Duties of Trustees/Remedies Flashcards
(109 cards)
1
Q
Case which held that in administering a trust, the trustees must act unanimously, unless the trust instrument allows otherwise
A
Luke v South Kensington Hotel Co (1879)
- this protects beneficiaries by preventing majority decision-making
2
Q
Doesn’t matter if the fiduciary generates profits for both himself and the trust, it will be held on constructive trust for the beneficiaries
A
Boardman v Phipps [1967]
3
Q
Held that trustees have a duty to act even-handedly, i.e. fairly, towards the different classes of beneficiary (beneficiaries with a life interest vs. beneficiaries in remainder)
A
Nestle v National Westminster Bank Plc [1993] - CoA per Hoffmann J and Staughten LJ
- Suggested that in determining fairness the trustees could take into account factors such as – the means of the beneficiaries and their relationship to the settlor
OBJECTIVE IS FAIRNESS NOT EQUALITY
4
Q
What statutory provision establishes trustees’ duty of care?
A
s.1 Trustee Act 2000 - it is because of this that if there is a breach of other provisions then the trustee is liable for the loss
5
Q
What statutory provision establishes the factors which should be taken into account by trustees in choosing investments?
A
s.4 TA 2000
6
Q
What statutory provisions establish the scope of the trustees’ investment powers?
A
s. 3 and s.8 TA 2000 -
- can be restricted by the trust instrument under s.6(1)(b) or legislation s.9 TA
i.e. they provide default trust powers unless the trust document specifies differently by exclusion, modification or widening.
7
Q
What prompted the drafting of the TA 2000?
A
The Law Com produced a report called Trustees’ Powers and Duties in 1999, included a draft bill which in large part constitutes the new Act.
8
Q
What is a fiduciary duty?
A
the obligation of the trustees to manage the trust is such a way that maximum potential gain accrues to the trust’s beneficiaries at all times
9
Q
THREE ways in which the Trustee Act 2000 extended powers of trustees?
A
- doesn’t define ‘investment’ - so the term is wide and will cover whatever the common law from time to time determines as such.
- s.8 expanded range of investments - previously under the Trustee Investment Act 1961, trustees were only allowed investment from a list of proscribed ‘authorised investments’
- used to require agreement of all beneficiaries e.g. s.1 Variation of Trusts Act 1958
10
Q
First established trustees’ equitable duty of care
A
Speight v Gaunt (1883)
“a trustee ought to conduct the business of the trust in the same manner that an ordinary prudent man of business would conduct his own.”
NB - now applicable only when section 1 is not
11
Q
statutory provision stating the standard investment criteria that a trustee must bear in mind when choosing appropriate investments
A
s.4(1) and (3) TA 2000
12
Q
4 examples of things which will be considered by trustees under the obligation imposed by s.4(3)(a) TA 2000
A
- the size of the trust fund
- the needs of the beneficiaries and tax position of the beneficiaries
- The purpose will clearly be relevant – income? Capital growth? Both? – generally it will be both but not always like in the British Museum case in which capital growth was of primary importance.
- inflation taken into account
13
Q
Aim of the inclusion of diversification in the standard investment criteria (s.4(3)(b) TA 2000)
A
to spread risk - combination of safe investments and some more risky ones
BUT… the need for diversification does vary with the size of the trust fund – if it’s small it will matter less/be less possible to diversify
14
Q
What’s the difference between a beneficiary with a life interest vs. a beneficiary in remainders
A
Beneficiaries with a life interest just get an income so would prefer the trustees to maximise the income i.e. choose investments with more substantial income.
Beneficiaries in remainder will get the capital so they don’t care about income, they want significant capital growth.
15
Q
What are moral objections?
A
Things trustees must normally NOT take into account when choosing investments
e.g. personal bias, not investing in something because they’re an alcoholic etc.
16
Q
what is the paramount duty of trustees?
A
To act in the best interests of all the beneficiaries, which normally means their best financial interests.
17
Q
Example case of trustees’ duty to not take moral objections into account when making investments
A
Cowan v Scargill [1985]
FACTS - a mineworkers’ pension fund. Half of the trustees were appointed by the union and they refused to accept an investment plan prepared by experts on the basis of union policy.
HELD - trustee’s personal views shouldn’t be taken into consideration, trustees should take advantage of the full range of possible investments which are in the best interest of the beneficiaries.
