Essay: The duties of the fiduciary

In certain circumstances, typically in trust also in agency and other relationship, equity will required one party to the relationship call the fiduciary to act in the best interest of the other party to the relationship called the principal.
It had been characterised as a duty of loyalty as a duty of altruism and as a duty of disinterestedness. The idea is that the fiduciary must placed the interest of the principal above all other consideration when he or she acts to a fact the principal’s position. As such, the by-product of such principle would be duty not to act in conflict of interest. As Lord Herschell said in the House of Lord in 1895. If such a situation exist in clear that the trustee may be tempted to act in his own interest rather than in the best interest of the trust and the beneficiaries. Any such conflict will not be allowed to prejudice the beneficiaries. The obligation of loyalty lies at the heart of fiduciary relationship; this entails that the fiduciary relegate his interest and acts solely in the interest of his principal. Not every duty which a fiduciary owes is necessarily a fiduciary duty. It is wrong to assume that at any time where a trustee breaches a trust he also breaches a fiduciary obligation. A trustee breach of duty of care and skill clearly may not be a breach of fiduciary obligation. A breach of trust is where a trustee is not performing as per the term of the trust whereas the breach of fiduciary does something he is entitled to do but does it in a way that shows he is not acting with the principal best interest in mind.
The court will take into account several issues in considering to impose the duty on the fiduciary. First, who is a fiduciary, what is an unauthorised profit and what should be the extent of their liability. A fiduciary is one who has a relationship that is based on confidence, trust and reliance with the principal and is someone who has undertaken to exercise some discretion on behalf of his principal. There are two types of unauthorised profits, bribes and secret profits. Bribes is a gift which is accepted by a fiduciary as an inducement to betray his trust. Secret profits is a benefit that the fiduciary derived from the misuse of the trust property or the misuse of knowledge which he acquired in the course of his office.
The ‘No Conflict Rule’ is the general rule which governing the behaviour of fiduciaries. Before considering the content of the no-conflict rules, it is important to appreciate that fiduciary duties are not of unlimited scope, as Lord Upjohn commented in Boardman v Phibbs . Different fiduciary relationships are of different scope . It is of the first importance to impose fiduciary obligations on parties to a purely commercial relationship who deal with each other at arms’ length and can be expected to look after their own interests . In the case Boardman v Phibbs , Wilberforce J held that the claimant was justified in thinking that he had only been told half the truth. The claimant also asked the defendants to account for the profits that they made. The House of Lords decided they both were liable to compensate for the profits which they had made. They were both acting bona fide. In such situation, this is referred as an equitable fraud or a constructive fraud. Make no mistake; no fraud is ever committed by the parties. The usage of the word fraud is only a convenient label a legal jargon and not in its true legal meaning. The solicitor had risked losing his own money by attempting to revive the fortunes of the company, so it might be seem fair for him to keep those profits, if he proved to be successful and thereby also increased the wealth of the trust fund. The judges refused to apply blindly a rule of equity, the fiduciary’s had benefited the principal, the long negotiations conducted with considerable skill by Boardman, and the purchase of the outstanding shares by Boardman and Phipps had resulted in great financial benefit to the trust. The courts applied the principle that a fiduciary should not profit from his or her position as a fiduciary is too strict. This controversial issue deserves consideration for a more relax approach.
The ‘No Unauthorised Profits’ Rule allow the principal expressly or impliedly for the fiduciary to retain any incidental profits acquired in the course of carrying out his or her fiduciary duties. If a fiduciary is allowed to retain unauthorised profits the fiduciary’s interest would be seek out and obtain those and this would be in conflict with his or her interest to act only in the best interests of the principal. The Privy Council took a strict approach in A-G for Hong Kong v Reid that the fiduciary was a debtor in equity for the amount of the bribe. It is submitted that the maxim rely on Lord Templeman is only appropriate in cases where equity were grant specific performance of an agreement to transfer property. But, in the cases of bribes how can it be said there are fiduciary had a duty to give up the bribes when his duty is not to receive the bribe in the first place. It can also be argued that constructive trust should be impose on the fiduciary where gain is in the form of use or acquisition of something which essential is the principal’s property. Bribes and profits should never been acquired at all, they are not in any sense derived from the trust property, therefore, while this cases are misuse of fiduciary position but not misuse of trust property. However, a softening approach demonstrated in Sinclair Investment Holdings v Versailles Trade Finance , the Court of Appeal held that it was bound by its previous decision and held that the receipt of a bribe does not normally give rise to a constructive trust. Bribes obtained by breach of fiduciary should be treated differently from secret profits. In a recent case, FHR European Ventures v Mankarious , the Court of Appeal said that Sinclair are correctly decided, but decided that a secret commission obtained by a purchasing agent was held on constructive trust for the principal.
