The Law Governing Fiduciaries - Case Law
The 'No Conflict' Rule
Boardman v Phipps (1967)
- The Phipps family trust had a large holding in a private company.
- There were three trustees of this trust and Boardman was one of their solicitors.
- Tom Phipps was a beneficiary under the trust. He and Boardman believed that new management would spell great rewards for the shareholders of the company (and also naturally the beneficiaries).
- Firstly, they unsuccessfully tried, with the informed consent of the trustees, to elect Phipps to the board.
- Next (again, unsuccessfully), they tried to separate the Phipps shareholding from the rest of the company - an effort to rid themselves of the less efficient deadweight of the company.
- Having tried the other routes, Boardman and Phipps bought a large number of shares at their own expensive. With the consent of the trustees, they used their majority shareholding to sell off certain assets of the company and consequently all the shareholders - including the beneficiaries - profited greatly.
- One of the beneficiaries to the Phipps trust (John Phipps), unsatisfied with the great benefits Boardman and Tom Phipps generated for him, successfully sued the two for the profits they earned on the basis that they received them in breach of their fiduciary duties i.e. because they earned them in conflict of interest.
Keech v Sandford (1726)
- The trustee wanted to renew a lease he had for the beneficiary (a minor).
- The lessor refused to renew it for the minor.
- The lessor agreed to grant the trustee a lease to himself, however.
- Held: the trustee was the only person in the world that was not allowed beneficial interest in the lease, and thus he held the lease on trust for the minor. This was held on the basis that to allow the trustee the lease would be to allow him to gain where there could have been a conflict of interest.
- Although on the facts it was clear that there wasn't - the lessor categorically refused to lease to a minor - the possibility that there might have been a conflict of interest was enough to prevent the trustee. Consider a trustee that persuades a lessor to not lease to the beneficiary so that he can have the lease instead - this temptation is entirely eliminated by Keech.
Reversion: the right to possess property on the death of the present possessor or at the end of his lease.
E.g. when the owner of a fee simple grants a life estate, and the owner of the life estate dies, the legal ownership of the property returns (or 'reverts') back to the owner of the fee simple. The owner of the fee simple possessed the 'reversion' to the property during the existence of the life estate.
Protheroe v Protheroe (1968)
- Held that the reasoning in Keech applied to a trustee buying the reversion upon a lease held by the trust.
- The reversion was held on trust for the beneficiary.
- Think about the consequences of not applying Keech. The trustee, having bought the reversion, would at the appropriate time become landlord of the property being leased out to the beneficiary. With regard to altering or renewing the beneficiary's lease, then, there would be a clear conflict of interest between gaining profits as a landlord and acting in the best interests of his beneficiary.
Public Trustee v Cooper (2001)
Hart J expounds the three ways that the problem of coming into a conflict of interest can be resolved.
- The trustee resigns. Not viable where the trustee in question is very valuable to the trust estate.
- Let the court decide. Where the conflict is extremely complicated and uncertain, the courts provide a sound unbiased solution.
- Go ahead with the decision anyway. This is only ever on the basis that the decision is a good one regardless of the potential conflict of interest that one or more of the trustees have. This solution is better where the decision is given to the court for analysis/approval priorly.
Hilton v Barket, Booth & Eastwood (2005)
- A team of solicitors worked for both parties of a property development transaction.
- The solicitors failed to inform the second party that the first had a history of fraudulent behaviour.
- Held: the solicitors were in breach of their contract of retainer (meaning that they were under a fiduciary obligation to inform their client of any information pertaining to the transaction) and were thus liable to pay for all the loss the uninformed party incurred as a result of entering into the contract that they would not have had they known the truth of the other party's history.
- The interest of this case lies in the fact that the solicitors also had a duty of confidentiality to both parties, meaning that if the solicitors had spilled the beans about the fraudulent past in order to honour their retainer, they would still have breached a duty. The House of Lords quite rightly placed the blame on the solicitors for willingly putting themselves in such a position.
Sometimes a trust instrument does not make provision for the amount of money a professional trustee should be paid for his services. The Trustee Act 2000 s 29 provides that a professional trustee is entitled to 'reasonable remuneration' for the services he provides if the trust instrument is silent about the issue. s 31 provides that any services that a trustee (professional or lay) had to employ (such as that of a solicitor) are also to be covered, either by separate payment or directly from the trust fund.
The court is allowed to authorise and increase remuneration for fiduciaries - Re Duke of Norfolk's Settlement Trusts (1982).
Boardman v Phipps and O'Sullivan v Management Agency and Music Ltd (1985) both show that remuneration for efforts made in conflict of interest may be given out. This is on the basis that the success or profit of the beneficiaries is in part due to the efforts of the fiduciaries acting in that breach of conflict.