BUT… they did say that the trustees can take their personal views into account if that won’t cause any financial detriment e.g. if there are 2 equally beneficial investments
ALSO… considered that if all the beneficiaries are of full age, full mental competence and they share the same strong views then clearly it wouldn’t be in THEIR best interests to invest in certain companies –> but said this would be rare
18
Q
What is the justification for a trustee taking their moral objections into account when making investments?
A
If the set law has given the trustee the power in the trust deed to take their own views into account then obviously they can
19
Q
Case which held that trustees of a charitable trust are equally under a duty to get the maximum financial return (primary consideration) consistent with commercial prudence BUT… in limited circumstances they can refuse to make certain investments even though there may be a risk of financial detriment
A
Harries/ Bishop of Oxford v The Church Commissioners for England [1992] -
FACTS - financial detriment prevailed - trustees wanted to use the church fund to promote the Christian faith, that wasn’t a consideration that could be taken into account
The court didn’t give a comprehensive list of when that decision can be made but did give examples
- e.g. trustees can refuse something that conflicts with the very aims of the charity
- e.g. can avoid investments that would hamper the work of the charity – if they make recipients of the charity unwilling to be helped, or alienate people who donate to the charity
and did qualify it by saying that this does still need to be weighed against the potential financial detriment - same as Cowan apart from these exceptions
20
Q
FOUR general fiduciary obligations in choosing investments
A
- Taking into account relevant, but not irrelevant, criteria
- act in the best interest of the beneficiaries
- Take professional advice - s.5 TA 2000
- after the investment has been made - Duties in retention of investments to periodically review them - s.4(2) and s.5(2) TA 2000
21
Q
can a trustee be the individual giving advice as required under s.5 TA 2000?
A
YES
22
Q
What statutory provision establishes trustees’ duty to consider proper advice before making an investment?
A
s.5 TA 2000
- exception in s.5(3) TA 2000
may be unnecessary because the trustee is already an expert, or small trust or no money to pay for advice etc.
and ‘inappropriate’ - the trustee shouldn’t trust the expert blindly but if they follow the advice they’re unlikely to be found in breach of duty
23
Q
What statutory provisions establish trustees’ duty to periodically review investments when in retention of them?
A
s.4(2) and s.5(2) TA 2000
24
Q
THREE types of investment allowed
A
- traditional
- land - authorised by s.8 TA, restricted by s.36-38 (can be as an investment or for the beneficiaries to occupy)
- loans - authorised by s.3(3) TA, and must be secured (Khoo Tek Keong)
25
FOUR ways in which an investment under a trust can be varied?
1. Agreement/consent of all of the beneficiaries
2. Variation provision in the trust deed
3. Section 57 Trustee Act 1925
Authorises court to approve a transaction on grounds of expediency, which includes extending investment powers but only authorises specific dealings. B’s don’t have to be consulted, but must be in their best interests as a whole
4. Section 1 Variation of Trusts Act 1958
General widening of powers possible; need consent of ascertainable beneficiaries of full age (unless ascertainable or incompetent)
26
Case which held that trustees have no liability for mere errors of judgment when fulfilling their obligation to periodically review investments; only liable for wilful default
Re Chapman [1896] - CoA
27
Case which held that there is an additional obligation on trustees to receive information they would do if they were on the board of directors if the trust has a controlling interest in a private company
Bartlett v Barclays Bank Trust Co Ltd (No 1) [1980] -
FACTS - The trust company took little notice and simply relied on the company directors who were making bad property development investments with the money.
can't rely on the directors to be working for the best interest of the investment made for the benefit of the beneficiaries under the trust --> this is a high burden on trustees
28
What is the general rule for beneficiaries proving a breach of trust?
The beneficiary must prove that he has suffered loss because of investment decisions that cannot be justified --> must be unjustified not just inappropriate
29
Case which highlights the unfairness of the rule that a beneficiary must prove that he has suffered loss because of investment decisions that cannot be justified to prove a breach of trust
Nestle v National Westminster Bank plc.
- corporate trustee had failed to understand the width of the investment clause in the trust deed and took no legal advice and had also failed to comply with the obligation to review investments. This meant the trust was only worth £270,000 when it should have been worth £1 million if it had retained its value alone (never mind made money)
HELD - no breach of trust because it couldn’t be shown that the decisions of the trustee were totally unjustifiable
30
After finding a breach of trust or breach of fiduciary duties what do you consider next?
the personal liabilities for that breach
31
Do beneficiaries have to pursue one remedy for a breach?
