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Equity 6 Tracing
Fiduciary Liability and
FIDUCIARY LIABILITY; TRACING (breach of fiduciary duty) Abbreviations: C Claimant D Defendant T Trustee S Settlor B Beneficiary F Fiduciary P Principal PoA Power of Appointment CT Constructive Trust
TO FIDUCIARY LIABILITY
Why do we need fiduciary liability? Because there is a gap in protection of B, which is not covered by common law/equitable duties. There are 3 kinds of risks that B is exposed to:
1. "hand in the till" - risk that T will use trust funds to make profitable investment.
can get trust money back, but how about the profits?
2. "self-dealing transaction" - risk that T enters into contract, on behalf of trust, with himself.
might not be able to prove loss, but what if T made a killing? Unfair if B can't get back anything.
3. Risk that T takes opportunities, which trust may be interested in, for himself. What we are objecting to here is the element of disloyalty - hence, look to fiduciary duties. But must be careful not to over-regulate Ts' discretion, or it will be counter-productive. Different perspective: usually, for equitable remedies, we put the claimant back in the rightful position had duty not been breached. But for fiduciary remedies, we look at the fiduciary, and place him in the position he would have been in had he not breached the duty - must pay over profits too!
Issues: how far can we go in tracing money to secondary/subsequent profits? What if T exercised skill in making secondary profits? What if T goes bankrupt - should B have to share the traced trust assets with other creditors?
What is a fiduciary relationship?
Label of "fiduciary" isn't just randomly placed on persons - rather, look to the facts: characteristics of the relationship that he is in, and the context. Also, his consent to operating in that context
Bristol & West BS v Mothew, 1998: F is one who has undertaken to act for/on behalf of another ins circumstances giving rise to relationship of trust and confidence. Distinguishing feature is obligation of loyalty owed to principal!
[Finn]: F is one whose principal is entitled to expect will act in latter's interests/joint interests, to the exclusion of F's own interest. (higher standard than common law - key notion is that of self-denial)
[Worthington] thinks that fiduciary duties should be imposed only sparingly, when self-denial is necessary to achieve purpose of the relationship. Otherwise, should just rely on contractual/tortious/unjust enrichment obligations etc. Who is a fiduciary?
Equity started off with imposing F duties on trustees, then looked for analogous relationships.
Looking for relationship where A's has position and power in respect of B, and is in position to be capable of detrimentally affecting B, and B has reasonably induced expectation that A will act exclusively in B's interest (or in their joint interests).
Exception to the common law presumption of self-interest.
Settled categories: i. Trustees 1
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Fiduciary Liability andii.iii.
Lonrho plc v Fayed (No 2), 1992: dispute between parties over share control. Millet LJ held that if you void a voidable contract and treat it as if it never was, so that D is constructive trustee, you cannot impose retrospective fiduciary duties on D. This would be unfair, since D didn't even know he was a trustee (different from express trust)
Westdeutsche Landesbank Girozentrale v Islington LBC, 1996: similar situation but contract here was void not voidable, as LBC entered into it ultra vires (beyond capacity LBC not supposed to hold interest swap transaction). Void right from the beginning, hence whatever money LBC got was held on constructive trust.
HOL went further and held there was no trust. Lord Browne-Wilkinson held that D cannot owe F obligations unless he knows he is in such a position.
So express trustees = fiduciaries. But if it's constructive/resulting trust, be careful about asserting fiduciary duties. Agents
De Bussche v Alt, 1878: agents are fiduciaries! This was a case of self-dealing - agent sold ship to himself for X pounds, and then sold to another for X+Y to make profit.
Note that if principal allowed agent to mix principal's monies with agent's own, and submit monthly accounts to principal, then agent will only be personally liable in debt.
but if it had been agreed that agent was to hold money received on principal's behalf separately, then principal will have equitable proprietary interest Company directors
Regal (Hastings) Ltd v Gulliver, 1967: established that they are a category of fiduciaries.
Note company directors' fiduciary duties are, unusually, codified in statute today. Companies Act 2006 s170/8. Solicitors
Boardman v Phipps, 1967: affirmed that this is recognised category. Partners
Natural that partners owe F duties to each other, since they are all working tgt and have capacity to act detrimentally to others' economic interests. Hence, should subordinate own interests to those of the enterprise.
