Fiduciary Duties - An In-depth Guide

In this guide, we look at fiduciary duties. When do they arise? What are the consequences of a breach? And what is their relevance in the context of civil fraud?

Who owes fiduciary duties to whom?

A fiduciary relationship is one which involves a level of trust. One person owes certain duties to the other, which attract legal consequences if they are breached.

The following are examples of relationships in which one party owes fiduciary duties to the other:

• Trustee to the beneficiary of a trust.
• Director to his / her company.
• Agent to his / her principal.
• Partner to fellow partners.
• Solicitor to his / her client.

However, a fiduciary relationship can be found to arise outside of these categories. The distinguishing feature of a fiduciary relationship is that a fiduciary is expected to prefer the interests of the principal to his or her own interests, and the fiduciary cannot benefit from the relationship without the principal’s consent.^[1]

What are the duties of a fiduciary?

The leading case on fiduciary law is Bristol & West Building Society v Mothew [1998] Ch. 1.

From Millet LJ’s analysis emerge three core duties (i) to avoid conflicts of interest, (ii) not to profit from the fiduciary office, and (iii) to show undivided loyalty to the principal.

The duties are proscriptive, rather than prescriptive. In other words, their objective is to prohibit certain conduct. Given the position of trust that the fiduciary occupies, the duties act as a disincentive from misusing the position to the fiduciary’s own advantage.

But these are broad categories and not an exhaustive list of what may or may not be a fiduciary duty. In practice, what falls within a fiduciary’s duties is flexible and fact-sensitive.^[2]

Self-dealing

One of the sub-rules of the duty of no conflict is the real against self-dealing. This is one of the breaches that often arises in the context of civil fraud.

A fiduciary cannot purchase property that is held on trust, or which he/she also controls in a fiduciary capacity. Or to say it another way, a company director cannot authorise the sale of company-owned property to another business of which he or she is also a director. In that case, the director profits from effectively being on both sides of the transaction.

It is tempting to think that this sort of transaction would be allowed if it is made with the fully informed consent of the principal. But that is not the case. There is an unavoidable risk of conflict between the fiduciary’s duty and his or her interest in the transaction.

A fiduciary cannot place himself in a position where his duty to his principal conflicts with her or her own personal interest.

For example, in Hotel Portfolio II UK Limited (in liquidation) & Anor v Andrew Ruhan & Anthony Stevens [2022] EWHC 383 (Comm) Mr Ruhan was found to have contravened the self-dealing rule. Mr Ruhan was a director of the first claimant, Hotel Portfolio II. He used companies associated with himself to masquerade as independent purchasers of three hotels owned by Hotel Portfolio II. Mr Ruhan stood to profit from the transaction and from concealing his involvement with the purchaser companies.

Exploitation of Commercial Opportunities

In a similar vein, it is not permitted for directors to divert a “maturing business opportunity” to a company in which they are involved. If the fiduciary’s principal was contemplating the opportunity (to purchase a property for example), it is a breach of the fiduciary’s duties for him to pursue the opportunity himself.

The leading case to illuminate this scenario is Regal (Hastings) Ltd v Gulliver [1967] 1 WLR 443. A company proposed to subscribe for shares in a subsidiary that would then be used to acquire certain cinemas. Instead, the directors of the company subscribed for shares themselves. There was no dishonesty or malice in the transaction – it was simply the case that the company was unable to finance the entire subscription itself. Nevertheless, the directors were liable to account for profits they made on the disposal of their shares.

While that was a case of contravening the rule in good faith, civil fraud cases deal with errant fiduciaries who misappropriate business opportunities nefariously for their own means.

Dishonesty

When we talk about fiduciary breaches of duty in the context of civil fraud, dishonesty is a key element. As in any other area of civil fraud, the courts are reluctant to find fraud unless dishonesty is proven.

What constitutes dishonesty on the part of the fiduciary? It can be described as:

A breach of fiduciary duty can be characterised as dishonest if the fiduciary deliberately acts (or fails to act), either knowing that the course of action is contrary to the interests of his principal, or being reckless or indifferent as to whether it is contrary to its interest.^[3]

Or it is an act that is lacking in good faith: “for a breach of trust to be fraudulent it is not enough to show that it was deliberate. There must be an absence of honesty or good faith.” First Subsea v Balltec [2017] EWCA Civ 186.

Defences of Breach of Fiduciary Duty

Where an honest fiduciary finds himself or herself in breach of their duties, there are possible defences available:

• Fully informed consent of the principal: If the fiduciary gave full and frank disclosure to the principal of the nature of the potentially conflicting interest, this may be a defence. A fiduciary cannot hide behind half-truths though. He or she must be fully transparent about the source and scale of the profit in question.
• Relief from liability: In some circumstances, a court may exclude or limit a fiduciary’s liability, if the officer or person acted honestly and reasonably (see for example section 1157 Companies Act 2006).

These defences, however, are not available for unconscionable or dishonest behaviour. So in the context of fraud, where dishonesty is required, then it will be difficult for a fiduciary to rely on a defence.

Remedies for Breach of Fiduciary Duty

The remedies for breaches of fiduciary duties are equitable. Equitable remedies are discretionary and can be refused if it becomes inequitable to grant the relief (due to the conduct of one of the parties for example).

Available remedies include:

• Recission: the principal can elect to set aside a transaction conducted in breach of the fiduciary’s duties.
• Accounting for unauthorised profit: Once accounted for, the profit may be disgorged.
• Equitable compensation: to compensate for the loss flowing from the wrong.
• Declaratory relief: a statement from the court to clarify a situation.
• Injunctive relief: to freeze assets, or to order a party to perform a specific action.
• Proprietary remedies: based on constructive trust.

There is also the possibility of pursuing additional claims against other people involved in the breach. A wronged principal may be able to seek equitable compensation or account for profits from anybody who dishonestly assisted in the breach or was in knowing receipt of misappropriated trust funds.

Sources

1. Civil Fraud: Law Practice & Procedure First Edition, Sweet & Maxwell (2018) 11-012
2. Sales J at [222] in F&C Alternative Investments Ltd v Barthelemy [2012] Ch. 613
3. Civil Fraud: Law Practice & Procedure First Edition, Sweet & Maxwell (2018) 11-062