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
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
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.
- Two ex-directiors of the company left the original company and set up another one. The ex-company argues that the directors are fiduciaries who are exploiting knowledge. The fiduciaries are ex-directors of the companies that resigned and then provided the same services to the family. The directors argued that there was an agreement with the family to get a share of the profit.
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
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.
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
fiduciary duties
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