NO - Can recover twice for the same loss. There may be more than one route for getting compensation so there may be more than one breach, more than one potential remedy
- It is usual for beneficiaries to pursue all possibilities BUT... need to make a choice once the judgment has been received
32
Case which held that there is an obligation on beneficiaries to elect between inconsistent remedies after judgment in their favour to prevent double recovery for a loss
Tang Man Sit v Capacious Investments Ltd [1996]
FACTS - Joint venture for the development of land: D provided the land; C provided the money for the development. Agreement D would transfer a number of houses to C when built. Effect of agreement that D held property on trust and the failure to transfer was a breach of trust. D rented properties out. Clearly C’s loss was the rent that they should have been getting had the properties been transferred to him.
C brought 2 claims: (a) an account of the profits made by D on the basis they were unauthorised profits in breach of fiduciary duty; and (b) damages for loss caused by the breach of trust i.e. the rents C could have obtained from the properties if he had owned them.
HELD - once the judgment was in C's favour he had to pick one claim to pursue
33
FOUR general considerations in Personal Liability of a Trustee for Breach of Trust or Duty
1. election between remedies by claimant
2. looking for equitable compensation
3. liability between trustees
4. defences
34
What is the test for considering liability for equitable compensation as a result of a trustee's breach of trust or breach of fiduciary duty?
the "but-for" test
- Target Holdings Ltd v Redferns [1996] established the use of this test to find if beneficiaries are entitled to compensation for any loss they wouldn’t have suffered but for the breach
35
Cases which established the use of the "but-for" test to find if beneficiaries are entitled to compensation for any loss they wouldn’t have suffered but for the breach
Target Holdings Ltd v Redferns [1996]
- this entitles the claimant to be put back in the position he would have been had there been no breach
more recently confirmed in AIB Group (UK) plc v Redler [2014] in UKSC which held that there must be a CAUSAL LINK between the loss suffered and the breach and confirmed that the but-for test applies in ALL BREACHES OF TRUST (not necessarily all of breach of fiduciary duty)
36
How can a defendant avoid liability for equitable compensation under the but-for test?
if he can show the claimant would have suffered the loss anyway
37
THREE cases which show how important it is to identify the breach of fiduciary duty or trust precisely and how that is crucial to show the causal connection in the but-for test
1. Target Holdings Ltd v Redferns - mortgage fraud
2. Swindle v Harrison - solicitor not disclosing hidden profit in bridging loan
3. Canson Enterprises Ltd v Boughton & Co (1991) - solicitors were in breach of fiduciary duty in failing to disclose an improper profit being made by the sellers. HELD - 'common sense of causation'
38
Case in which is was suggested that common law rules of causation, remoteness and measure of damages could be used to provide compensation to claimants for breach of the equitable duty of care rather than the but-for test
Bristol and West Building Society v Mothew [1998] per Millet LJ
Expressed the view that equitable compensation is for the breach of duty of care and skill, it resembles common law damages and there is no reason in principle why you can’t therefore use the common law rules of causation, remoteness and damages
- decided at the same time as Target Holdings
39
If in acting of breach of trust a trustee causes a loss for the trust fund with one of his actions BUT with another action actually creates a profit for the trust, can the trustee set the profit off against the loss? Thereby reducing the amount of equitable compensation payable?
basic rule in Dimes v Scott (1828) - NO - Profit belongs to the beneficiaries, the loss must be compensated for
40
Case which is the exception to the basic rule that trustees acting in breach which cause a loss can't set a profit off against the loss
Fletcher v Green (1864) - where the profit and loss can be said to arise from the same transaction or breach of trust it can be used to offset the other
- this has later been explained as involving a ‘continuing breach of trust’ relating to the same property
BUT... it is difficult in its application because it is sometimes hard to say whether the profit and loss arose from the same breach - e.g. it is unclear in Dimes v Scott (1828)
p10 notes
41
Case which shows the more relaxed approach recently to a trustee offsetting a loss caused by them for the trust fund with another action which creates a profit - to reduce the equitable compensation payable
Bartlett v Barclays Bank Trust Co Ltd (No 1) [1980]
- Part of the profit of the first successful property development was used to fund another property development scheme which was a disaster
HELD - that the profit on the first transaction could be held against the second transaction
- they were 2 separate transactions but they were linked as examples of a result of the same speculative investment approach of the company
42
What's the next issue to consider once the compensation payable for breach has been calculated?
