The Fiduciary Relationship and its Obligations (no profit, no conflict, no purchase)

Question 1

what are the 3 main duties of trustees as fiduciaries of the beneficiaries?

Answer 1

(1) duty not to conflict T’s personal interests with duty to B

(2) duty not to purchase trust property (falls under no conflict duty)

(3) duty not to profit from their position as a fiduciary

Question 2

what is the no conflict duty?

Answer 2

fiduciary must not put themselves in a position where his personal interests conflict with their duty to the principal

a conflict cannot be excused by a trustee’s good intentions seeming to be in B’s interests

3 prohibitions:
(1) self-dealing
(2) fair dealing
(3) conflict between principals

Question 3

what is the prohibition on self-dealing? what are the exceptions? (2)

Answer 3

a trustee is prohibited from purchasing trust assets or selling assets to the trust

the transaction will be voidable by the Bs

exceptions:
- trust instrument allows self-dealing
- all Bs are adults who provide fully informed consent

Question 4

what is the prohibition on fair dealing? what is the exception?

Answer 4

a trustee is prohibited from directly transacting with a beneficiary to buy their beneficial interest

the transaction will be voidable by the Bs

exception = allowed if the trustee can demonstrate they made full disclosure to the beneficiary, acted honestly and fairly, and did not take advantage of them

Question 5

what is the prohibition on conflict between principals? what are the exceptions to this? (2)

Answer 5

a fiduciary cannot act of their duties to one principal conflicts with their duties to another principal

exceptions:
- transaction is authorised by the trust instrument
- T obtains the fully informed consent of the adult beneficiaries

Example: A is trustee and wants to buy a house for occupation by beneficiary B. A is also an estate agent and has been instructed by C to sell C’s house. A thinks this is a good house for B. There is a conflict between A’s duties to B and C – duty to B is to pay lowest price but duty to C is to secure highest price

Question 6

what are the consequences if a trustee breaches the no conflict rule?

Answer 6

• if loss was caused = B can sue T personally and T is liable to compensate
• if the breach results in profit to T = B can recover profit from T OR end the trust
• if breach of self-dealing or fair-dealing = transaction is voidable so B can seek to rescind it

Question 7

what is the duty for fiduciaries not to profit? what is the exception?

Answer 7

a fiduciary must not obtain an unauthorised benefit because of their position as fiduciary

exception = obtains fully informed consent of beneficiaries who are all adults

Question 8

what are examples of unauthorised benefits?

Answer 8

(1) direct profit = T uses trust property directly to make a profit e.g., retains interest from bank account for themselves

(2) indirect profit = T receives prohibited remuneration

(3) exploiting opportunities = T keeps profit made as a result of an opportunity they get in the course of performing their fiduciary duties

(4) bribes and secret commission = influencing the way T performs their role

Question 9

what is the consequence of a trustee breaching the no profit rule?

what choices do beneficiaries have? (2)

Answer 9

T will be stripped of their profits

B can elect one of the following options:

(1) account for profit = B makes a personal claim against T to pay an amount equivalent to T’s profits and benefit received

or

(2) constructive trust = B can argue that the profit made is held on constructive trust by T for B (protects against insolvency of trustee and allows B to make a proprietary claim and trace their interest into subsequent profits)