Unless authorised no profits can be made, except for the limited exceptions laid out in s29 and s31 of the Trustee Act 2000 or when the courts intervene. Incidental profits are those that come as a side-effect of good decisions made by the trustee. Secret profits are made discretely and knowingly in breach of a fiduciary position; bribes are the most obvious type.
Williams v Barton (1927)
- A trustee directs work to a particular brokerage firm with whom he had an agreement that he would receive a commission for any work he brings them.
- The trustee was accountable to the trust for the commission.
Re Macadam (1946)
- Trustees that are appointed to the board of directors for a company that the trust has a large shareholding in receive director's fees.
- These are incidental profits that must be accounted for in the absence of authorisation.
Imageview Management Ltd v Jack (2009)
- An agent negotiates a contract for a football player.
- At the same time he enters into an undisclosed contract with the football club, resulting in a commission given to the agent for obtaining a work permit for the football player.
- This secret profit was held to be accountable to the trust.
- Furthermore, the secrecy of the hidden commission meant that the trustee was no longer entitled to the commission that he was authorised to receive for negotiating the contract.
Islamic Republic of Iran Shipping Lines v Denby (1987)
- A solicitor accepted a bribe from the opposing side to pressure his client into accepting a settlement from that side.
- The bribe was accountable to the client.
A-G for Hong Kong v Reid (1994)
- This bribe money was held to be accountable to the Crown for whom Reid was held to be in a fiduciary relationship with
- Although the harm affected Hong Kong's justice system, the money still went to the principle - the Crown - as the stripping away of profits from the fiduciary is done for the sake of disgorgement, not compensation.
The Self-Dealing Rule
Wright v Morgan (1926)
- A trustee's transaction to buy property belonging to the trust, or sell his property to the trust, is voidable unless authorised.
- This is because of the obvious conflict of interest arising from the trustee being both the seller and purchaser.
Re Thompson's Settlement (1986)
- The self-dealing rule applied here to the conveyance of a lease, suggesting that all types of property are bound by the self-dealing rule.
Holder v Holder (1968)
- Here property was purchased at an auction at a reasonable price, and the purchaser was unaware that he had become a fiduciary of the estate that owned that property.
- The property was not found to be affected by the self-dealing rule; the purchaser had not played any part in the sale of the house and so was not in conflict of interest when he acted as a buyer.
The Fair-Dealing Rule
The fair-dealing rule applies where a trustee buys the beneficial interest off of one of the beneficiaries under the trust. A beneficiary under the trust cannot set aside such a transaction at his will. The trustee is given a chance to provide evidence that he disclosed all relevant information, wasn't the only source of advice to the beneficiary on the matter, and otherwise didn't take advantage of his position in obtaining the interest.
Equitable Compensation for Breach of Fiduciary Obligation
- Normally response: strip away profits made in conflict of interest.
- In the case of fair self-dealing and fair-dealing: reverse the transaction, or, if that isn't available, strip the profits of the transaction.
- In the case that the breach of fiduciary obligation leads to loss to the principal, the fiduciary is liable to compensate him out of his own pocket.
Nocton v Lord Ashburton (1914)
- A solicitor advises his client to lend money on a mortgage in part of a land development scheme.
- The solicitor did not disclose benefits he would receive from such a scheme.
- He then advised the release of a property from the mortgage, again not disclosing his interest in such an action.
- The scheme failed and the value of the property did not make up the money the client lent out.
- Held: the breach of fiduciary obligation played a part in the client's losses and so was liable to pay for them. This form of remedy is called equitable compensation.
Swindle v Harrison (1997)
- A solicitor arranges for his firm to give out a loan to one of his client's, so that she may complete a transaction for a restaurant.
- The solicitor fails to disclose relevant facts, such as the profit that his firm would make on the loan.
- The restaurant resulted in loss and the client claimed that her solicitor was liable for the losses suffered from the restaurant since, but for the loan his firm provided, she would not have completed the transaction for the restaurant and then suffered the loss.
- Held: whilst the bridging loan agreement could be rescinded the loss resulting from the restaurant was not caused by it, and thus no equitable compensation could be awarded to the client.
Hilton v Barker, Booth & Eastwood (2005)
- Another case which lead to equitable compensation. See above for the facts of this case (under the section: "The 'No Conflict' Rule").
- Note the difference in result in regards to equitable compensation cases: the level of involvement of the fiduciary is important. Where the fiduciary knowingly does something that is clearly not in the best interests of his client to the point that he risks loss arising, such as failure to disclose a history of fraud of the other party to the transaction (Hilton), or advising the release of a property leading to a mortgage becoming less secure (Nocton), the court is inclined to hold the fiduciary liable for the losses arising from the transaction.
- Where the fiduciary could not be reasonably seen to believe his breach would lead to loss, such as granting a loan necessary to start a restaurant business, his breach of fiduciary obligation is rightly not attributable to losses that do arise.