Liability between trustees
Each trustee is liable for the same loss, so they may not be guilty of the same breach of trust – e.g. one may be guilty of making an unauthorised investment and one may be guilty of doing nothing and leaving everything to his co-trustee
43
If 1 trustee is sued for the full amount of compensation and another trustee is also sued for the full amount of that loss what options do they have?
1. the trustee who ends up paying the compensation could claim a contribution from a co-trustee who is similarly liable for the damage
- governed by s.1 and s.2 Civil Liability (Contribution) Act 1978 (not in statute book) - who? and how much (courts have wide discretionary powers in apportioning)?
2. indemnity - any trustee ending up paying compensation can end seek a full indemnity from a co-trustee in certain situations
44
when is there liability between trustees?
trustees have joint and several liability
- beneficiaries can sue any one of the trustees for FULL compensation. Therefore, trustees are liable for their own breaches, so if several are liable then are liable jointly and severally
So we’re looking at a situation where 2 or more are guilty of a breach of trust and those breaches of trust have led to the same loss
- don't have to be the same breach e.g. a co-trustee can be in breach of leaving everything for the co-trustee to do
45
What is a trustee indemnity?
Rather than seeking a contribution from a co-trustee, any trustee ending up paying compensation can end seek a full indeminity from a co-trustee
46
FOUR examples of when a full indemnity is available when there is liability between the trustees?
* Where one trustee is guilty of fraud
* Where a trustee is a solicitor whose advice could be reasonably relied uponand has a controlling influence
* Where a trustee has exclusively benefited from the breach of trust
* Where a trustee is also a beneficiary (not necessarily at the time of the breach) whose beneficial interest can be impounded
47
Authority for the fact that a trustee who ends up paying equitable compensation for a breach can seek an indemnity from a co-trustee where that trustee is also a beneficiary (doesn’t need to have been a beneficiary at the time of the breach, only at the time of the action) and his interest is capable of being impounded -
Chillingworth v Chambers [1896]
48
Authority for the fact that a trustee who ends up paying equitable compensation for a breach can seek an indemnity from a co-trustee where a trustee is a solicitor and has a controlling influence
Head v Gould [1898]
49
What are potential defences available to a trustee who is being sued?
1. consider whether the beneficiary/ies has taken part or consented to the breach of trust - A beneficiary who participates in or consents to a breach of trust WITH knowledge will not be able to sue - Re Pauling's ST [1964]
2. an exemption clause in the trust deed
3. Statutory relief under s 61 TA 1925
4. within the limitation period of 6yrs (unless it's a fraud case)
50
Case which held that a beneficiary who participates in or consents to a breach of trust with knowledge will not be able to sue
Re Pauling's ST [1964]
NB - 'with knowledge' is simply knowing of the facts – don’t need to know the breach of trust
51
If a trustee can use the defence that a beneficiary/beneficiaries participated in or consented to the breach of the trust with knowledge then what action can the trustee bring against them?
It may be possible to impound the interest of a beneficiary who was somehow involved in the breach – meaning the value of that beneficial interest will be used first to pay any compensation to beneficiaries and thereafter the trustee is liable
NB - doesn't mean the trustee isn't liable just because they can impound the interest of the beneficiary
52
TWO ways in which the interest of the beneficiary can be impounded -
1. Under the inherent jurisdiction of the High Court
2. Section 62(1) Trustee Act 1925
NB - needs to strong reasons to tell a beneficiary that you are primarily liable for this loss, you’re going to be liable before the trustee is
53
What is necessary for a beneficiary to be impounded under the inherent jurisdiction of the High Court?
the beneficiary instigated, requested or consented to the breach with knowledge AND with the motive of getting a personal benefit
- if the beneficiary simply consented rather than instigated it, he must ACTUALLY have benefitted from the breach of trust
54
What is necessary for a beneficiary to be impounded under section 62(1) Trustee Act 1925 ?
similar to the inherent jurisdiction of the High Court but with the added need for the consent to be IN WRITING (instigation or request doesn't need to be)
and the beneficiary DOESN'T need to have a motive for benefiting or actually benefit
NB - just because a motive or actual benefit isn't necessary doesn't mean that the court wont consider it when exercising their discretionary powers
55
Authority for the use of exemption clauses in the trust deed as validly excluding the liability for trustees BUT cannot exclude liability dishonesty/wilful fraud
Armitage v Nurse [1998] - CA.
- includes excluding liability for negligence and even gross negligence
- these are typically professional trustees! - they're insured for negligence anyway so why should they be able to hide behind exemption clauses?
