The fiduciary Flashcards
Keech v Standford
loyalty duty
Lord King: “This may seem hard, that the trustee is the only person of all mankind who might not have the lease; but it is very proper that the [‘noconflict’] rule should be strictly pursued, and not in the least relaxed.
Held:
D was entitled to an assignment of the new lease and an account of the profits made since the renewal of the lease.
Lord Chancellor
> Though I do not say there is a fraud in this case, yet he should rather have let it run out, than to have had the lease to himself. This may seem hard, that the trustee is the only person of all mankind who might not have the lease: but it is very proper that rule should be strictly pursued, and not in the least relaxed; for it is very obvious what would be the consequence of letting trustees have the lease, on refusal to renew tocestui que(the beneficiary of the trust) use. So decreed, that the lease shouldbe assigned to the infant, and that the trustee should be indemnified from any covenants comprised in the lease, and an account of the profits made since the renewal.
Facts:
- D held lease of a shop in market on trust for an infant, C
- D failed to negotiate a new lease on behalf of C because the landlord was unsatisfied that C as an infant could provide sufficient security for the lease
- D then negotiated a new lease for himself
- When C was grown, he sued D for the lease and profits obtained from the shop in the intervening years
Cradock v. Piper (1850)
no conflict rule
A solicitor trustee is automatically allowed to charge the trust for a litigation work in the normal rates.
Tito v. Waddell [1977]
self-dealing rules - fair dealing
Maggary V-C: “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”.
The Crown had not undertaken any enforceable trust or fiduciary obligations towards the native landowners
As such, there had been no breach of the fair-dealing and self-dealing rules
Megarry VC
The self-dealing rule was defined as follows: ‘if a trustee sells the trust property to himself, the sale is voidable by any beneficiary ex debito justitiae, however fair the transaction’:
Had the Crown owed a fiduciary duty to the native landowners?
The Crown granted a lease on the Ocean Islands, a British settlement to the British Phosphate Commissioner, a board in which the Crown held a 42% interest
It was argued on behalf of the native Banaban landowners that the lease to the British Phosphate Commissioners was a lease by the Crown to itself
There was a question as to whether the Crown had owed fiduciary obligations to the native Banaban landowners
Boardman v Phipps [1967] 2 AC 46
no self-dealing - disgorgment remedy
More difficult is why the scope of the duty extended to the defendants’ acts. For the minority, Lord Upjohn noted a solicitor could act against a client in any area not retained for (at 125–6). Boardman was not so retained. The problem is more acute for Tom Phipps, who was a mere beneficiary. On the basis of explanation (i), the scope of their duties would not have extended to this activity and therefore they should not have been liable. Since they were, perhaps explanation (ii) is the better one (see Bryan at 586–9). Then it was a case—as stated by Lord Cohen (at 104)—of personally exploiting one’s fiduciary office. As Bryan points out, while it may appear that Tom Phipps was only made liable for standing by Boardman and submitting to the court, he too was liable as a joint primary wrongdoer.
Further remarks on the case’s impact
- Since the trust made not a loss, but a profit, from Boardman’s activities, the case raises questions about the severity of fiduciary duties
- Do you think the approach inBoardman, where breach was found but countered with a generous allowance, is an adequate compromise?
Bare majority (Viscount Dilhorne and Lord Upjohn dissenting), the House of Lords dismissed the appeal. the defendants were liable to account for the shares and profits to the trust beneficiaries, but the liberal allowance was maintained
The most straightforward part of the judgment is the basis of liability: a fiduciary should not make a profit from his or her fiduciary office (the ‘no-profit rule’) and should not put his or her interests ahead of her principal’s (the ‘no-conflict rule’). This was precisely what the defendants did. Liability is strict, not requiring bad faith, but the allowance was upheld because they had acted openly and honestly. The point of division between majority and minority was a crucial reason why the defendants were held liable. The minority thought that there was no possibility of a conflict on the facts, but the majority disagreed.
