Breach of Fiduciary Duty | Carl's Mediation Blog

This year I have been involved in 3 cases involving allegations of breach of fiduciary duty (including self-dealing by executors and fraudulent calumny by a fiduciary who remained silent), and this subject features in my forthcoming book the ‘Contentious Trusts Handbook’ which I am writing for the Law Society.

I am also giving a talk about ‘Breach of fiduciary duties by trustees’ at Barlow Robbins Solicitors in Guildford on Tuesday 13 November 2018, and will address the recent judgment by Mr Justice Nugee in Glenn v Watson & Ors [2018] EWHC 2016 (Ch) (31 July 2018), in which the Judge observed,

‘I was referred by both [Counsel] to a number of authorities on the question whether a fiduciary duty is owed by one person to another. For the most part I did not detect any significant difference between them as to the law; the authorities referred to were rather put forward as illustrations, thought to be helpful to one side or the other, of the principles. In those circumstances, I do not intend to discuss the authorities at length, but will try and summarise what I understand the principles to be.

Those are I think as follows:

(1) There are a number of settled categories of fiduciary relationship. The paradigm example is that of trustee and beneficiary; other well-settled examples are solicitor and client, agent and principal, director and company (subject to the impact of the Companies Act 2006), and the relationship between partners: Snell’s Equity (33^rd edn, 2015) at §7‑004.

(2) Outside these settled categories, fiduciary duties may be held to arise if the particular facts warrant it. Identifying the circumstances that justify the imposition of fiduciary duties has been said to be difficult because the courts have consistently declined to provide a definition, or even a uniform description, of a fiduciary relationship: ibid at §7‑005.

(3) …

(4) …

(5) …

(6) What then are the particular factual circumstances that will lead to the Court finding that fiduciary duties are owed? This can best be elucidated by a number of citations:

(a) In his well-known classic judgment in Bristol & West Building Society v Mothew [1998] Ch 1 (“Mothew”) at 18A, Millett LJ said:

“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.”

(b) In Arklow Investments Ltd v Maclean [2000] 1 WLR 594 at 598G, Henry J, giving the judgment of the Privy Council, said:

“the concept encaptures a situation where one person is in a relationship with another which gives rise to a legitimate expectation, which equity will recognise, that the fiduciary will not utilise his or her position in such a way which is adverse to the interests of the principal.”

“Fiduciary duties are obligations imposed by law as a reaction to particular circumstances of responsibility assumed by one person in respect of the conduct of the affairs of another.”

(d) In another case involving Ross River Ltd, Ross River Ltd v Cambridge City Football Club [2007] EWHC 2115 (Ch) (cited by Lloyd LJ in Ross River at [56]-[58]), Briggs J referred at [198] to:

“well known badges or hallmarks of a fiduciary relationship, such as … [if] the plaintiff entrusts to the defendant a job to be performed, for instance, the negotiation of a contract on his behalf or for his benefit.”

(e) In Ross River at [51]-[52] Lloyd LJ cited with approval a passage from Bean, Fiduciary Obligations and Joint Ventures (1995) (itself referring to Finn, Fiduciary Obligations (1977)), which is too long to set out in full but the essence of which is as follows:

“[Fiduciary] office holders are entrusted with power to act for the benefit of another, but are not under the immediate control and supervision of the beneficiary…

Finn’s rationale is that the fiduciary who has freedom to determine how the interests of the beneficiary are to be served requires the supervision of equity. Indeed, it is the fiduciary’s autonomy in decision-making that requires equity’s supervision and this is required whether or not the autonomy is created under a contract between the parties or is inherent in the office.”

(7) Without in any way attempting to define the circumstances in which fiduciary duties arise (something the courts have avoided doing), it seems to me that what all these citations have in common is the idea that A will be held to owe fiduciary duties to B if B is reliant or dependent on A to exercise rights or powers, or otherwise act, for the benefit of B in circumstances where B can reasonably expect A to put B’s interests first. That may be because (as in the case of solicitor and client, or principal and agent) B has himself put his affairs in the hands of A; or it may be because (as in the case of trustee and beneficiary, or receivers, administrators and the like) A has agreed, and/or been appointed, to act for B’s benefit. In each case however the nature of the relationship is such that B can expect A in colloquial language to be on his side. That is why the distinguishing obligation of a fiduciary is the obligation of loyalty, the principal being entitled to “the single-minded loyalty of his fiduciary” (Mothew at 18A): someone who has agreed to act in the interests of another has to put the interests of that other first. That means he must not make use of his position to benefit himself, or anyone else, without B’s informed consent.

