EQUITY AND TRUSTS

1. EQUITY AND TRUSTS TRUSTEES 3 FIDUCIARY DUTIES

2. Trustees as fiduciaries • The nature of the trustee’s duty is fiduciary • Trusteeship one of number of fiduciary relationships • Trustees subject to Fiduciary duties.

3. Who is a fiduciary? • Classic statement is from Finn: “someone who undertakes to act for or on behalf of another in some particular matter or matters”. Finn, Fiduciary Obligations (1977). • Bristol and West Building Society v Mothew [1996] Ch. 1, per Millett LJ, “…in a particular matter in circumstances which give rise to a relationship of trust and confidence.”

4. Fiduciary Duties & Regulatory Rules L.C. 236, (1995) “ …a fiduciary relationship is one in which a person undertakes to act on behalf of or for the benefit of another, often as an intermediary with a discretion or power which affects the interests of the other who depends on the fiduciary for information and advice.” (para. 1.3).

5. Who is a fiduciary? Another definition comes from Professor Hayton: “The relationship of trustee and beneficiary is the original fiduciary relationship and provides the guidelines for determining when other persons are in a fiduciary relationship to each other by virtue of the position and power of one in respect of the other and the latter’s reasonably induced expectation that the former will act exclusively in the interests of the latter...

6. continued … Trustees are persons who are under a duty to act exclusively in the interests of the trust beneficiaries who are vulnerable if the trustees seek to abuse their position, because trustees have rights and powers that are capable of being exercised so as detrimentally to affect the beneficiaries. Thus, if such aspects are present in other relationships these are treated as fiduciary relationships as a matter of law…”

7. Who is a fiduciary? • Fiduciaries are those able unilaterally to alter either practically or legally the position of their principal/beneficiary • Key point – the power to affect the practical or legal interests of another.

8. Examples of fiduciary relationships First: status based relationships I.e. those that arise as a matter of law from status: • Personal representatives and beneficiaries of deceased’s estate (Re Diplock [1948] Ch 465) • Solicitor and client (Re Hallett’s Estate (1880)13 Ch D 696 CA) • Partner and partner (Featherstonhaugh v Fenwick (1810) ) • Principal and agent (De Bussche v Alt (1878) 8 Ch D 286) • Employment relationship – can be fiduciary if more than contractual (AG v Blake [2000] 4 All Er 385) • Commercial relationship – ordinary commercial relational not fiduciary (Re Goldcorp Exchange Ltd [1995] 1 AC 74).

9. Examples of relationships Concept has been extended to cover situations outside the normal scope of fiduciary relations i.e. “fact based fiduciaries” imposed in interests of justice because of claimant’s particular vulnerability of claimant to defendant upon whom he is relying. See Reading v AG [1951] AC 507 HL.

10. Who is a fiduciary? • Is this class of relationships a closed category? • It is undefined • Fiduciary relations can easily be found to suit the circumstances/desired remedy.

11. Who is a fiduciary? “I do not think that the categories of fiduciary relationships … should be regarded as falling into a limited number of straight-jackets or as being necessarily closed. They are, after all, no more than formulae for equitable relief.” per Slade J, English Dedham Vale Properties Ltd [1978] 1 WLR 93 at 110. • Class is not yet closed. Problem: what is the extent of the rule implying fiduciary relations?

12. What are the fiduciary obligations? For useful summary see: Bristol & West BS v Mothew, per Millett LJ: • The distinguishing obligation of the fiduciary is the obligation of loyalty. The principal is entitled to the single minded loyalty of his fiduciary this core liability has several facets: • Must act in good faith • must not profit from the trust • Must not place self in position where duty and interest no conflict • May not act for own/third party benefit without informed consent of principal • Must prove any transaction with principal was fair + full disclosure • “Breach of fiduciary obligation connotes disloyalty or infidelity.”

13. Self Dealing Rule • Trustees must not be purchasers unless authorised. Why? Because trustee is then in conflict with beneficiaries interests. • exceptions to the rule: (i) trust may authorise a purchase (ii) Court can authorise (iii) Bens can agree but must be sui juris • Effect of rule – transaction is voidable at instance of beneficiary.

14. Fair Dealing Rule Refers to trustee purchasing beneficiary’s interest rather than the trust property • Less strict • Justification more like real sale • Ay purchase provided can show transaction has to be fair – i.e. full value and beneficiary had all information prior to the sale • Trustee cannot circumvent rule by dealing through a third party?