**Phipps Trust, which owned shares in a company called Lester and Harris. The defendants, Tom Phipps, a beneficiary, and Tom Boardman, the solicitor to the trust, were dissatisfied with the performance of the company. After failing to persuade its directors to restructure it, they tried to persuade the trustees to purchase the remaining shares in the company so restructuring could be imposed. The trustees refused. The defendants, having obtained valuable information about the company’s finances during this process, bought all the other available shares in the company and restructured it themselves. The consequence was that the trust made a profit, and so did the defendants.
However, Tom Phipps’ brother John, another beneficiary to the trust, was displeased and sued for an account of profits. Wilberforce J awarded that remedy for breach of fiduciary duty, subject to a ‘liberal’ allowance for the work and skill Boardman had put in. The Court of Appeal dismissed the appeal. The defendants appealed to the House of Lord
Recovery Partners GP Ltd v Rukhadze [2023] EWCA Civ 305 (CA)
strict liability - remedies for breach of FD
The Supreme Court unanimously dismissed the appeal, but delivered four judgments giving different reasons for reaching that conclusion. The majority (Lord Briggs, Lord Reed, Lord Hodge, and Lord Richards) held that the obligation to account for profits earned was an essential feature of a fiduciary obligation, that it was well-established that it did not depend on any counterfactual analysis, and that there was no compelling justification for changing the law.
Cockerell J was approved by CA:
- The defendants had wrongfully appropriated a business opportunity disgorgement of $130M profit
- Alleged ‘share of profit’ agreement was not specific enough
- CA: if there was a persistent and binding agreement, that would have been relevant to the scope of the account of profit (it would have reduced the amount of the disgorgement)
- The question of strictness is crucial in that case.
The principals are companies established to provide ‘recovery’ services to a family of a deceased billionaire (to find and recover his assets) - usually you pay them a percentage of the assets they recover.
Three individuals who had been appointed by their principal to pursue a lucrative business opportunity decided instead to pursue it for their own benefit. They were found at trial to have breached fiduciary duties owed to their principal. On the taking of an account of profits, they were found to have earned around $170m from the pursuit of the business opportunity, and were ordered to account to the principal for the entire sum less a 25% equitable allowance to reflect the work they had done in generating it.
On appeal to the Supreme Court, the three fiduciaries argued that the law concerning a fiduciary’s obligation to account for profits earned from his fiduciary position was too harsh. They submitted that they should only be required to account for the difference between (i) profits that they actually earned, and (ii) profits that they would hypothetically have earned if they had not breached their fiduciary duties. In doing so they accepted that they were asking the Court to depart from two previous decisions of the House of Lords which established that a ‘but for’ approach to causation is inappropriate in this context.
FHR European Ventures LLP & Ors v Mankarious & Ors ([2014] UKSC 4
remedies for breach of FD - personal or proprietary
- be simplest to make the outcome the same as for all other breaches of fiduciary duty and thus proprietary in all cases of bribes and secret commissions. The court accepted that this could prejudice unsecured creditors because, on insolvency, such a remedy takes the property out of the insolvent’s estate and thus it goes to the principal in priority instead of being shared amongst all creditors. However, it accepted the argument that the bribe (or secret commission) ought not to be in that estate; it represented an increase in the purchase price and ‘can fairly be said’ to be the principal’s property accordingly.
- Policy reason: ‘[b]ribery is an evil practice which threatens the foundations of any civilised society’ and ‘[s]ecret commissions are also objectionable as they inevitably tend to undermine trust in the commercial world’. This pointed to the stronger, proprietary, remedy + would be paradoxical to grant a stronger, proprietary, remedy for less egregious breaches of fiduciary duty but only a personal one for bribes and secret commissions.
In a unanimous judgment, the Supreme Court held that the remedy was always proprietary. It stated a desire to reach a conclusion on the bases of past authority, principle, policy, and practicalities. Previous authority was inconsistent, but in the majority of past cases, a proprietary remedy had been granted.
