Trusts and Duties:
Trustees’ duties are an important element of a trust.
‘A trust is an equitable fiduciary obligation, binding a person (called a trustee) to deal with property (called trust property) owned and controlled by him . . . for the benefit of persons (called beneficiaries . . .) . . . any one of whom may enforce the obligation.’ [1]
Different duties arise from different sources (the settlor’s intentions, statute, case law etc.). What duties apply will be different depending on the trust.
Example Duties:
Duty to Follow the Terms of the Trust
Duty of Care and Skill
Fiduciary Duties
Duties to Provide Certain Information to Beneficiaries
Duty to Consider All and Only Relevant Considerations
Idea of the ‘Irreducible Core’:
The irreducible core is the minimum obligations placed upon all trustees.
‘[T]here is an irreducible core of obligations owed by the trustees to the beneficiaries and enforceable by them which is fundamental to the concept of a trust. If the beneficiaries have no rights enforceable against the trustees there are no trusts.’ [2]
Arguably, this minimum threshold should be subject to whether the trustee is aware of the trust. [3] In express trusts, they will always be aware, but in implied trusts a trustee may not be aware of their position and responsibilities.
The trustee is obliged to hold and apply the property for the benefit of the beneficiary, not their own benefit. This is primarily encapsulated within the fiduciary duties and giving effect to Saunders v Vautier rights.
‘The duty of the trustee to perform the trusts honestly and in good faith for the benefit of the beneficiary is the minimum necessary to give substance to the trusts’ [4]
Fiduciary Duties:
Fiduciary duties can be owed in many circumstances (not necessarily limited to trusts).
Examples of General Fiduciary Relationships:
Business / commercial partners.
Agent-principal.
Bailee-bailor.
Company-director.
Solicitor-client.
Employee-employer.
Examples of (Though not Necessarily Fiduciary) Duties within Companies: [5]
To act within powers.
To promote success of company.
To exercise independent judgment.
To exercise reasonable care, skill and diligence.
To avoid conflicts of interest.
Not to accept benefits from third parties.
To declare interest in proposed transaction.
Breaches of fiduciary duty carry strict liability.
In Keech v Sandford, the trustee held a lease on trust for an underage beneficiary. The trustee goes to the landlord to renew the lease. The landlord refuses to renew the lease in the name of the beneficiary since they were a minor. The trustee renews the lease in their own name. The beneficiary objects, wanting the trustee to assign the lease to them and give up profits made in the meantime.
The court held that the trustee held the new lease on constructive trust for the beneficiary. This occurred even though the trustee was acting innocently / without fraud.
‘This may seem hard, that the trustee is the only person of all mankind who might not have the lease: but it is very proper that rule should be strictly pursued, and not in the least relaxed; for it is very obvious what would be the consequence of letting trustees have the lease, on refusal to renew to cestui que use.’
Justification:
Strict liability here is based on the fear that the trustee may be incentivised not to act for the benefit of the beneficiary if the liability threshold is any lower. By stripping the fiduciary of all their profits, their considerations are exclusively on acting for the beneficiaries’ best interests.
The core idea is that the fiduciary (trustee) is under a duty to act in what they honestly believe to be in the principal’s (beneficiary) best interests (good faith).
This is a subjective question based on the trustees’ motives; the outcome is less relevant.
Defining ‘Fiduciary Duties’: [6]
Fiduciary duties are obligations that can only be held by fiduciaries and when breach of these obligations results in legal consequences.
‘The expression "fiduciary duty" is properly confined to those duties which are peculiar to fiduciaries and the breach of which attracts legal consequences differing from those consequents upon the breach of other duties. Unless the expression is so limited it is lacking in practical utility. In this sense it is obvious that not every breach of duty by a fiduciary is a breach of fiduciary duty.’
These arise in relationships of trust and confidence where loyalty is expected.
‘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.’
‘The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary…’
Conflicts of Interests and Unauthorised Profits:
The trustee is also under a duty to avoid possible conflicts of interests. This includes putting themselves in a position where their duty to act in the beneficiaries’ best interests may come in conflict with their own (or with some other duty owed to a third party).
EG: selling property to the trustee (a seller will always seek the highest price while the buyer would seek the lowest price – the trustee would be both seller and buyer). [7]
EG: being a director of two companies that would both seek to purchase the same property (performing duty to one company will mean breaching the duty to the other company).
A fiduciary working for 2 conflicting principals will not breach their duty of undivided loyalty if both principals have provided informed consent, the fiduciary is acting in good faith, and does not allow their relationship with one prejudice the other.
The trustee is under a duty to not make a profit from their position as trustee. If they do and the settlor or beneficiaries have not authorised this, they must forfeit it.