Aas v Benham, 1891: but there are limits! There must be some point beyond which F can act for himself/private autonomy still present.
firm of shipbrokers, and one of the partners got involved in another company which was building ships. Used info he got from first firm to build up the second company, which ended up being profitable. Other partners claimed account of profits.
Lindley LJ refused to give it! There is a limit to scope of fiduciary obligation: activities/business of the second firm here were outside scope of partnership.
Chan v Zacharia, 1984: partnership between 2 doctors of leased premises. Partnership dissolved and lease expired. One doctor, C, took up new lease for his own benefit.
court held that lease was asset of partnership, and C held it on constructive trust for the partnership. Even though partnership dissolved, not yet wound up - F obligations still continuing. Crown servants/employees: In the next 2 cases, court found that the employees were fiduciaries, but they were employees of the crown. Hence, NOT general rule that EEs owe F obligations.
Reading v AG, 1951: R worked in army, and drove truck while wearing uniform in Greece so that truck wasn't searched. This allowed him to transport contraband goods. Question was whether employer (the Crown) could confiscate profits - R acted criminally, but only in Greece. Also didn't act at expense of the Crown, however, the court was reluctant to allow R to get away.
HOL said that R was the equivalent of an agent of the Crown (official position) - allows master to rescind position and get back money, since anything R does is on behalf of master/principal. Hence R was accountable for profits.
basically using fiduciary obligations to deal with situation for which court couldn't find alternative remedy.
AG for HK v Reid, 1994: Privy Council decision! Crown prosecutor had been taking bribes, and used them to invest in property in NZ in name of his wife and solicitor. Could Crown get the money back?
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**Fiduciary Liability and
PC said yes! R had breached fiduciary obligation, made profit, and successfully invested profit - court made R disgorge profits, and allowed Crown a proprietary claim on profit + secondary investment.
The above categories are not closed! (English v Dedham Vale Properties, 1978) - can still argue for new category in problem qns. Are there any limits? See Worthington - thinks that we should create specialised rules rather than latch on to F concept, for new categories of relationships. Otherwise, high standards of self-denial are being imposed.
there are also fact-based fiduciaries, who become subject to F obligations not cos they fall within a category above, but cos imposition of duties is considered appropriate in the interests of justice. This is so where C is particularly vulnerable to being taken advantage of by D. Fiduciary relationships in the commercial context: usually where people seek fiduciary remedies. BUT as Lord Millet (writing extra-judicially) wrote, it is key not to impose F obligations on parties who are in a purely commercial r/s, dealing with each other at arms' length/looking after own interests.
must consider if other party is entitled to expect D to subordinate his own interests.
In re Goldcorp Exchange Ltd, 1995: NZ case where company holding investments guaranteed gold bars would be kept secure, and clients would get certificate of title. But didn't have enough gold for all investors, and didn't label them. Legal ownership was still in company, and company then went bankrupt.
court held clients didn't have proprietary interest - no promise that company would act in F capacity! Rather, just a contract, with no superadded F obligations. Commercial contract doesn't necessarily import F duties.
Comparing fiduciary relationships with other kinds of relationships which F might be in too... I. Relationships of influence
Another equitable obligation - but doesn't necessarily import F duties.
No need to know in detail. II. Relationships of confidentiality
Employees are usually under such duties, but once again, this doesn't necessarily import F duties too.
NATURE AND CONTENT OF FIDUCIARY DUTIES
Broad structure of analysis (from Boardman v Phipps, 1967): i. Establish that there is a fiduciary relationship ii. Determine what fiduciary duties are imposed on the agent, and what the scope/ambit of the duties are iii. Determine if agent has committed breach of duties by placing himself in conflict of duty and interest iv. Address question of accountability for profits made within scope/ambit of duty. Fiduciary duties are proscriptive, not prescriptive: usually, when law imposes duty, it is positive imposition telling person what to do. But F obligations tell F what not to do. Scope of F's duties will be affected by the terms of the contract between parties.
Duties of loyalty
Bristol & West BS v Mothew, 1998: "fiduciary duties" refer only to those duties specific to fiduciaries, and breach of which import different legal consequences from breach of other duties. Otherwise, there is no point in having specific category of "fiduciary".
