Notes on Boardman v Phipps Case

  • Background of the Case

    • Assets Involved: Shares in Lester Harris, a textile company.
    • Key Figures: Mr. Borden (solicitor to the estate) and Mr. Phipps (child of the late Mr. Phipps).
    • Initial Findings: Upon examining the accounts, they concluded the company was underperforming and needed intervention.

  • Actions Taken

    • Phase One:
    • Mr. Borden and Mr. Phipps attempted to nominate Tom Fitz to the board but were unsuccessful.
    • They decided to make a personal takeover bid to become majority shareholders to influence company operations.
    • The aim was to sell unprofitable assets while gaining majority control.
    • One trustee (Mrs. Phipps) was not informed of this plan, which was crucial because unanimous decision-making is required by trustees.

  • Phase Two:

    • Mr. Boardman negotiated on behalf of the trust using trust information gained as a minority shareholder.
    • He utilized this information regarding recent share prices and company assets to bolster negotiations.

  • Phase Three:

    • Successfully executed the takeover using personal funds, not trust money.
    • This allowed them to pass shareholder resolutions, sell assets, and significantly increase company profitability, yielding a profit of £53,000.

  • Legal Challenge

    • A beneficiary, Mr. John Phipps, became aware of the takeover and sued Borden and Phipps for a share of the profits, asserting his entitlement based on the trust's terms.
    • Allegations:
    • Breach of fiduciary duty by Boardman as the estate solicitor.
    • Claims that both he, as an agent of the trust, and Phipps were acting on behalf of the trust during negotiations.
    • Unauthorized profit was made, breaching the no profit rule.

  • Decision of the Court

    • Majority Judgment (4-1): Found Borden and Phipps liable for breaching the no profit rule.
    • Establishing a fiduciary relationship through his roles as solicitor and agent.
    • The no profit rule is strictly enforced; profit through unauthorized use of trust information violated it.
    • The primary defense explored was whether the course of action was authorized by trustees, which it wasn't due to the lack of consent from Mrs. Phipps, who was incapable of consenting.
    • The court declared the profits were held in constructive trust for the plaintiff, thus mandating compensation to him.

  • Minority Dissent (Lord Upjohn)

    • Different view of facts, believing fiduciary duty ended after phase one when the nomination of Tom Fitz failed.
    • Argued that Borden and Phipps did not breach the conflict rule since the trust showed no interest in purchasing shares, and granting liability was unreasonable and unequal.

  • Key Lessons on Fiduciary Duties

    • Breach of fiduciary duty involves the no profit and no conflict rules—unilateral profit gain is not acceptable without trust authorization.
    • Equity does not allow individuals to gain from information related to their fiduciary obligations to trusts or beneficiaries.

  • Remedies Discussed

    • Account of Profits: Required to restore benefits gained from unauthorized actions.
    • Equitable Remedies: More flexible than common law, focusing on justice and restoring the parties to pre-transaction status.
    • Discretionary Nature: Courts may refuse remedies depending on circumstances even if conditions for their granting are met.