In Keech v Sandford, (see above) the trustee made an unauthorised profit because they learned of the lease by virtue of their position as trustee.
In Regal v Gulliver, R wanted to set up a subsidiary company. This subsidiary needed capital, which was to be provided by R’s directors buying shares in it. The shares rose in value and were sold for large profits.
The HL held this to be breach of fiduciary duty because the directors made their profits by virtue of their directorship. There is no defence to say that they would’ve profited even if there had been no breach.
The case illustrates that the fiduciary duty can be breached even if the fiduciary is acting in good faith in profit cases.
In Boardman v Phipps, a family trust was created for the benefit of the P family. B was the family solicitor and advised the trustee occasionally. One of the trust assets was company shares in a company that was losing value. The trustees, advised by B, entered negotiations to buy more shares in the company to take over the company.
The negotiations broke down and B and TP (part of the P family / a beneficiary) personally bought shares in the company. 2 of the 3 trustees consented to this. They made improvements and the shares (including those part of the trust asset) rose in value. One of the beneficiaries argued that all the shares were held on trust for the beneficiaries.
The HL (3:2) held that there was a breach of fiduciary duty. Upholding the claim, they stated that a portion of the profits had to be forfeited, making an allowance as renumeration for the work B and TP had put in.
Majority: Justified on the ground that the profits came from information that only a trustee would have (which is part of the trust property too) and the principals (beneficiaries) had not given informed consent for profits to be made by the fiduciaries.
Minority / Dissent: there was nothing wrong since the information wasn’t property and the trustees were opposed to purchasing further shares. Therefore, there wasn’t a conflict of interest.
Judgement criticised and many favour the minority opinion.
Remedies:
Personal Remedies (Defendant has to Pay Sum of Money):
Equitable compensation (suing for the beneficiary’s loss).
Accounts of profit (suing for the trustee’s gain, not the beneficiary’s loss).
In Murad v Al-Saraj, M1 and M2 (sisters) enter into a joint venture with A to buy a hotel. A does not tell them that he is paying his share of the purchase price using setoffs against what the seller owes him, and got a commission for arranging the sale. When the venture fails, the sisters sue for an account of all profits that A made; A contended that he should only have to pay for profits made from gain.
The CA rejected A’s argument and awarded the account of all profits (normal remedy). Allowance for services and expenditures may be granted.
Proprietary Remedies:
Rescission (unwinding transaction entered into by the trustee).
Constructive Trusts.
In FHR v Cedar Capital, C provided consultancy services. C acted as FHR’s agent to purchase hotel business from MC. MC was under an agreement to pay C €10m following a successful sale. Following FHR purchasing the hotel, MC paid C the €10m. FHR sought to recover this for breach of their fiduciary duty.
The SC held that C held the €10m commission on constructive trust for FHR, as is the case with any bribe or secret commission.
Different Accounts of Fiduciary Duties – Answering Why and When they Arise:
Edelman argues these fiduciary duties aren’t very different from any other type of voluntary legal obligation. In this sense, they don’t differ much from contractual duties.
Conaglen proposes that fiduciary duties are special because they are underpinned by the idea of deterrence, thus rejecting Edelman’s argument. [8]
Smith argues the key idea is that fiduciary duties arise from certain types of relationships. The reason the duties arise is by virtue of the relationship itself. [9]
Resources:
References:
[1] Hayton, P. Matthews, and C. Mitchell, Underhill and Hayton: Law Relating to Trusts and Trustees, 19th ed (LexisNexis 2016), [1.1] (1) [2] Armitage v Nurse [1997] EWCA Civ 1279 (Millett LJ) [3] Chambers, ‘Resulting trusts in Canada’ (2000) 38 Alberta Law Review 378 [4] Armitage v Nurse [1997] EWCA Civ 1279 (Millett LJ in obiter dicta) [5] Companies Act 2006, s171-177 [6] Bristol and West Building Society v Mothew [1996] EWCA Civ 533 (Millett LJ) [7] EG: Ex parte James (1803) 8 Ves 337; Tito v Waddell (No. 2) [1977] Ch 106, 225 [8] Conaglen, ‘The nature and function of fiduciary loyalty’ (2005) 121 LQR 452 [9] Smith, ‘Fiduciary relationships: ensuring the loyal exercise of judgement on behalf of another’ (2014) 130 LQR 608
Cases Mentioned:
Keech v Sandford [1726] EWHC J76
Regal (Hastings) Ltd v Gulliver [1942] UKHL 1
Boardman v Phipps [1966] UKHL 2
Murad v Al-Saraj [2005] EWCA Civ 959
FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45
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