Mothew: breach of fiduciary obligation connotes disloyalty or infidelity
not every breach of duty by a fiduciary will be a breach of fiduciary duty (Hilton v Barker Booth &
Eastwood, 2005) Two "themes" [Chan v Zacharia, 1984]: i. Where benefit/gain obtained in circumstances where there was (significant possibility of) conflict between his fiduciary duty and personal interest
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Fiduciary Liability and
Where benefit/gain was obtained by usage/reason of his fiduciary position, or opportunity/knowledge resulting from his position (unless you have principal's fully informed consent)
2 kinds of opportunity cases: opportunities that should have been pursued for principal instead, or opportunities D should not have taken at all!
AG for HK v Reid type case, where it's harder to say that there is conflict between duty and interest. (i) is more common! Note that the distinction matters as there may be differences in remedies. Boardman v Phipps, 1967: the fundamental rule of equity that fiduciary must not make profit out of his trust, is part of wider rule that trustee cannot place himself in position where duty and interest may conflict.
1) Conflict between duty and interest
SHIFT IN IDEOLOGY: In the past, Chancery courts didn't impose positive duty on T to avoid conflicts of interest and duty. Rather, they held that Ts were disabled from entering such transactions (negative approach) transaction voidable at Bs' option, but no compensatory remedy. (at most, any profits made by T were to be held on constructive trust for Bs).
- but recently, compensatory claims for breach of fiduciary duty are becoming possible in other jurisdictions. T's liability to account for unauthorised profits is increasingly seen as wrong-based remedy for breach of duty! Looking towards positive duty approach.
Aberdeen Railway v Blaikie Bros, 1854: no fiduciary is allowed to enter engagements in which he has a personal interest conflicting, or which could possibly conflict, with the interests of the principal . Strict!! Fairness of contract will be irrelevant, even if principal ends up being better off.
Here, contract of sale between BB (producer of metal chairs for railway carriages) and railway. Mr B was partner in BB, but also trustee for railway.
Didn't reveal his involvement in BB - no full disclosure or consent!
NB: Mr B owned most of the shares in railway - could have disclosed issue to himself and the other minority shareholders - question then of how sufficient consent has to be (is it enough that he, as majority, agrees?|)
Hence, self-dealing transaction, which was voidable regardless of whether it was good deal, at principal (railway)'s option. Railway's reason for voiding the transaction is irrelevant.
Hence for self-dealing, F doesn't have to be dealing with just himself. F could be dealing with a company in which he has an interest.
Chan v Zacharia, 1984: partnership between 2 doctors (see above). Z claimed C should have taken lease for benefit of partnership, not himself. Court agreed and imposed constructive trust.
Bray v Ford, 1896: rule on fiduciary is not based on principles of morality. No requirement of morally wrong behaviour - might even be acting in principal's benefit. But duties are still imposed strictly cos of risk of F being "swayed by interest rather than by duty"-
SCOPE OF FIDUCIARY DUTIES
New Zealand Netherlands Society "Orange" Inc v Kuys, 1973: K was employee/officer of society, but then ran a newspaper which published a defamatory article. Society claimed K was in breach of F duties.
Idea of fiduciary is a strict one, but precise scope depends on the actual r/s (fact-specific!)
K was not being paid for services to society. Still, it is possible for K to be in F position in relation to just some acts for the Society.
Clear that here, society had agreed it would support K's endeavours in the newspapers (buy certain number of copies). But beyond that, relationship was distinct - no further reliance on society. Hence, did not owe F obligations in relation to the latter endeavour.
No notion that K would be doing things for benefit of the society - commercial debt/risk was on K himself.
But in the context of trusts and trustees, the courts have taken a much stricter approach!
Longstaff v Birtles, 2002; solicitor asked ex-clients to invest in hotel business. Court found clear conflict of interest - should have asked them to seek independent legal advice.
far-reaching! Not that clear why solicitor should owe ex-clients strong duties, especially when transaction was not one on which solicitor was advising them!
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**Allied Business and Financial Consultants v Shanahan (also O'Donnell v Shanahan), 2009: Court of Appeal decision! Company with 3 directors, who were also the 3 shareholders. Provided clients with financial advice. 2 directors were running another property investment company, which took a property investment opportunity which came up in the course of discussions with a client. Third director got annoyed, and said acquisition should have been channeled through the firm of which he was part of. Court of Appeal decision:
Held that profits had to be handed over from the latter company to the former.
Said that the judgment in Aas v Benham (RE: acts outside scope of partnership) was of NO relevance, in determining the no-conflict rule for Ts and directors. In Aas, the contract of partnership circumscribed F duties. Here, no such limit.