15. Incidental profits Most significant fiduciary obligation is not to profit from the trust • Bray v Ford [1896] per Lord Hershell: “it is an inflexible rule of equity that a person in a fiduciary potion is not … entitled to make a profit. He is not allowed to put himself in a position where his interest and duty conflict.” • Rationale – conflict between duty of loyalty and self interest. Trustees cannot keep profits but must pay over to principal. Only where profit is authorised fully informed prior consent or ratification of principal can profit be kept. • Compare authorised profits.

16. Rule on not profiting is very strict Even where no real prospect of conflict rule is designed to prevent even v remotest possibility of conflict • Irrelevant: that principal suffers no loss / or even a gain i that profit was gained using fiduciary’s own assets/skills/own risk That fiduciary acted in good faith • All that needs to be shown is a link between profit and position • Is the duty not to profit an application of the no conflict rule? See Bristol and West BS v Mothew (supra). So – two separate principles, arguably this means not necessary to go further in such cases to show conflict of interest.

17. Rule extends to all fiduciaries NB - No profit without authority extends to all fiduciaries. Although we are concerned with trustees many of the examples we will look at are of e.g. company directors. But these are authoritative on the position of trustees.

18. Trustees Rule derives from continuous application of Keech v Sanford (1726) 2 Eq Cas Abr 741. Case concerned a lease of market held on trust for infant beneficiary. The trustee tried unsuccessfully to obtain a renewal of the lease for the trust and then took lease in his own right. Court: Trustee held lease on trust for the minor beneficiary.

19. Trustees Trustees as using voting rights in company to obtain appointment as directors. See Re Macadam [1946] Ch 73 where trustees once appointed received fees. Trustees held liable to account for the remuneration Per Cohen J. the question is “Did the trustee acquire the position in which he drew the remuneration by virtue of his position as trustee?”

20. Trustees as company directors Remuneration will not be accountable to trust where trustee has already become director before becoming trustee Re Dover Coalfield Extension Ltd. [1908] 1 Ch 65 • Or where trustee became director independently of votes of shares of trust Re Gee [1948] Ch 284 • Or as in Re Lewis [1910] 103 LT 495 by independent bargain.

21. Other profits Trustees can receive money in various ways: • Fees for introducing business • Bribes/commissions as inducement or reward Regardless of method, any payments received as a result of the trustee’s position belong to the trust

22. Other fiduciaries • Bray v Ford (supra) no profit rule applies to any fiduciary • Company directors – cannot profit from their office without authority e.g. articles of association / consent of shareholders.

23. Company directors Leading case HL in Regal Hastings v Gulliver [1967] 2 AC 134: R. could only purchase £2000 worth of shares in a subsidiary company set up for investment purposes. Directors agreed to purchase the remainder. Profit made when business transferred to new owners. Directors having acquired the shares by virtue of their fiduciary position were held liable to account for the profits made out of them. Lord Russell: “ The rule of equity which insists on those, who by use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud or absence of bona fides; or upon such questions or considerations as whether the profit would or should otherwise have gone to the plaintiff, or whether the profiteer was under a duty to obtain the source of the profit for the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or benefited by his action. The liability arises from the mere fact of a profit having, in the stated circumstances, been made.”

24. Regal Hastings v Gulliver Points to note from the case: • Irrelevant that the directors had acted in good faith but as Russell made clear – liability to account does not depend on fraud or absence of good faith • The company lost nothing (indeed it had gained from the directors’ actions) – this was irrelevant. New owners obtained a windfall as company was cheaper. • Liability arises simply from link between position and profit. It made no difference that the company could not take up the opportunity itself for lack of finance • See no conflict rule (Bray v Ford (supra)) duty and interest must not conflict • A conflict apparent? Possibly not since company could not purchase shares themselves. But decision that led to profit was made by directors.

25. Company Directors Clearer case is that of Guinness v Saunders [1990] 2 AC 663 • Ward (a director) was paid £5.2 million for assisting in the takeover of Distillers by Guinness. Decision was made by Saunders but not the board. Wards fee dependant on the amount of the takeover bid. Guinness claimed repayment of this fee • HL held Ward not entitled because contract with directors void – should have reached agreement with board. Ward = constructive trustee of the money • Clear case of conflict – duty to negotiate good price in conflict with his interest in enhancing his own fee.