56
Responses to the allowance of exemption clauses in the trust deed excluding liability of trustees after Armitage v Nurse [1998]
1. in Armitage v Nurse [1998] - Millet LJ said that exemption clauses had gone too far but it was for parliament to change the law
2. The Law Com looked into putting restrictions into place but abandoned the exercise
57
Definition of exemption clause in the trust in Barnsley v Noble [2016]
"its express wording, addressed the issue of personal liability of the defaulting trustee for loss to the trust consequent on breach of the trustee's duty"
58
Statutory provision which provides the court with discretion to relieve a trustee for liability wholly or partly
s. 61 TA 1925
| - if they satisfy all 3 criteria
59
what considerations will the court take into account when consider whether to grant a trustee statutory relief under s.61 TA 1925?
It is a question of fact but there have some general indications that the court will consider -
- reasonableness has been aligned with duty of care and whether a trustee has acted reasonably would include such questions as ‘did he take advice?’
- bear in mind the fact that if they exclude the trustee of liability, the beneficiaries will suffer loss - so may see if they'll be compensated in any other way e.g. insurance
- the courts seem reluctant to excuse paying trustees from liability
60
What is the limitation period in which claims for trustees liability need to be brought?
6 yrs
| BUT.. the period may be longer in the case of fraud or where a proprietary claim rather than personal claim is brought
61
Definition of a fiduciary?
“A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence.”
per Millet LJ in Bristol and West Building Society v Mothew [1998]
i.e. acts on behalf of a principal
it is a question of fact whether there is a fiduciary relationship
62
Example of the courts seemingly being prepared to find a fiduciary duty on the facts in order to give a remedy
Reading v A-G [1951] -
British Army soldier was paid by Egyptian smugglers to smuggle contraband in. He tried to claim back his money which was seized by British authorities.
HELD - HoL was prepared to hold that Reading was in a fiduciary relationship with the crown and therefore he was under a duty to account for the profit he had wrongfully made by exploiting his position
63
Authority which outlined the basic duty of loyalty of a fiduciary
Millett LJ, Bristol and West Building Society v Mothew [1998]
"A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal...he is not subject to fiduciary obligations because he is a fiduciary; it is because he is subject to them that he is a fiduciary"
and states that mere incompetence is not enough for a breach, it must be disloyalty and infidelity.
64
Authority which held that when acting in a fiduciary capacity, any knowledge that is obtained becomes the property of the principal and the fiduciary can only profit from that knowledge with express consent from the principal
Boardman v Phipps [1967] - solicitor/client
- regardless of whether the principal itself is unable to profit from it in any way or if the principal is going to benefit from it as well.
65
Case which held that a fiduciary who is acting OUTSIDE the scope of his fiduciary duties they cannot be liable for breach of duty
Boardman v Phipps [1967] - solicitor/client
66
Can a fiduciary relationship be unlimited in scope or limited in scope?
BOTH - have to look at the agreement between them
example -
- solicitor may have been appointed merely to deal with the purchase of 1 particular building – that’s the scope of the relationship
- BUT… the solicitor may only be on retainer to deal with any legal issue the scope of this relationship is clearly much wider
67
What has the area of law of fiduciary's duty of loyalty been criticised for?
being too strict - not finding the right balance between protecting principals from abuse but allowing fiduciaries some freedom of action
68
Why do we have to assess the scope of the fiduciary relationship when looking at their duty of loyalty?
Because if a fiduciary is acting OUTSIDE the scope of the relationship there can be no liability
69
What is the current approach of the law of where to impose liability for breach of duty of loyalty by fiduciaries?
DETERRENT APPROACH - the law is all about preventing any possible abuse of position so there is ALWAYS liability, a fiduciary can never make a profit out of their position unless they are authorised
- strict and inflexible approach
It is often argued that they should aim for a deterrent effect approach but take into account relevant circumstances and a remedy will only be available where it can be proven reasonable or fair
70
FOUR main specific examples of duty of loyalty -
1. remuneration
2. Purchase of trust property; a.k.a the "self-dealing" rule
3. Dealings with the principal; the "fair-dealing" rule
4. Incidental profits; conflict of interest and duty --> most case law and disputes on this one
71
duty of loyalty - what is the general rule for remuneration as a trustee?
Trustees are not entitled to receive remuneration as they shouldn't benefit from the trust property
72
duty of loyalty - what are the FIVE potential exceptions to the general rule preventing trustees from receiving remuneration?