Generally, a trustee shall not receive payment unless this has been explicitly authorized by the trust deed. This approach has now been recognised by section 28 of the Trustee Act 2000 . The ‘no conflict’ principle, which has been ‘established as the irreducible core of fiduciary obligation’ . Indeed, the principle is strictly applied to prevent fiduciaries from furthering their own interests at the expense of the vulnerable principal to the extent that even the possibility of conflict is sufficient to constitute a breach of duty. Certainly, the principle aims to make it impossible for fiduciaries to take personal benefit from their position by ensuring that where this happens, the principal is entitled to rescission or an account of profits, stripping the fiduciary of any gain. This is a clear and settled principle, illustrated, for example, by the rule laid down in Keech v Sandford, which prevents a fiduciary from renewing a lease for his own benefit, which he was able to obtain solely from his position as trustee to the original lease, even where he has unsuccessfully attempted renew the original lease on behalf of the beneficiary. This case clearly demonstrates that the common law strictly applies the ‘no conflict’ principle even where the result seems harsh. However, on consideration of the nature of the remedies available following breach of the no conflict principle, it is clear that they are regulatory rather than punitive, and as such, perhaps its inflexibility is justifiable. A reluctance to relax the rules for breach of fiduciary duty is where the fiduciary makes an unauthorised profit from his position. There is ambiguity regarding whether the appropriate remedy should be proprietary or personal. In Lister v Stubbs for example, the Court of Appeal required the defendant to pay the sums received to the plaintiffs. Liability is treated as a purely personal obligation to pay over the value of the commission. This is because the relationship between them was that of a debtor and creditor rather than trustee and a beneficiary. Therefore, since it is not the beneficiary or the principal’s property paying it to them will give them a wind ford which he would never received other than as a result of fiduciary along the way. If the object of compensation is to satisfy the loss to the principal then why does it matter it is proprietary or personal.
Hence, it is submitted that with reference to relevant case law and secondary sources, the court decisions’ on exclusive loyalty rule to the position of trustees are inflexible. This area of law desperately needs an informed judicial pronouncement.
BIBLIOGRAPHY
Primary Sources
Cases
Bray v Ford [1896] AC 44 (Lord Herschell)
Sinclair Investment Holdings v Versailles Trade Finance Ltd [2007] (Arden LJ)
Sinclair Investment Holdings v Versailles Trade Finance [2011] EWCA Civ 347 (Lord Neuberger MR)
Bristol and West Building Society v Mothew [1997] 2 WLR 436 (Millet LJ)
Re Goldcorp Exchange Ltd [1994] UKPC 3
A-G for Hong Kong v Reid (Lord Templeman)
Boardman v Phibbs [1976] 2 AC 46 (House of Lords)
FHR European Ventures LLP v Mankarious & Ors [2013] EWCA Civ 17
Keech v Sandford [1726] EWHC Ch J76
Lister v Stubbs [1890] 45 Ch D 1
Statutes and statutory instruments
The Trustee Act 2000
Secondary Sources
Books
J E Penner, James Penner: The Law of Trusts (8th edn, Oxford University Press 2012)
Davies Virgo, Paul S Davies and Graham Virgo: Equity & Trusts Text, Cases And Materials (Oxford University Press 2013)
McDonald & Street, Iain McDonald and Anne Street: Equity & Trusts Law Concentrate (3rd edn, Oxford University Press 2013)
Hanbury & Martin, Modern Equity (18th edn, Sweet & Maxwell 2009)
Journal articles
Sir Peter Millett, ‘Equity’s Place in the Law of Commerce’ [1998] 114 LQR 214
L. S. Sealy, ‘Fiduciary Relationships’ , The Cambridge Law Journal [November 2015] , 20, pp 69-81
Gareth Jones, ‘Unjust Enrichment and the Fiduciary’s Duty of Loyalty’ [1968] 84 LQR 472
Ernest J Weinrib, ‘The Fiduciary Obligation’ [1975] 25 UTLJ 1, 16
Matthew Conaglen, ‘The Nature and Function of Fiduciary Loyalty’ [2005] LQR 452, 465
Tsun Hang Tey, ‘Fiduciaries, third parties and remedies – Singapore’s perspectives and contribution’ [2010] TLI 234
Alastair Hudson, ‘Recent cases suggesting moving away from Boarman v Phipps’ [2012]