(8) …

(9) …

(10) Even if a party is held to have owed a fiduciary duty to another party, the nature of the fiduciary obligations owed is itself a fact-sensitive enquiry, to be determined by considering the particular relationship between the parties: Ross River at [64]. Thus for example in John v James the defendants were not disposed to dispute that the publisher owed a fiduciary obligation to account for royalties received, but it was disputed, and had to be decided, whether it owed a fiduciary obligation in respect of exploitation of the copyrights; in Ross River Morgan J had found that the defendants owed fiduciary duties in certain respects but not others, and the Court of Appeal found that the duties were more extensive.

Mr McCaughran had a further submission on this point, which is that a distinction can be seen in the authorities between cases in which the Court has held that a fiduciary duty arises out of an existing contractual relationship as an incident of the contract between the parties, and cases in which a party is held to owe a fiduciary duty to the other party in the negotiation of the contract. He relied on what Lord Walker had said in Cobbe v Yeoman’s Row Management Ltd [2008] UKHL 55 at [81] where he referred to:

“the general principle that the court should be very slow to introduce uncertainty into commercial transactions by over-ready use of equitable concepts such as fiduciary obligations and equitable estoppel. That applies to commercial negotiations whether or not they are expressly stated to be subject to contract.”

That was not in fact a case about fiduciary duties but about promissory estoppel, but I do not think that detracts from the force of what Lord Walker says, or from its good sense. Parties negotiating for a contract are normally entitled to act in their own interests and are not obliged to have regard to the interests of the other party, and it takes particular circumstances before fiduciary duties are to be imposed on them. Mr McCaughran said that in the case of negotiations for a joint venture such cases were very rare, the only example he had found being Murad. In Murad the claimants were two sisters who lived abroad and looked to the defendant, a Mr Al-Saraj, to make appropriate recommendations and assist them in connection with investments in England; they had no relevant experience, had no knowledge of the arrangements made by the defendant with third parties, and entrusted him with extensive discretion to act in matters affecting their interests. They were, in the words of Etherton J “wholly dependent” on him for his advice and recommendation, the negotiations with the vendors, and the instruction of professionals on their behalf, including in relation to the structure of the transaction and documentation; see at [328], [332].

I will add one further point here. The reference in the cases (such as John v James, Mothew and Longstaff v Birtles) to a relationship of “trust and confidence” does not mean that every relationship in which one party trusts the other is a fiduciary relationship. Contracting parties usually do trust each other – indeed they would be unlikely to do business with each other if they did not – but this does not mean that they owe each other the duties which are peculiar to fiduciaries. What I think is meant by a relationship of trust and confidence in this context is where one party places himself, or is placed, in the position where he trusts and confides that the other party will act exclusively in the first party’s interests. If the concept of trust and confidence is not confined in this way, it seems to me to cease to be of any utility in determining whether a fiduciary duty is owed: cf the recent decision of Leggatt LJ (at first instance) in Sheikh Al Nehayan v Kent [2018] EWHC 333 (Comm) (“Al Nehayan”) at [164]-[165]. This judgment, which contains a valuable analysis of the whole question of fiduciary duties (see at [153ff]), was not available at the time of the hearing, but it contains nothing with which I disagree, and on this particular point seems to me plainly right, and I have not thought it necessary to ask for the parties’ further submissions on it.’

In Sheikh Al Nehayan v Kent [2018] Lord Justice Leggatt stated,

‘As Lord Browne-Wilkinson cautioned in Henderson v Merrett Syndicates Ltd [1995] 2 AC 145 at 206:

“The phrase ‘fiduciary duties’ is a dangerous one, giving rise to a mistaken assumption that all fiduciaries owe the same duties in all circumstances. That is not the case.” … I bear in mind that it is exceptional for fiduciary duties to arise other than in certain settled categories of relationship. The paradigm case of a fiduciary relationship is of course that between a trustee and the beneficiary of a trust. Other settled categories of fiduciary include partners, company directors, solicitors and agents. Those categories do not include shareholders, either in relation to the company in which they own shares or to each other. While it is clear that fiduciary duties may exist outside such established categories, the task of determining when they do is not straightforward, as there is no generally accepted definition of a fiduciary. Indeed, it has been said that a fiduciary “is not subject to fiduciary obligations because he is a fiduciary; it is because he is subject to them that he is a fiduciary”: see Finn, Fiduciary Obligations (1977), p2, cited with approval by Millett LJ in Bristol and West Building Society v Mothew [1998] Ch 1, 18. If this is right, it simply begs the question of how to determine when a person is subject to fiduciary obligations if not by analysing the nature of their relationship with the person to whom the obligations are owed.