Trustees can receive remuneration -
• Where the trust instrument so provides.
• Where authorised by statute.
• Where the beneficiaries agree – not common as all beneficiaries have to be of full age, mental capacity, and not under undue influence (clear risk)
• Where authorised by the court. – been made clear that the court will only do this in exceptional circumstances where a trustee has done work which is of substantial benefit to the trust and if the trustee hadn’t done it then someone else would have had to do it.
• Under the rule in Cradock v Piper (1850) - where a solicitor-trustee is acting for a co-trustee as well as himself in litigation can charge for his professional services
73
Case which held that remuneration will never be awarded if it puts a fiduciary in a position of a conflict of interest
Guinness plc v Saunders [1990] - House of Lords
74
Example of the courts awarding remuneration in some circumstances to a fiduciary because the merits are overwhelming
Boardman v Phipps [1967]
FACTS - A solicitor to a family trust was awarded remuneration for his skill and labour when he was required to disgorge a profit he made from investing in shares. He had acted honestly and in the best interests of the trust at all times and had made a profit for the trust.
75
authority for the inflexible, blanket rule that a trustee cannot buy trust property - also known as the "self-dealing" rule
Ex p Lacey (1802)
this is clearly not to do with dishonesty but to do with a conflict of interest and duty which the courts want to deter from
76
Exceptions to the rule that a trustee cannot buy trust property
* the trust instrument
* the court
* the beneficiaries - full age and no undue influence as per
77
What is the effect of the rule that a trustee cannot buy trust property?
It wouldn’t be possible to prove whether the trustee advantaged from the situation – so the effect is that if a trustee purchases a trust property it is VOIDABLE within a reasonable time
- beneficiaries can claim the property back or order its sale
78
One case which creates an 'exceptional exception' to the rule that a trustee cannot buy trust property because of the duty of loyalty
Holder v Holder [1968] - CoA
- court held an executor who had renounced his position (even though this wasn't effective) was allowed to buy the farm (trust property) because in reality he was merely the seller not the purchaser of the property
look at p18 for full description
79
What is the "fair dealings rule"?
A purchase from the principal will be voidable unless the fiduciary can show that he did not abuse his position, that he acted honestly and fairly and he made full disclosure to his principal.
e. g. the trustee buying the interest of the beneficiary
e. g. a director of a company buying property of a company
- this will ideally include a fiduciary paying full value and proving to the principal that they received independent legal advice
80
What is the general rule for fiduciaries receiving incidental profits?
it is a conflict of interest and duty therefore the fiduciary will be liable for ALL incidental or secret profits
81
What are the SEVEN general situations where there is a conflict of interest and duty because of a fiduciary receiving incidental profits?
(1) Use of the principal’s property to make a profit
(2) Purchase from a third party - the rule in Keech v Sandford
(3) Remuneration as a director
(4) Commission
(5) Bribes and secret commissions
(6) Competition
(7) Opportunities arising from the fiduciary position
82
First case in the area of conflict of interest and duty where the court used the strict deterrent approach
Keech v Sandford [1726]
| HELD - circumstances are irrelevant, it’s a deterrent to prevent possible abuse.
83
Authority for the rule preventing a purchase by a third party because of the conflict of interest and duty arising from the fiduciary's receipt of incidental profits
Keech v Sandford [1726]
FACTS - T held a lease of the profits of Romford market. He requested a renewal of the lease for the benefit of the trust but the landlord refused. T consequently took a renewal of the lease in his personal capacity for the benefit of another. The new lease had not formed part of the original trust property; the minor could not have acquired the new lease from the landlord; and the trustee acted innocently, believing that he committed no breach of trust and that the new lease did not belong in equity to his beneficiaries under the trust.
HELD - the circumstances were irrelevant. It was held this was a breach of duty. Can’t keep the renewal of the lease for personal benefit so he held it on constructive trust for the beneficiary
84
Authority for the rule that trustees who appoint themselves as directors of a company in which the trust has shares cannot keep any remuneration received because of the possibility for a conflict of interest and duty
Re Macadam [1946]
85
If the shares of the trust don’t affect the voting so that the trustee would have been appointed as a director would the rule in Re Macadam [1946] apply?
NO - the trustee would be able to keep the remuneration. The rule only applies to trustees who appoint themselves.
86
Does the ban on trustees who appoint themselves as directors of a company in which the trust has shares keeping remuneration received apply to all profits?