26. Industrial Development Consultants Ltd V Cooley [1972] 1 WLR 443 • D = director of the claimant company that provided industrial design services, attempting to obtain a contract with the Eastern Gas Board. But EGB was not prepared to deal with the company. Afterwards D was offered the contract in his private capacity. He did so by falsely claiming that he was ill. Then accepted offer from EGB. D held liable to account for the profit. • At time he obtained the contract he was director of company and therefore under fiduciary duty to pass on information in this capacity. • NB The company lost nothing; EGB would not deal with the company and indeed it gained only as a result of D’s breach of fiduciary duty.

27. Queensland Mines Ltd v Hudson (1978) 18 ALR 1 • Company had obtained mining licences but were unable to proceed. • D resigned as managing director and then developed the mines with knowledge of the board successfully developed the mines; • Board then claimed the profit • Privy Council held that opportunity came to D as director and therefore liable in principle to account for the profit (Regal Hastings) However, consent of Board was sufficient consent • Consistent with Regal Hastings – board took part in the transaction but still liable to account? • Difficulty – only shareholders and not board could consent? But both shareholders were on board.

28. Crown Dilmun & Or v Sutton & Or [2004] AER (D) 222 Jan. • Director rejected an investment opportunity on the company’s behalf • Subsequently took the opportunity for himself • D in breach of his fiduciary duty • Liable to account

29. The honest fiduciary Honest fiduciaries maybe awarded allowance for the work involved Contrast Boardman v Phipps (See next section) and Guinness v Saunders

30. Boardman & Or v Phipps [1967] 2 AC 46 One of the most important cases: • Phipps trust had minority shareholding in under performing company. Boardman and a trustee suggest acquiring majority shareholding. Suggested to other trustees but they said trust had no powers to purchase more shares. B & T decided to acquire shares themselves. Negotiations with the company where B said he represented the trust /attended AGM and obtained information on share prices/value of company’s assets. B and T purchased shares and obtained control. Re-organised company; trust, B and T made profit of £75k. • J Phipps –a beneficiary claimed B and T = constructive trustees.

31. Boardman & Or v Phipps By 3 to 2 majority HL held information came through B acting on behalf of trustees: • “…as both the information... and opportunity for [the shares] came to B and P as a result of B acting or purporting to act on behalf of the trustees…, B and P were constructive trustees…of the shares in the company for the respondent and were liable to account to him for the profit thereon accordingly.”

32. Boardman v Phipps It made no difference that: • Both acted honestly throughout • The trust had lost nothing • The trust was unable or unwilling to make the purchases.

33. Boardman v Phipps Some confusion over the ratio of the case because of different judgments • Lords Hodson and Guest thought information was trust property. Having used trust property they were liable. With Lord Cohen they thought B’s interests and duties might have conflicted. As solicitor to trust not able to give impartial advice e.g. when they might have obtained wider investment powers to achieve the same result for themselves. • Lord Upjohn considered there was no conflict. • Outcome for Boardman – had to account but awarded payment. • A similar allowance was not paid to Ward in Guinness v Saunders (supra). HL said inappropriate because agreed fee placed him in conflict with his duty.

34. Other fiduciaries • Employees can be fiduciaries • See Reading v AG [1951] army sergeant benefited from use of uniform • More significant: AG for Hong Kong v Reid [1994]. Public prosecutor took bribes to buy houses abroad. Profits from houses were traceable proceeds and held on trust for Crown. Lister v Stubbs (1890) had established only liable to account for bribe received so only original sum payable back. But AG HK v Reid held Lister wrongly decided. “If a fiduciary acting honestly in good faith and making a profit which his principal could not make for himself becomes a trustee of that profit, then a fiduciary acting dishonestly who accepts a bribe must also be a constructive trustee.”

35. Is AG for HK v Reid to be followed? Before Reid inconsistency in the treatment of bribes and other profits was unsupportable. Personal liability to account only; no constructive trust for the principal. Courts seemingly treated dishonest fiduciaries more favourably than honest. See Boardman. Reid (as PC case) is only persuasive not binding. In AG v Blake [1997] Lister was said to be binding. As a precedent is questionable. In recent case: Daraydan Holdings Ltd & Ors v Solland Int & Ors [2004] EWHC 622 (Ch.) Reid to be followed - policy reasons – fiduciaries should not gain in this way. H/L affirmation?

