Trusts - Fiduciaries

What is a fiduciary relationship?

A relationship where one party owes a duty of single-minded loyalty to another, often arising from an imbalance of power.

e.g. trustee-beneficiary, solicitor-client, director-company, agent-principal

What are two key fiduciary duties?

1. No-conflict rule - fiduciary must not put themselves in a position where their personal interests conflict with their duties to their principal.

2. No-profit rule - fiduciary must not obtain an unauthorised benefit from their position for themselves or a third party.

What is self-dealing in fiduciary relationships?

When a trustee purchases assets from the trust or sells their assets to the trust

- in breach of no-conflict rule

What happens if a trustee enters into an unauthorised self-dealing transaction?

The transaction will be voidable, allowing beneficiaries to seek rescission.

Can a trustee circumvent the self-dealing rule by using a company?

No, using a wholly owned company does not negate the conflict of interest.

Is self-dealing rule breached when trustee buys from or sells trust assets to a company in which the trustee holds shares but is not the sole shareholder?

- almost definitely if they have a controlling interest

- if no controlling interest - unlikely to be self-dealing but still breach of no-conflict rule

What is the fair-dealing rule?

- A rule requiring a trustee to demonstrate fairness when transacting with a beneficiary to buy their beneficial interest from the trust

- if cannot show fairness - transaction is voidable

- rules not as stringent as self-dealing rule as the beneficiary is actually involved in the transaction

What must a trustee show to avoid voiding a fair-dealing transaction?

Full disclosure, honesty, fairness, and not taking advantage of the beneficiary.

What is a conflicting duty in fiduciary relationships?

When a fiduciary's duties to one principal conflict with their duties to another principal.

e.g. T wanting to buy a house for a beneficiary while also acting as an estate agent for the seller.

When can trustee continue to act in the circumstance of a conflicting duty to another?

if transaction expressly authorised by instrument creating the fiduciary relationship

if unauthorised, need fully informed consent of the principals - without this, it's a breach

What are the consequences for breach of fiduciary duty? (depends on the type of loss)

- loss for the principal may be recoverable personally from the fiduciary

- if transaction is voidable = principal may seek rescission

- if breach results in profit for the principal, remedy may not be required

- but if breach also results in profit for the fiduciary, principal can recover this profit

How might a fiduciary breach the no-profit rule?

a) Directly using the property of their principal to make a personal profit.

b) Indirectly profiting from their role as a fiduciary (can be authorised with fully informed consent)

c) Exploiting an opportunity which has come to them as a result of their fiduciary position.

d) Receiving a bribe or secret commission to influence the way in which they perform their role as fiduciary.

What is an example of direct profit?

- solicitor keeping interest that is gained on client money

What is an example of indirect profit?

- trustee is appointed as a director of a company because of their role of trustee, and receives remuneration in this capacity

- in this case, should pay any money into the trust fund rather than accept it

(but subject to any conditions in the trust instrument allowing remuneration - and could keep the money with consent of the beneficiaries)

How strict is the rule about exploiting opportunities received as a trustee?

- very strict

- e.g., landlord would not give lease to B as they were a minor, despite trustee's efforts. Landlord leased the property to T instead, held to be breach of F duty

- T was required to assign the lease to the beneficiary and account for the profits made.

- still effective even if beneficiary could not have benefitted from the opportunity - just matters that the opportunity came via role as trustee

What is required for a fiduciary to retain profits from opportunities arising from their role?

- If the profit is either permitted by the terms of the trust

- or fully informed consent is provided by all the beneficiaries.

How can buying shares in a failing company to save it for the sake of the trust fund be considered exploiting opportunity?

- TP (beneficiary) and Boardman (solicitor to the trustees) breached the no-profit rule by obtaining personal profits from their actions related to the trust

(fiduciary relationship arose here, not just beneficiary vs trustee - TP made himself an agent of the trust by trying to help it)

- trust fund owned some shares in failing company - Boardman personally purchased remaining shares to save the company and do well

- they breached no-profit rule by obtaining a personal benefit even though they acted in best interests and turned the company's fortunes around

- required to give up their profits due to the breach of fiduciary duty, although Boardman received a liberal allowance for his work.

What remedies are available for breach of the no-profit rule?

Beneficiaries may elect between an account of profits or a constructive trust.

- which they may choose depends on the circumstances - e.g. may want to trace into shares purchased if they have increased in value

What is an account of profits?

A personal claim requiring the fiduciary to pay the principal an amount equivalent to the profit made from the breach.

What is a constructive trust?

A legal remedy that allows the principal to claim rights over profits made by the fiduciary,

- protects against the fiduciary's insolvency as they have a trust over an asset and therefore rank highly as crediros

- allows the principal to trace into any assets acquired with the profit.

Is bribery a civil/criminal offence?

breach of fiduciary duty in civil law and an offence under the Bribery Act