Despite saying in the Mothew case that a fiduciary is defined by the obligations to which he is subject and not the other way round, Millett LJ did give a general description of a fiduciary as “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”: see [1998] Ch 1, 18. This description has often since been cited with approval, including by the Supreme Court in FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45, [2015] AC 250, para 5. To similar effect, in another much quoted statement, Mason J in the High Court of Australia in Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41, 96-97, said:

“The critical feature of these relationships is that the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense. The relationship between the parties is therefore one which gives the fiduciary a special opportunity to exercise the power or discretion to the detriment of that other person who is accordingly vulnerable to abuse by the fiduciary of his position.”

Thus, fiduciary duties typically arise where one person undertakes and is entrusted with authority to manage the property or affairs of another and to make discretionary decisions on behalf of that person. (Such duties may also arise where the responsibility undertaken does not directly involve making decisions but involves the giving of advice in a context, for example that of solicitor and client, where the adviser has a substantial degree of power over the other party’s decision-making: see Lionel Smith, “Fiduciary relationships: ensuring the loyal exercise of judgement on behalf of another” (2014) 130 LQR 608.) The essential idea is that a person in such a position is not permitted to use their position for their own private advantage but is required to act unselfishly in what they perceive to be the best interests of their principal. This is the core of the obligation of loyalty which Millett LJ in the Mothew case [1998] Ch 1 at 18, described as the “distinguishing obligation of a fiduciary”. Loyalty in this context means being guided solely by the interests of the principal and not by any consideration of the fiduciary’s own interests. To promote such decision-making, fiduciaries are required to act openly and honestly and must not (without the informed consent of their principal) place themselves in a position where their own interests or their duty to another party may conflict with their duty to pursue the interests of their principal. They are also liable to account for any profit obtained for themselves as a result of their position …

But the existence of trust and confidence is not sufficient by itself to give rise to fiduciary obligations. In the first place, the question whether one party did in fact subjectively place trust in the other is not the test. As Dawson J said in the Hospital Products case (1984) 156 CLR 41 at 71:

“A fiduciary relationship does not arise where, because one of the parties to a relationship has wrongly assessed the trustworthiness of another, he has reposed confidence in him which he would not have done had he known the true intentions of that other. In ordinary business affairs persons who have dealings with one another frequently have confidence in each other and sometimes that confidence is misplaced. That does not make the relationship a fiduciary one. A fiduciary relationship exists where one party is in a position of reliance upon the other because of the nature of the relationship and not because of a wrong assessment of character or reliability.”

The inquiry, in other words, is an objective one involving the normative question whether the nature of the relationship is such that one party is entitled to repose trust and confidence in the other.

It is also necessary to identify more precisely the nature of the trust and confidence which is a feature of a fiduciary relationship. There plainly are many situations in which a party to a commercial transaction may legitimately repose trust and confidence in another without the other party owing any fiduciary duties. Thus, in Re Goldcorp Exchange Ltd (In Receivership) [1995] 1 AC 74, the Privy Council rejected an argument that a company was a fiduciary because it had agreed to keep gold bullion in safe custody for customers in circumstances where the customers were totally dependent on the company and trusted the company to do what it had promised without in practice there being any means of verification. Lord Mustill said (at 98):

“Many commercial relationships involve just such a reliance by one party on the other, and to introduce the whole new dimension into such relationships which would flow from giving them a fiduciary character would (as it seems to their Lordships) have adverse consequences …. It is possible without misuse of language to say that the customers put faith in the company, and that their trust has not been repaid. But the vocabulary is misleading; high expectations do not necessarily lead to equitable remedies.”

Mutual trust and confidence between parties dealing with one another can be of different kinds. At a basic level any contracting party is entitled to rely on the other party to perform its contractual obligations without having to monitor performance or even if (as in Re Goldcorp Exchange Ltd) it is unable to monitor performance. The kind of trust and confidence characteristic of a fiduciary relationship is different. As discussed above, it is founded on the acceptance by one party of a role which requires exercising judgment and making discretionary decisions on behalf of another and constitutes trust and confidence in the loyalty of the decision-maker to put aside his or her own interests and act solely in the interests of the principal.’