The fiduciary relationship

Question 1

When do we have fiduciary relationships?

Answer 1

The trustee-beneficiary relationship is fiduciary in nature.

They arise in a range of situations, often where there is an imbalance in power within the relationship.

Question 2

What are the two key fiduciary duties?

Answer 2

1. No-conflict:
   A fiduciary must not put themselves in a position where their personal interests conflict with their duties to their principal.
2. No-profit:
   A fiduciary must not obtain an unauthorised benefit as a result of their position as a fiduciary either for themselves or for a third party.

Question 3

What is the conflict of self-dealing?

Answer 3

Self-dealing involves a trustee purchasing assets from the trust or selling assets to the trust.

If the trustee does enter into an unauthorised self-dealing transaction, the transaction will be voidable

Question 4

What is the conflict of fair-dealing?

Answer 4

It involves the trustee directly transacting with the beneficiary to buy their beneficial interest under the trust.

As is the case with self-dealing, the transaction is voidable unless the trustee can demonstrate that they made full disclosure to the beneficiary, acted honestly and fairly and did not take advantage of their beneficiary.

Question 5

Consequences of a breach?

Answer 5

• If the breach causes a loss to the principal, they can sue the fiduciary personally for breach of fiduciary duty.
• With breach of the self-dealing rule and fair-dealing rules result in the transaction being
  voidable. The beneficiaries may seek rescission.
• If the breach results in a profit to the principal, they may not require a remedy although they may wish to end the fiduciary relationship.

Question 6

How can the no profit rule be breached?

Answer 6

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

b) Indirectly profiting from their role as a fiduciary.

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.

Question 7

Remedies for breach of no-profit rule?

Answer 7

1. An account of profits:

This is a personal claim which requires the trustee to pay the principal an amount equivalent to the profit they have made

2. A constructive trust:

A principal may wish to argue that the profit made by the fiduciary is held on constructive trust for the principal.
a) A constructive trust provides protection against the insolvency of the fiduciary.

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