable for a breach of trust they are jointy and severally liable. * A trustee is not liable for breaches of trust which were committed before his appointment. * Trustees are not vicariously liable for each other. * The Trustee Act 2000 repealed a provision in the Trustee Act 1925 (s30) which addressed the issue of when trustees would be liable for the acts of other trustee. It did not replace it. * Election between compensatory and restitutionary remedies.

Answer 96

In some circumstances, beneficiaries may have more than one remedy. **Example:** where a trustee has improperly used trust property for his own purposes and made a profit. The beneficiary may be able to pursue both an action for the loss caused to the trust by the breach (equitable compensation), and an action to deprive the trustee of the profit (a claim for restitution based on unjust enrichment). These remedies are not cumulative.

Answer 97

PC held that the remedies of compensation for breach of trust and resituttion where a trustee has breached his fiduciary duty are alternatives, and that the beneficiaries must elect between them to prevent double recovery.

Answer 98

Equitable compensation. The trustee responsible is liable to compensate the trust (rather than an individual beneficiary) for all loss flowing directly or indirectly from the breach.

Answer 99

The SC affired without qualification the approach by the HL in Target Holdings v Redferns. The SC additionally took the view that damages in a case like Target Holdings should be limited to that which would have been recoverable in contract.

Answer 100

The HL held in Target Holdings v Redferns that the quantum of equitable compensation payable in respect of a breach of trust is to be assessed not at the date that the breach occurred, but at the date of judgment.

Answer 101

**It is hard to reconcile the decision in *Barlett v Barclays Bank (NO.2 )* with *Dimes v Scott.* Brightman J was not enthusiastic for the general rule and distinguished his own decision in order to achieve justice.** **The approach to the assessment of compensationa dopted by the HL and SC in Target Holdings and AIB v Redler is consistent with tthis.** **It may be that if the SC has the opportunity to review the decision in Dimes v Scott, it will conclude that common sense requires that a realistic, rather than a purist approach should be taken to balancing profits and losses (Pearce and Barr)**

Answer 102

**Facts:** Hudson was a managing director. Two licences were obtained from the government, but the company was unable to start operations due to a lack of finance. Instead, Hudson resigned as managing director and exploited the licences himself, eventually selling them to an American company from which he received royalties. The PC held that he was not liable to account for the profits he made. **Held:** the PC concluded that the BODs allowed Hudspn to exploit this. The basis of this decision seems to be that the directors had decided that the company would not take up the opportunity, and that Hudson was therefore free to take it up himself. Held: The Privy Council held that Hudson was not liable to account because QML’s rejection of the opportunity to develop to mines took the venture outside the scope of the fiduciary relationship and because Hudson had acted with full knowledge of the directors of the company, who must be taken to have consented to his activities. In this case, there had effectively been approval by the majority of shareholders for Hudson to continue

Answer 103

in the course of negotiations for the purchase of the majority shareholding in the company, Boardman, while purporting to acts as the trust solicitor on the business of the trust, received essential information about the value of the company's assets and the prices at which shares had recently changed hands. This information enabled him to put foward his offer for the majority shareholding. Lord Hodson and Lord Guest held that Boardman was accountable for the profit made because he had acquires the shares using this confidential infroamtion, which they considered to be trust property. However, Lord Cohen took the view taht the information that had been obtained was not 'property in the strict sense' and decided the case on the bais of the rule in Regal v Gulliver. Lord Upjohn rejected the argument that the information was to be regarded as part of the trust assets.

Answer 104

Yes, but they are constrained by authority.

Answer 105

He believes that the strict rule in Boardman v Phipps is justified. The article is focused on the ‘deterrence’ justification for the rule, and argues that its unusual strictness should be read as a response to a substantial risk of conscious-silencing self-deception. Given the knowledge gap between them, the principal is very much dependent on the fiduciary’s personal integrity but, in the grip of self-deception, the fiduciary’s inner checks break down so that manipulative transactions are approved as harmless ones. Two distinctive features of the fiduciary relationship increase the chances that even a professional and virtuous fiduciary will be moved by self-deception to misapprehend the harm which a conflict of interest might cause to the principal: first, the wide discretion in the application of the fiduciary’s duty to specific situations; and, second, the power gap between the fiduciary and the principal which enhances the temptation to exploit the fiduciary’s position. This risk can only be averted by the more stringent version of the rule, as it is only by preventing the fiduciary from ever considering the legitimacy of a specific conflict of interest that we can hinder the process of reflection which is so prone to being subverted by self-deception One very good way to protect the principal from such a destructive process is to exclude such sensitive deliberation; that is, to answer the question ‘can I legitimately enter a transaction from which I will profit as a fiduciary?’ with a firm universal ‘no’. This is exactly what the absolute ‘no conflict’ rule does. Allowing the fiduciary to argue that she acted as an honest person would therefore be more than a mere decrease in its overall deterrent effect. Opening this possibility would undermine the whole point of a very specific preventative device that can work only by altogether eliminating a reflection that can so easily be manipulated.

