fiduciary duty

In commercial life, fiduciary duties apply in a wide variety of situations.

For instance, liability for breach of a fiduciary duty would probably exist where an employee or director of a company:

1. takes advantage of business opportunities made known to them during the course of their relationship and diverted such opportunities to themselves,
2. receives bribes from suppliers, and/or
3. engages in unlawful competitive activity, the employee or company director will not be permitted to retain that benefit, as the law treats money or corporate opportunities as belonging to the principal company.

In addition to this, if the person owing the fiduciary duty earns further profits from a breach of fiduciary duties, those profits also belong to the principal. Principals are in some circumstances entitled to trace the property received through to third parties. Moreover, even if the person has spent the money or disposed of the assets in question, a fiduciary remains personally liable for the monetary equivalent of the benefit received.

The Duties

Fiduciary duties are owed by persons who have been placed in positions which require loyalty and the utmost good faith to his principal. The duties require these persons to act in the best interests of their principals. In the event of a failure to do so, a Court of Equity may grant appropriate remedies and relief to principals – to rectify abuses of the position of superiority held by the fiduciary over the principal. A breach of these duties must be an intentional act, derived from an improper motive (such as dishonesty) or recklessness. Mere negligence or incompetence is not enough.

A fiduciary has at very least, the following duties:

1. to act in the utmost good faith to their principal;
2. must not make a profit from the trust placed in him;
3. not to place themselves in a position where their own interests conflict with his duty;
4. may not act to their own advantage or the benefit of a third person without the fully informed consent of the principal.

Thus, the general nature of these duties are (1) personal interests and the duty must not conflict; and (2) one must not take personal advantage of their position of trust; and (3) proscriptive and not prescriptive.

Scope of Duties

It is important to bear in mind that a relationship may encompass duties which are fiduciary in nature, as well as those that not – ‘non-fiduciary’ duties. To determine whether a duty is fiduciary in nature, the duty must touch upon obligations of loyalty, which differs to mere contractual, tortious or statutory duties which import their own standards of conduct.

The nature and extent of the duties imposed by law rely on the factual matrix of the case, such as the agreements in force between the parties, the nature of the engagement of the person and in appropriate cases, the prior conduct of the parties. When determining the scope of a particular person’s duties, a court will look to consider non-fiduciary duties, as an exercise in determining the nature and scope of the obligations enforceable as fiduciary duties. That is to say, simply because the relationship has received an elevated status in law, does not mean that it is elevated for all purposes.

It may be that the alleged breach of duty, in the context of the dealings between the parties fell outside the scope of the fiduciary duties, thus the person did not act in breach. One should bear in mind that a contractual relationship may exist between the parties. This relationship in its own right might give the claimant the remedy they require, without the need for a fiduciary relationship transcending it, as a court may find that a particular obligation was not fiduciary in nature.

Duration

As the duties imposed by equity are reliant on a pre-existing relationship (such as a contractual relationship), it is the facts and circumstances surrounding that relationship that assist a court of equity to determine the length of time that the duties will be imposed. A similar exercise to that required in determining the scope of the relationship is required to ascertain the length of time that a court may be inclined to extend the time of the particular obligations.

Having said that, a person lawfully terminating a relationship to take up an opportunity that is properly their principal’s, exposes them self to a risk of unlawful conduct.

When Conflict Arises

Fiduciary Conflict Rule

The tests that have been applied for breach of the duty are flexible. Courts of Equity have held that it is enough in appropriate circumstances that the duties will be breached where there is a real possibility of conflict. Further to this, it has been held that it is not necessary to show that a fiduciary duty has been breached, but simply a non-fiduciary obligation which has the tendency to interfere with the duty in the future. The tests take as their measure the considerations of risk, rather than actual breach.

Evidence to the following effect is inadmissible whether or not:

1. the transaction was fair;
2. the fiduciary acted honestly at all times;
3. the principal had the opportunity to enter into the transaction themselves; or
4. the transaction was entered into by a third party on behalf of the fiduciary.

The principal may give consent to the transaction, provided that full and frank disclosure of all material facts is made. Indeed, such disclosure may have a further affect on the relationship and change the nature of the relationship in whole or in part. Even then, the consent should be clear and unequivocal. We recommend that authorisation to proceed is obtained in writing prior to risking a breach of duty.

A fiduciary will have a defence to a claim by their principal where they exercise a pre-existing contractual right, or if they were not responsible for the breach in question. A fiduciary would be well advised to make disclosure of any the particular rights that they have prior to the engagement so as to minimise the chances of the principal claiming ignorance.

Lastly, a fiduciary may approach the court to under Part 8 and Part 64 of the CPR for a declaration that the fiduciary is entitled to enter into a particular transaction.

Such is the antiquity of these relationships, a number of rules have developed, such as:

1. a fiduciary is not entitled to remuneration for their care and trouble. Any right to payment will arise under contract or a trust deed.
2. transactions entered into by a fiduciary are voidable at the option of their principal, unless the fiduciary is able to positively show that they have not taken advantage of their position, ie they have made a full and frank disclosure and the transaction is fair and honest.
3. sale of a trust property to a trustee is voidable at the option of the beneficiary.
4. the fiduciary trustee is entitled to be indemnified for may recover out of pocket expenses.

Profit Rule

A fiduciary is required to account for any benefit obtained or received by reason of their fiduciary office, or from an opportunity or knowledge resulting from it. In common with the foregoing Conflict Rule, it is immaterial whether the principal had the opportunity to make the profit; whether the fiduciary was honest or not; and it is immaterial whether the principal has suffered any loss.

The principal may give their fully informed consent to absolve the fiduciary of their obligation to account for profits made. The policy basis for this apparently harsh approach lies on the basis that if this were not the case, a fiduciary may well not act on the opportunities for their principal, preferring to keep those opportunities for themselves.

Instances of breaches of the duties obviously include bribes and secret commissions, as they create clear conflicts between personal interests and those of the principal. It is irrelevant that a bribe did not affect the fiduciary’s conduct; motive is also immaterial. The bribe is recoverable by the principal, as it is a profit made during or arising from their fiduciary office.

Secret profits are also recoverable. They may take the form of an appointment to a new employment or consultancy role; acquisition of shares in a company; using trust property for their own benefit; receiving commission on contracts from his principal’s assets; taking advantage of corporate opportunities, amongst any other situation where the touchstone of the profit is the fiduciary connection to the principal.

An Example: Duties in Practice

By way of example, in partnerships, the duty is a reciprocal obligation between each of the partners. Thus, where a partner refuses to perform their duty towards their other partners, he loses his right to complain if they do not perform their duty to him. Retaliatory breaches of duty serve to prejudice the position of the otherwise innocent party. The duty applies to partnerships that are in the process of being dissolved, and to persons entering the partnership.

Peculiar to partnerships, partners will not expose the partnership to avoidable risks, account for profits made on behalf of the partnership or engage in criminal conduct.

Remedying Breaches

Where the fiduciary acts in breach of their duty, the principal may, subject to the rules of equity be entitled to rescission, an account for their profits, forfeiture of fees, equitable compensation for the loss caused by the breach of fiduciary duties and/or an injunction.

If a claimant principal seeks a proprietary remedy, a court of equity may be inclined to declare a constructive trust over the property or money illicitly obtained, such that the fiduciary holds the property on trust for their principal.

Breaches must be enforced within 6 years of the acts giving rise to the breach, unless the breach involves an element of dishonesty or fraud.