36. Remedies • What is the remedy for fiduciary who has obtained an unauthorised profit? • Is it personal (liability to account) or proprietary (CT) • Important where F is insolvent or where acquired assets have increased in value. CT here would favour principal. • Courts inconsistent in approach (e.g. bribes). Sometimes awarding an account of profit, on others a CT. • See effect of AG for HK v Reid (supra) where bribe was held on CT.

37. The question of remuneration • General principle: no profit from position. Should a trustee benefit then is liable to account • Follows from rule that trustees receive no remuneration – gratuitous office. Two reasons for this rule; trustee must not benefit from trust property + conflict of interest and duty • However, there are specific instances where equity will authorise payment, the most common being where the trust instrument contains an express charging clause (see egg. Trust Deed clause 11 and other fiduciaries by e.g. contract/articles of the company/partnership deed etc.) • Further, the advent of the TA 2000 has seen a change in the law’s stance.

38. Authorised remuneration • In addition to TA 2000 some other statutes authorise fees usual;y where statutory trustee appointed e.g. Public Trustee Act 1906, s.9 • Court has inherent jurisdiction to authorise remuneration both retrospective/future remuneration and to increase payment beyond that in trust instrument see Re Duke of Norfolk’s ST [1982] • Power also applied to fiduciaries in breach of fiduciary duty see Boardman v Phipps (supra) and in O’Sullivan v Management Agency Ltd. [1985] a case of undue influence.

39. Authorised remuneration • Trustees can obtain agreement of the beneficiaries to pay. Bens must be sui juris and there is always possibility of undue influence. • Trustee can also be paid under the rule in Cradock v Piper (1850) for work done by solicitor-trustee in litigious matter.

40. Trustee Act 2000 • Trustee has right to reimbursement of expenses under TA 2000, s31 • Powers of court to reward remuneration, and of bens to agree it still apply. But will be rarely used in light of TA 2000. Rule in Craddock (supra) now obsolete.

41. Remuneration under the Trustee Act 2000 • TA 2000 has changed position: • Where there is an express professional charging clause within the trust instrument, the Act provides for new rules of construction of the clause: • Trustee can charge for services which lay trustee could provide (s.28(2)) - express clause necessary previously • Remuneration is not a gift for the purposes of s.15 Wills Act 1837 (s.28(4)) This means that a trustee may witness the will (s.28(4)) without the risk of invalidating the benefit he/she receives under the will. Such a provision is particularly useful to solicitors who may have drawn up the will and are appointed as trustees with the benefit of a charging clause.

42. Remuneration under the Trustee Act 2000 Under s29(2) a trustee is entitled to “reasonable remuneration” for any services that he provides to the trust.

43. Remuneration under the Trustee Act 2000 • Ss 3 – what is “reasonable remuneration” : such remuneration that is reasonable in the circumstances for the provision of those services • The right to remuneration applies only to a trust corporation or to a trustee who acts in a professional capacity (s29(2)) • s28(5) defines “professional capacity” - profession or business which consists of/includes the administration/management of trusts.

44. Remuneration under the Trustee Act 2000 • In the case of a professional trustee (defined S28(5)) trustee must obtain agreement in writing from each other trustee (subs 2) • The right to remuneration does not apply to a sole trustee, nor to charity trustees see ss.30 s.29(1) & (2) • Section 29 thus provides a statutory default power of remuneration and reverses the common law rule against remuneration.

45. Section 29 Trustee Act 2000 • Provides statutory default power of remuneration • Section therefore reverses the rule against remuneration see Robinson v Pett (supra).

46. Fiduciary duties of trustees (conclusion) We have considered the following: • Who is a fiduciary? • What are the characteristics of a fiduciary relationship making it fiduciary e.g. company directors, principals and agents. • Importance of fiduciary obligations see Bristol and West BS v Mothew (supra): core obligation of loyalty being developed into particular duties – in particular duty not to profit and duty not to place in conflict with the duty • Rationale: designed to deter fiduciaries but all that all that is required to be liable is to profit whether or not a conflict exists • Also the issue of trustees’ remuneration -when they are eligible for payment for work for the trust.