ONLY UNAUTHORISED PROFITS - so if the trustee has authorisation for their remuneration from the beneficiaries, the courts or by the trust instrument then it will be allowed.
- only profit opportunities that arise from their position as fiduciary are subject to the ban
87
Authority for the rule that a fiduciary that receives commission as a consequence of acts done in his fiduciary capacity will not be able to keep that commission
Williams v Barton [1927]
FACTS - T was a clerk at a firm of stockbrokers. He appointed this firm to act for the trust. He was entitled to commission from the firm for introducing new business.
HELD - Even though he acted in good faith he couldn’t keep that commission
88
Example case of a fiduciary being liable/in breach of duty for receiving a bribe in the context of his fiduciary role
Reading v A-G
| - Soldier sitting in Egyptian smugglers lorries and receiving a bribe
89
Example case of a fiduciary being liable/in breach of duty for receiving a secret commission in the context of his fiduciary role
Lister v Stubbs (1890)
| Involved a secret commission from a supplier to persuade the fiduciary to order from that supplier
90
Authority for the rule that a fiduciary can’t put himself in a position where he would be in competition with his principal
Re Thomson [1930] - Executors were directed to carry on the testator's business as a yacht broker. One of the executors was prevented from SETTING UP his own business of the same
- it was noteworthy that the business was highly specialised and very sensitive to competition --> so is possible a court might come to a different conclusion where the business is more perfectly competitive industry
91
Example of how a fiduciary can only be in conflict of their duty and interest by setting up a competing business if the business is the same
Aas v Benham [1891]
| - held it wasn't competition for a partner of a ship brokers firm (fiduciary) to open a ship building company
92
Why are some rules surrounding the ban on fiduciaries taking/exploting opportunities arising from their fiduciary position not relevant to directors anymore?
authority has been overtaken by the Companies Act
93
Case which is relevant when considering breaches as a result of opportunities arising from the fiduciary position for fiduciaries such as trustees but not really directors because of the Companies Act now
Regal (Hastings) Ltd v Gulliver [1942] - HoL
in particular the important summary by Lord Russell
FACTS - directors bought shares in the subsidiary in a personal capacity because the company didn't have the resources. The directors made a profit when the company and the subsidiary were sold. The new owners claimed the profits from the directors and were successful
--> example of strict law
"The liability arises from the mere fact of a profit having, in the stated circumstances, been made. The profiteer, however honest and well-intentioned, cannot escape the risk of being called upon to account.”
94
TWO main arguments for the strict position of the HoL in the case of Regal (Hastings) Ltd v Gulliver [1942]
FOR -
1. It was the directors who decided the company couldn’t buy the shares in the first place - conflict of interest
2. Although these particular directors appear to have acted honestly it is clearly a situation where they COULD have abused their position
95
arguments against the strict position of the HoL in the case of Regal (Hastings) Ltd v Gulliver [1942]
AGAINST -
1. the directors acted in good faith, their actions enabled the company to purchase the 2 leases of cinemas which is what the company wanted to do.
2. the company didn’t have the resources to carry out those actions without the help of the directors
3. The profit the directors made couldn’t have been made by the company because the company couldn’t have bought those shares
96
Example of the strict approach to incidental profits made by fiduciaries
Boardman v Phipps per Lords Hodson, Guest and Cohen -
- Viscount Dilhorne and Lord Upjohn took a more flexible approach
complex facts so look at p22 of notes for full facts
Boardman was clearly the fiduciary – he was the solicitor to the trust - there was never any argument that Tom should be treated any differently
97
What were the only 2 exceptions the majority found in Boardman v Phipps for a fiduciary receiving incidental profits?
1. where the fiduciary has the fully informed consent of his principal
2. where the actions of the fiduciary were wholly outside the scope of his duties --> confirming Aas v Benham [1891]
- found that Boardman had unlimited scope in his fiduciary duties
98
What is the more flexible approach to incidental profits made by fiduciaries stated in Boardman v Phipps?
Lord Upjohn is frequently cited for his opinion that -
A fiduciary will only be liable where he’s acted within the scope of his duties and he’s put himself in a position where his interest and duty ACTUALLY do conflict or there is a REAL SENSIBLE POSSIBILITY that his interest and duty will conflict
- HELD - there was no conflict of interest and duty on the facts because the trust didn’t want to buy any more shares
- He distinguished the case from Keech v Sandford and Regal (Hastings) v Gulliver on its facts because the distinction was the principal had actually contemplated the purchase in question in those cases but hadn't in Boardman v Phipps
99
Case which also shows the strict approach of the courts to incidental profits made by fiduciaries - the court held it didn't matter that the fiduciary lacked good faith and it didn’t matter that the opportunity wasn’t available to the company
Industrial Development Consultants Ltd v Cooley [1972]
FACTS - C was a director and general manager of a company providing construction consultancy services. He tried to interest the Gas Board in a project but they refused to employ the company. They offered him a profitable contract in his personal capacity. He took this and in order to fulfil it he falsely told the company that he was ill.