Answer 106

He welcomes a potential relaxation of strict liability ## Footnote Boardman v Phipps that although the beneficiaries were never in a position to acquire further shares in the private company, albeit through their trustees, nevertheless Boardman was required to account for the profit he made on the shares. Similarly, in Keech v Sandord it was observed at the outset of this article that the infant beneficiary was not in a position to renew the lease of Romford Market; nevertheless, the trustee was required to assign the lease to him and account for profits. The rationale for the strict approach hinges on a delicate matter of evidence. From the early nineteenth century the Court of Chancery preferred a deterrence approach because of the evidential difficulties involved in determining the motive of the fiduciary and establishing whether he did act honestly and in good faith. AJ Oakley concludes by commenting that ‘if Lord Browne-Wilkinson's remarks cause judges to think twice before they automatically apply conclusions reached in totally different legal and economic contexts to modern conditions. It is submitted that, whilst the strict liability rule was justified in the context of some of the nineteenth century cases where evidential issues prevented the court from ascertaining the intention of the fiduciary, in modern cases it is questionable whether such an approach is justified. There is much to be said for recent judicial calls for recognition that it is not appropriate to apply laws decided in a wholly different context to a different kind of situation. This recognition has already been made in a number of commonwealth jurisdictions and it remains to be seen how far English lawyers follow suit.

Answer 107

**Facts:** The company could not develop a mining opportunity because of liquidity problems. The managing director resigned and took up the opportunity himself with the consent of the board. This was a Privy Council decision where a more flexible approach was taken. The Privy Council held that he could take up the opportunity because it had been rejected by the board of directors. There is no doubt that there must be consent of the principal for allowing a fiduciary to make a profit from his position. But at the time this case was decided, it would appear that any consent should have come from the shareholders of the company, not the board of directors. **Any consent should have come from the shareholders not the board of directors - that was the view of the HL in Regal (Hastings) v Gulliver.** **The law is different now because of the 2006 Companies Act – but at the time, it was probably not the consent of the right people. Therefore, Queensland Mines v Hudson is arguably only justifiable only on the basis of a more flexible approach and in reality, there was no conflict of interest and duty.**

Answer 108

A flexible approach which asks whether the fiduciary has abused his position. The courts look at a wide range of factors, such as whether the principal was interested in the opportunity, whether the principal had the ability to take the opportunity (primarily a financial consideration) and whether by taking the opportunity personally the fiduciary would be comprising his position.

Answer 109

The fiduciary who has consent of the principal can take advantage of his position and profits made. If it is a trustee, he needs consent of beneficiaries or consent of trust deed.

Answer 110

In *Queensland*, until the point was clarified by Companies Act, it was unclear who consented on behalf on the company - shareholders or directors?

Answer 111

Boardman was a solicitor to the trust and the issue was: did he need consent of the trustees or beneficiaries, or both. On the facts he did not have the consent of anyone, there was inadequate disclosure to the beneficiaries and one of the trustees was senile and could not consent. But had there been the consent, the HL were in total disagreement as to whose consent was required: **Lord Guest** = it was the consent of the trustees. **Lord Hodson and Cohen** = consent of beneficiaries **Viscount Dilhorne** = both. **Lord Upjohn** = definitely the trustees and don’t need to decide if it was the beneficiaries as well.

Answer 112

A personal remedy

Answer 113

_Personal remedy: duty to account for profit_ Any fiduciary who makes an unauthorised profit from his position must pay over to his principal a sum of money equivalent to this profit. The duty to account extends only to the original unauthorised profits. There is no duty to account for any further profit made – this was made clear in Lister v Stubbs and Sinclair Investments v Versailles.

Answer 114

1. Can claim any further profits 1. This may be in order to claim any further profits made by the fiduciary with that original profit. If the fiduciary has profited from his position, invested this profit and the investment increased in value, the principal may wish to claim that increase in value. 2. Can trace the profits even if dispersed to third parties 1. A proprietary remedy may also be beneficial where the profit has been dispersed to third parties because it may be possible to bring a claim against those third parties (by the rules of tracing) 3. Gives priority over unsecured creditors 1. It gives priority over unsecured creditors in the case of insolvency.

Answer 115

_Proprietary remedy:_ ## Footnote held that in the case of a bribe, there is only ever a duty to account for the value of the bribe (personal remedy) and no proprietary remedy. The reason given by the CA was that to decide otherwise would have the unacceptable result that the principal would have priority over other creditors in the event of the fiduciary’s bankruptcy.

Answer 116

This may be an acceptable argument because in Boardman v Phipps, the trust did not suffer a loss at all, but it actually got a profit from his actions. In Lister v Stubbs, it is not a bribe case but you can see that where the creditors risk suffering loss, why should the principal get a windfall at the expense of the fiduciary’s other creditors. But the outcome of taking into account the interest of other creditors in reaching this position was that Stubbs (who was undoubtedly dishonest), got to keep the further profits he made by investing the bribe into land. Ultimately, he did profit from his breach of duty.