Hence, in principle, any profits made will have to be handed over, cos knowledge of opportunity was acquired in the course of business in first company.
Critique: might be too tough? Should directors also enjoy a limit on the scope of their F duties, as partners do?
Where F is on both sides of the contract, conflict will be inevitable! Basically talking about a transaction between the trust and the trustees/fiduciaries.
Tito v Waddell (No. 2), 1977: [Megarry VC]: "the self-dealing rule is...that if a T sells the trust property to himself, the sale is voidable by any B ex debito justitae, however fair the transaction".
Ex parte James, 1803:
Such transactions will be in breach of the conflicts rule, regardless of whether transaction was fair, or whether F was acting bona fide etc. Hence, this is a general principle, rather than a consideration of the individual facts. Strict rule! Immediately void!
Solicitor here had wanted to resign to take up opportunity. Court did not allow this - risk that people would get lots of info in position as F, then resign and take up a benefit that they wouldn't be allowed to otherwise.
Cf Holder v Holder, 1968:
Testator died - one of executors had been renting farm that was part of testator's duties. Farms were to be sold under the will. Executor bought farm when it was put up for auction, having openly tried (but technically, failed) to renounce executorship.
Court restated principle that Ts are barred from purchasing trust property.
But if T does purchase trust property, transaction is voidable at the election of the principal.
Court emphasised that here, executor was not acting for the vendors - beneficiaries didn't look to him to protect interests, knowing he was a potential purchaser. The remaining executors were not influenced by him in connection to the sale.
Wright v Morgan, 1926:
Self-dealing transaction is still prohibited even where it is not T himself who fixes the price.
Here, X who had option to purchase land assigned it to Y, his brother, who was also another T. Y was not authorised to purchase the land on the terms of the trust.
But Y arranged for sale to himself, retired from his position as trustee, and purchased land at price fixed by valuers. Court held there was still potential for conflict because Y was one of those responsible for determining when land was to be offered by sale/determining terms of payment (even though he didn't get to determine price itself)
It is also prohibited for T to conduct sale by auction and then purchase the property at the auction, since T is in position to discourage bidders.
Strong rule - can't be circumvented by T selling to third party, to hold on trust for T.
BUT if there was no prior agreement and the sale was bona fides, then T not precluded from later buying property over from third party purchaser.
note if T retired from trust with intention of purchasing property, sale can still be avoided (Wright v Morgan). But not if at date of retirement, he had no intention to purchase (unless he made purchase using info acquired in his position as T)
SCOPE: T can't sell trust property to: 5
Equity 6 Tracing
Fiduciary Liability and--Company of which he is principal shareholder/managing director/any other principal officer
Partnership of which he is a member
NB: can sell to spouse - not prohibited by self-dealing rule. But must fulfil necessary conditions under the fair-dealing rule. REMEDIES for breach of self-dealing rule:
Bs can claim any profit made by T when T resells property
If T hasn't resold - can't insist on reconveyance/demand a resale.
Might opt for T to be allowed to retain property (if it fell in price)
Note all this rests on equitable power of B - might be lost through doctrine of laches. Court might also exercise inherent jurisdiction and approve the transaction (either authorising a future sale or ratifying a past sale.
Defence: if Bs are of full capacity and absolutely entitled, collectively, T can try to prove that they authorised the sale (if T made full disclosure and didn't induce sale). Authorisation might also come from the trust instrument (express/implied), or if made pursuant to contract or option which arose prior to the trusteeship.
Situation where transaction is between the fiduciary/trustees and beneficiaries (not the trust)
eg. B has equitable interest in shares, which T offers to buy it.
Tito v Waddell: [Megarry VC] "the fair-dealing rule is...that if a T purchases the beneficial interest of any of his Bs, the transaction is not voidable ex debito justitiae, but can be set aside by B unless T can show all the following: (1) He has taken no advantage of his position (2) He has made full disclosure to B, and (3) The transaction is fair and honest"
Fair-dealing rule differs from self-dealing rule because B has asset which he can technically sell to anyone!
Dougan v Macpherson, 1902: claimant was both trustee and beneficiary under parents' marriage settlement. Wanted to purchase brother's interest, brother being B but not T. Offered brother price less than true value of interest, hence made profit. Brother's trustee in bankruptcy then sought to recover difference.
court held conditions in Tito were not complied with!