- court held it was an abuse of his position as fiduciary because it was the type of contract Cooley should have been acquiring for the company.
- The view of the judge was that he should have passed that info on to the company and he didn’t
this is arguably more justifiable than Boardman v Phipps and Regal (Hastings) Ltd v Gulliver [1942] because he did abuse his position here.
100
TWO example cases where the courts awarded an allowance to the fiduciary for work and skill
1. Boardman v Phipps
2. O’Sullivan v Management Agency and Music Ltd [1985]
- more generous here because the fiduciary was clearly guilty but they still awarded him money for his work and skill --> although the court made it clear that the percentage was a lot less than he would have made had he been honest
101
FOUR advantages of the current strict law on fiduciaries receiving incidental profits
1. It has a clear deterrent effect
2. It is certain and predictable
3. We don’t have to look into the mind of the fiduciary to find his motives
4. A fiduciary can always seek the consent of the principal
However - it is argued that adopting the minority approach in Boardman v Phipps would still provide many of those advantages of the present law but would also introduce an element of fairness
102
TWO examples of other jurisdictions more flexible approach to fiduciaries receiving incidental profits -
1. Queensland Mines v Hudson (1978) - held he could take up a business opportunity because it had been rejected by the board of Directors
2. the US - have the “corporate opportunity doctrine.” which asks questions to find if the fiduciary abused their position
103
Whose authorisation is needed for the fiduciaries profits to be authorised, allowing the fiduciary to receive the profits?
A principal's consent
BUT... there isn't clear agreement on who is the principal whose consent is needed
e.g. Boardman v Phipps - they didn't unanimously agree on whether he needed the consent of the trustees or the beneficiaries or both
Lord Trent – need trustee consent, Lord Thomson – need beneficiary consent, Dylon said both, Lord Upjohn – said definitely need trustee consent and don’t need to decide on beneficiary’s
ALSO - issue for this requirement is the limited time period for opportunities if they need consent before taking it
- this issue would also occur if it was held that the fiduciary needed the court's consent
104
TWO types of remedy available where there is an unauthorised profit by a fiduciary?
1. personal remedy = duty to account for the profit - always need to pay it back to prevent unjust enrichment
- this is preferable if the value of has declined or dissipated
2. proprietary remedy = claiming the unauthorised profit is held by the fiduciary on constructive trust for the principal
- policy considerations - strict rules relating to bribes/secret commissions, simplicity, allows tracing.
105
two authorities that the duty to account for profit is a remedy always available when there has been unauthorised profit
1. Lister v Stubbs (1890) - CA
| 2. Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2011]
106
Authority for proprietary remedies being available where there is an unauthorised profit by a fiduciary
FHR European Ventures LLP v Mankarious [2013]
- BUT... this issue has been controversial over the years, particularly in the context of bribes and secret commissions because a proprietary remedy gives the principal priority over other secured creditors in the event of the fiduciary's insolvency
107
Timeline of cases which sets out the disputes over whether proprietary remedies are available to principals for an unauthorised profit by a fiduciary
1. Lister v Stubbs [1890] - no proprietary remedy
2. A-G for Hong Kong v Reid [1993] - yes proprietary remedy
3. Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2011] - proprietary remedy only available in specific situations
4. FHR European Ventures LLP v Mankarious [2013] - no proprietary remedy because bound by Lister v Stubbs
then finally
5. Supreme Court in FHR European Ventures LLP v Cedar Capital Partners LLC [2014] - proprietary remedy available in ALL cases where a fiduciary makes an unauthorised profit from his position.
So this means that we have straight forward rules now for liability and remedies
108
Academic who disagrees with the current legal authority in FHR European Ventures LLP v Cedar Capital Partners LLC [2014] stating that proprietary remedies should be available in all cases where a fiduciary makes an unauthorised profit from his position.
Penham
109
Case where a proprietary remedy was used - all unauthorised profits received by a fiduciary were held on constructive trust
Cedar Capital Partners [2014]