⇒ where an agent received a benefit in breach of his fiduciary duty, the agent was obliged to account to the principal and to pay a sum equal to the benefit by way of equitable compensation. That represented a personal remedy for the principal against the agent. However, in cases where the rule applied, the agent was to be treated as having acquired the benefit on behalf of his principal. In such cases, the principal had a proprietary remedy in addition to his personal remedy against the agent and could elect between the two remedies. A number of authorities suggested that the rule should apply to bribes or secret commissions paid to an agent, so that the agent held them on trust for his princip
Facts:
FHR engaged Cedar as a purchasing agent, and therefore fiduciary, to purchase a hotel at the best price possible. meanwhile, C had entered into an agreement with the sellers of the hotel that he would secure a 10m commission for finding a purchaser. However, he did not disclose to F that he was taking a €10m secret commission from the sellers. The €10m had been passed on from Cedar to Mankarious and Cedar had no other funds, so a personal remedy against them was useless. FHR therefore sought a proprietary remedy, which would permit them to trace the €10m into the hands of Mankarious.
Issues
- Whether a fiduciary who takes a bribe or secret commission, which is a breach of fiduciary duty, is always liable to his or her principal for it.
- Scope of the equitable rule that where an agent acquired a benefit which came to his notice as a result of his fiduciary position, or pursuant to an opportunity which resulted from his fiduciary position, he was to be treated as having acquired the benefit on behalf of his principal. The question was whether that rule applied to a bribe or a secret commission obtained by an agent in breach of his fiduciary duty.
- But is that remedy always proprietary, or is it merely personal in certain circumstances
PC case
AG for HK v Reid
personal or proprietary
the Privy Council held that the claimant was able to establish a proprietary interest in the bribe monies received by Reid on the basis of the equitable maxim that equity sees as done that which ought to be done. This meant that the defendant held the property purchased with the bribe money (which had increased in value) on constructive trust for the claimant.
Dilemma: princial v fiduciary’s creditors = who should win
Lord Templeman: As a fiduciary to the crown, he should have given them the money as soon as he received it. The false fiduciary held the bribe on constructive trust since equity treats as done that which ought to be done.]
**held **that a proprietary constructive trust is imposed as soon as the bribe is accepted by its recipient – this means the employer is entitled in equity to any profit generated from the bribe received
Facts: Ried, a general attorney took bribes. He invested them successfully, and the value of the property inflated. Taking the bribes and giving them to the principal is complicated in thta case (bribes are illegitimate) => it is even more complicated to gibe it to hem as property.
Lister v Stubs
personal or proprietary
Held: The Court of Appeal held that to allow this would offend property rules and therefore could not claim title to the property acquired by the bribes
Lister v Stubbs (1890) LR 45 Ch D 1
Facts: The defendant was bribed to place certain orders with certain suppliers. The plaintiff (i.e. claimant) wanted to establish a proprietary claim to the profitable investments the defendant made on the bribes by arguing there is a constructive trust
fiduciary duties
Bristol & West Building Society v Mothew [1998] Ch 1
Other remarks on the judgment:
⇒ The argument that the solicitor was acting for both purchaser and lender and was therefore in breach of fiduciary duty was dismissed. The lender
- fully informed
- had indeed positively requested this arrangement.
= only a potential, not an actual, conflict and accordingly this authorisation was sufficient.
⇒ The solicitor was not gaining any advantage. Moreover, the non-disclosure of the information was not deliberate concealment. Consequently there was no bad faith and no breach.
⇒ The final argument put was that there was a breach of trust. It is important to emphasise that this is not the same as a breach of fiduciary duty. It simply means acting outside of the obligations in the trust and many of them will not be fiduciary obligations. The allegation was that the loan monies were paid out without authorisation. However, the instructions to proceed were never revoked and accordingly the payment out was authorised, so there was no breach of trust either.
NB: this view of fiduciary duty was criticised + illuminates one aspect of the courts’ view of equity. Attempts to use equity instrumentally, i.e. to obtain a better remedy than at common law for often not terribly good reasons, will be resisted. T
Held: The solicitor’s appeal was allowed. Millett LJ criticised the tendency of ‘unthinking resort to verbal formulae’ ⇒ in first instance, fiduciary status was being pressed as an automatic route to liability without thought as to why. Fiduciary duties are those that attract special remedies. But not every breach of duty by a fiduciary is a breach of fiduciary duty ⇒ here, a breach of contract by a fiduciary, but not a breach of fiduciary duty.