2) Conflict between duty and duty
Where fiduciary acts for 2 different principals
Ex parte Bennett, 1805: just as T can't buy for own benefit, he can't buy for another's benefit by misusing info obtained from his position as a fiduciary either.
How about solicitors acting for both sides of a single transaction?
Clark Boyce v Mouat, 1994: there is no general rule of law prohibiting it. Hence, possible for solicitor to do so if he has obtained informed consent of both parties, in giving consent, must know there is conflict. They must also be aware that solicitor might thus be unable to disclose full knowledge to either party, or give full advice which conflicts with the interest of the other. if parties agree, solicitor can thus do so!3) Profits made by reason of position as fiduciary
Keech v Sandford, 1726:
T held lease on trust for benefit of an infant. Lessor refused to renew lease to infant, hence T then took option of renewal for himself. Sued by infant.
Court held against T!
Might seem harsh, but it is important that the rule against such profits be strictly construed and not relaxed! Hence, even though infant B couldn't have gotten the lease in the first place, T is still liable to account and hand over benefit to B.
The only way to get round this is by obtaining B's fully informed consent. 6
Equity 6 Fiduciary Liability and Tracing
Rationale for strictness of the rule: A. F must be given incentive to resist temptation of misconduct
But Smith thinks that deterrence reasoning should only have a place in public law. Private law should not look beyond the relationship between C and D.
Langbein on the other hand thinks that rule can have over-deterrent effect, especially if F was acting in P's best interests. B. P would face insurmountable evidential difficulties if he has to prove that F acted in bad faith.
Langbein thinks this is unconvincing, since fusion of courts and reform of civil procedure have left courts better equipped to deal with this.
Courts are aware of the harshness of the rule, and have sought to mitigate it by granting remuneration (see below) - but note Lord Goff's limitation in Guinness!
Protheroe v Protheroe, 1968: applying the Keech rule in the context of purchase of reversion.
CAUSATION: breach has to be one cause of the gain, but no need to be only/predominant cause!
- F can't escape liability just by showing that he would have made gain anyway even without breaching duty. Rather, must show that breach had no causative effect whatsoever - that gain was only due to legit activities.
Use of property (hand in the till sort of examples):
Brown v IRC, 1965: F cannot gain/receive any financial benefit from use of trust property, unless he can show authority to do so. Any benefit will be held on constructive trust for B.
Exploitation of opportunities which T ought to be pursuing for B - 3 key cases
Regal (Hastings) Ltd v Gulliver, reported 1967:FACTS
RH was a company which owned cinemas in Hastings. Directors wanted to establish a monopoly, then sell it for a profit. They set up a new company (Hastings Amalgamated Cinemas) to make acquisitions - meant to be wholly owned subsidiary.
But RH could only afford to put in PS2k. Cinema owners were unwilling to sell unless subsidiary had PS5k. Directors decided to buy the remaining PS3k worth of shares, with 4 taking PS500 each, and one selling to third party, and the solicitor taking the last PS500.
After the cinemas were sold, shares of RH were sold to third parties (new shareholders) for huge profit. New shareholders instated new directors, who turned around and said old directors had breached fiduciary duties owed to the subsidiary.
So company sued old directors! Reason there was even litigation was cos of change in management of company.HOL JUDGMENT
Although directors acted bona fides and intended to benefit RH (principal), they still had to account for profits. This was because standing in F relationship, they had by reason and in the course of that F relationship, made a profit.
Liability for account does NOT depend on fraud/absence of bona fides/whether company profited/whether Fs were obliged by virtue of fiduciary duty to get profit for company/whether principal suffered any loss or not. Liability arises from mere fact of profit being made in stated circumstances - Keech v Sandford illustrates strictness of the rule.
Directors should have protected themselves by getting fully informed consent of principal
- getting shareholders of RH to agree (in fact, they held most of the shares already, hence this would have been easy).
NB: 5th director didn't make profit, hence not liable. Solicitor also not liable, since he bought shares under direction of the company (the company being principal of the fiduciary relationship he was in).
Query how far should remedies go to protect the fiduciary relationship? Third party purchasers got back part of the price they paid to buy the subsidiary ... unfair?Boardman v Phipps, 1967: FACTS
There was trust which owned company shares. Boardman was solicitor of the trust, and Tom Phipps was a trustee-beneficiary. John Phipps, claimant, was another beneficiary. 7
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