Answer 117

_Proprietary remedy_ ## Footnote The PC took the opposite approach to Lister v Stubbs. The PC held that a fiduciary holds bribes on constructive trust and this constructive trust arises because on receipt of the bribes, he was under an obligation to pay them over to the principal. Basic justification for this result and following Lister v Stubbs is that a fiduciary should never be allowed to profit from his breach of duty. A -G for Hong Kong case dealt with a fiduciary who received bribes, invested it in land, this went up in value so the constructive trust of bribe meant that the land was also held in CT for the principal.

Answer 118

Then there are two decisions of the CA where court the found it bound to follow Lister v Stubbs (Court of Appeal) and established a rule which was difficult to apply to the facts.

Answer 119

_Proprietary remedy_ Rule established: a proprietary remedy is available only where the asset or money acquired in breach of fiduciary duty "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". The test was regarded as not clear suggesting narrow distinctions between taking advantage of an opportunity and simply taking a bribe.

Answer 120

a proprietary remedy in the form of a constructive trust is available in all cases where a fiduciary makes an unauthorised profit from his position. Case heard by 7 judges. Lord Neuberger delivered the judgement. The SC was asked to specifically consider the law with bribes and secret commissions. **Facts:** FHR had engaged Cedar as its purchasing agent to secure the purchase of a hotel at the best possible price. Cedar had failed to disclose a €10 million commission it received from the sellers. FHR needed a proprietary remedy as Cedar had no assets so it wanted to be able to follow the money to Mr Mankarious who had controlled Cedar. Mr Mankarious had ensured that Cedar capital transferred all the asset (€10 million to him), Cedar had no assets so a duty to account would be useless. They wanted a Proprietary remedy so they could follow the assets to Mr M. The SC held in favour of FHR, holding that a proprietary remedy in the form of a constructive trust is available in all cases where a fiduciary makes an unauthorised profit form his position.

Answer 121

**SAD** * ***Firstly,*** *the SC said:* a simple rule of law is more attractive than a rule with distinctions and subtle exceptions (criticising the previous two cases). There had previously been an exception for bribes and secret commissions and this exception was based on the fact that a bribe is never something which the principal could ever have received. A bribe is not something the principal is entitled to. They held that this was a totally unattractive argument, a fiduciary should not accept a bribe, it undoubtedly is a conflict of interest of duty. * ***Secondly*** *the SC said:* there is a very strong possibility that the receipt of a bribe by the fiduciary actually disadvantages the principal in some way. For example, on the facts of the case, the seller most probably put the price up by €10 million in order to cover the bribe being paid. The SC then said if the argument is that a bribe is not something which could ever had been received by the principal, that same reasoning applied to G v F, Keech v Sandford. The profit in both those cases was something which was not available to the principal. * **Thirdly** (in favour of a simple rule that PRs are always available): it is wrong that there would be more advantageous remedies are available against those whose behaviour was better. It is wrong to say the person who has been dishonest actually has less advantageous remedies against them. The Supreme Court had to deal with the strongest argument against proprietary remedies - this is where other creditors would be disadvantaged. Lord Neuberger said the bribe is not something the fiduciary should have ever received, as he should not have gotten it his creditors should not benefit from it. In the end, it was said that yes there is an argument in favour of creditors, but it is balanced out by the fact that the principal should be able to take advantages of the rule of tracing and trace and follow the bribe to other property and future recipients.

Answer 122

The decision of Supreme Court in HFR means that we have straightforward rules for both liability and remedies, there is consistency here and this ensures that a fiduciary cannot profit from his position. The law is now more consistent with other common law jurisdictions. Having said that, in Australia a Constructive Trust arises but it is discretionary, so that creditors can be taken into account. **Against the SC decision:** But there do remain those who argue that the Supreme Court should not have decided in the way it did and that there should not be proprietary remedy and that there should only be personal remedy in all cases, but that personal liability should extend to further profits made and one of those who think this is: Kenner. Kenner argued that the Supreme court got it wrong and argued that there should just be personal liability.

Answer 123

The duty laid down in s.1 is what is "reasonable in all the circumstances". There is a higher standard for professionals whether they charge or not. * The law commission rejected test based on the prudent man of business. This is because * to retain the prudent man test would be no more than restatement of the traditional common law rule. * standard adopted permits express regard to be had to the particular skill and position of the trustee.

Answer 124

Penner argued that Megarry V-C in Cowan v Scargill (when speaking about all beneficiaries being adults and condemning something, that it might not be for the benefit of them to have a particular investment) said: * The statement of Megarry V-C should not be taken to suggest that a trust might make "ethical" investment decisions in such circumstances. * If all actual/potential beneficiaries are adults, then a trustee intending such a policy should present it to them in advance and get their consent, in which case the investment will not be in breach of trust.

Answer 125

Keech v Sandford and Regal v Gulliver to show that it was totallt irrelevant whether the principal could have taken advantage of the knowledge or opportunity.

Answer 126

JESSED CE 1. Justifications (Nestle v National westminster bank (Hoffmann J). 2. Election of remedies 3. several liability 4. secondary duties 5. extension of powers 6. trust deed 7. Causation 8. exemption clauses.