Set out principles of fiduciary law: Fiduciary duties were limited to those arising out of the relationship of trust and confidence.
- the duty to act in good faith
- the duty not to place oneself in a position where one’s duty and other interests conflict,
- the duty not to make a profit out of one’s position.
⇒ indicate a requirement of disloyalty or infidelity for breach
Millett LJ said that ‘[a] servant who loyally does his incompetent best for his master is not unfaithful and is not guilty of a breach of fiduciary duty’
Facts: The solicitor acted for both the claimant lender and the purchasers. The purchase price was £73,000 and to be financed with a loan of £59,000 from what was to become Bristol & West. The purchasers stated in the loan application form that they were providing the balance of £14,000 personally and not applying elsewhere for financial assistance. The lender then offered a first mortgage of £59,000 on the condition that no further mortgage or other loan was used.
The purchasers had intended to raise the balance from the net proceeds of sale of their existing property. However, they arranged with the mortgagee of that property, Barclays Bank, for a small part of the debt, £3,350, be secured on a second mortgage on the new house. The solicitor was informed of this arrangement but either forgot or failed to appreciate that he was required to report it to the lenders. The first and second mortgages were granted over the house accordingly. Unfortunately, the purchasers soon defaulted and Bristol & West realised its security. It sold the house and realised net proceeds of £53,000 (loss of some £6,000).
Proceedings & arguments: Non-disclosure was a breach of contract. Subject to the usual rules of causation and remoteness, damages would be recoverable for any loss sustained by reason of the breach. However, assuming the lender would have continued in any event, the second mortgage would have made no difference to their losses, since as first mortgagees they had priority over the proceeds of sale, hence damages from the solicitor would be zero.
They turned to equity ⇒ a constructive trust was raised, because when the solicitor gave misleading information it amounted to a breach of fiduciary duty. Consequently the entire £59,000 had to repaid, subject only to a credit for the net proceeds of sale, hence judgment would be for the entire loss, £6,000.
Issue: the remedies available against him to the mortgage lender and whether the solicitor’s fiduciary status meant a better remedy in equity could be obtained than at common law.
Sinclair v Versailles (2011)
personal vs proprietary
Held: The Court of Appeal held there should be no constructive as to maximise assets available to unsecured creditors
Facts: Versailles Trading group comprised companies set up by Cushnie which were intended to operate a fraudulent ponzi scheme. Through the money Cushnie made he bought a house in Kensington and he wanted to establish a proprietary constructive trust to the house. It was counterclaimed that there should be no proprietary constructive trust and it should be sold and the proceeds distributed in insolvency proceedings
The court of appeal made a distinction: a constructive trust will arise if a fiduciary misused trust property to make a personal profit, but will not arise if he misused his office to make a personal profit
Neuberger made some unconvincing arguments for not following Reid: 1) he said it was best to follow the very old court of appeal judgment, rather than the judgment of the House of Lords sitting 15 years previously in the privy council; 2) Neuberger says there is more support in favour of Lister v Stubbs than Reid, but this fails to account for the fact that most academics seek deliberately to take a contrarian point of view as to get published; 3) only convincing argument is that a constructive trust would mean assets could not be distributed to the other creditors
This finding does not mean that the taker of bribes, who has breached his fiduciary duty, can keep the money → There will be a duty to account, which is a personal remedy.
However, a personal remedy will be of no avail where the person concerned cannot meet it.
Bray v Ford
Fiduciaries cannot retain any unauthorized profits generated by their connection to the trust:
Regal v Gulliver
they had to account fr their profit to the company
The directors took shares in a subsidiary company when the plaintiff holding company could not afford to take them up.
The directors made a profit when both the holding company and the subsidiary were sold to a third party purchaser.
The company sued.
