The fiduciary relationship and its obligations - Duty to avo...

Learning Outcomes

This article explores the core fiduciary duty requiring fiduciaries to avoid conflicts between their personal interests and their obligations to their principal. It examines the strict 'no-conflict' and 'no-profit' rules derived from this core duty. For the SQE1 assessments, you will need to identify fiduciary relationships, understand the stringent nature of these duties, recognise potential breaches, and know the available remedies. This knowledge will enable you to apply these principles to SQE1-style single best answer questions concerning trusts and other fiduciary contexts. It further develops your ability to distinguish between self-dealing and fair-dealing transactions, to assess whether disclosure and consent are sufficient to authorise otherwise conflicting conduct, and to select appropriate equitable remedies such as account of profits and constructive trust in light of current case law (including proprietary remedies for bribes). You should be prepared to evaluate whether equitable allowances for skill and effort are available and how courts treat conflicts where the principal could not have taken the opportunity themselves.

SQE1 Syllabus

For SQE1, you are required to understand fiduciary duties, particularly the avoidance of conflicts of interest, within the Trusts syllabus; these principles may also be relevant in Business Law and Practice contexts (e.g., director's duties). You need to be able to apply these principles practically, with a focus on the following syllabus points:

• Identifying relationships that give rise to fiduciary duties.
• Understanding the strict nature of the 'no-conflict' and 'no-profit' rules.
• Recognising situations that constitute a breach of these duties.
• Knowing the requirements for obtaining valid authorisation or consent to act despite a potential conflict.
• Understanding the remedies available for breach, such as account of profits and constructive trusts.
• Distinguishing self-dealing (trustee purchases trust property) from fair-dealing (trustee purchases a beneficiary’s equitable interest), and knowing the consequences of each.
• Appreciating how fiduciary obligations apply beyond trusteeship (e.g., company directors and agents), including statutory authorisation of conflicts under Companies Act 2006.
• Applying proprietary remedies for bribes and secret commissions and understanding when beneficiaries may elect between proprietary and personal remedies.
• Recognising when equitable allowances may be granted for skill and effort in profit-stripping claims.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which of the following relationships does NOT automatically give rise to fiduciary duties?
   1. Trustee and beneficiary
   2. Solicitor and client
   3. Company director and company
   4. Landlord and tenant.
2. A trustee uses information gained during their trusteeship to purchase shares personally, making a significant profit. The trust itself could not have afforded the shares. Is the trustee liable to account for the profit?
   1. No, because the trust suffered no loss.
   2. No, because the trust could not have taken the opportunity itself.
   3. Yes, because the trustee made an unauthorised profit from their position.
   4. Yes, but only if the trustee acted dishonestly.
3. What is the primary remedy sought when a fiduciary makes an unauthorised profit from their position?
   1. Damages for negligence.
   2. Rescission of the transaction.
   3. An account of profits.
   4. Specific performance.

Introduction

A fiduciary relationship is one built on trust and confidence, where one party (the fiduciary) undertakes to act in the best interests of another (the principal). This relationship imposes stringent duties on the fiduciary, foremost among which is the duty of loyalty. Flowing from this overarching duty are two fundamental rules: the fiduciary must not allow their personal interest to conflict with their duty to the principal (the 'no-conflict' rule), and they must not make an unauthorised profit from their fiduciary position (the 'no-profit' rule). These rules are strictly applied by the courts to ensure undivided loyalty.

The strictness of these rules is prophylactic: they operate to remove temptation and the risk of disloyalty. Courts do not investigate whether the fiduciary in fact acted in the principal’s interests; if a real possibility of conflict exists or personal profit is made without authorisation, liability follows even if the fiduciary acted honestly and even if the principal suffered no loss. This approach is consistently articulated in leading authorities and remains core doctrine in current UK law.

Key Term: Fiduciary
A person who holds a legal or ethical relationship of trust with one or more other parties (person or group of persons). The fiduciary is under a strict duty to act solely in the interests of their principal.

Examples of fiduciary relationships include trustee and beneficiary, company director and company, agent and principal, and solicitor and client.

The Core Duties: No Conflict, No Profit

Equity enforces fiduciary loyalty through two overlapping rules, often referred to as the 'no-conflict' rule and the 'no-profit' rule. These rules are applied strictly, meaning that a fiduciary's good faith or the fact that the principal suffered no loss is generally irrelevant if a breach occurs. It is sufficient that the fiduciary placed themselves in a position where there was a real sensible possibility of conflict (not merely a remote or fanciful one), or that they derived any unauthorised benefit from their position.

The Duty to Avoid Conflicts of Interest (No-Conflict Rule)

A fiduciary must not place themselves in a position where their personal interests conflict, or potentially may conflict, with their duty to act in the best interests of their principal. The rule addresses the danger that a fiduciary might be swayed by personal considerations rather than their duty. Even the possibility of a conflict is often enough to constitute a breach. This includes situations where the fiduciary stands on both sides of a transaction (for example, a trustee selling trust property to themselves), or where they have duties to two principals whose interests may diverge.

Classic statements of the rule emphasise that human nature may incline individuals to prefer their own interests over their duty; equity therefore imposes a positive rule prohibiting conflicts to protect beneficiaries. In practice, this rule captures:

• Self-dealing by trustees (buying trust property for themselves), which is voidable at the election of the beneficiaries, even if the trustee acted openly and paid full value.
• Acting in competition with the trust or principal’s business.
• Serving two principals with potentially divergent interests without obtaining proper, fully informed consent.

Key Term: Conflict of Interest
A situation in which a person or organisation is involved in multiple interests, financial or otherwise, one of which could possibly corrupt the motivation or decision-making of that individual or organisation.

Key Term: Self-Dealing
A transaction where a trustee or other fiduciary purchases trust property or sells their own property to the trust, placing themselves in the position of both vendor and purchaser. Such transactions are voidable at the instance of beneficiaries regardless of fairness.

Key Term: Fair-Dealing
A transaction where a trustee purchases a beneficiary’s equitable interest (rather than trust property). The transaction stands if the trustee proves full disclosure, fairness, and absence of advantage taken; otherwise it is voidable.

The Duty Not to Make Unauthorised Profits (No-Profit Rule)

A fiduciary must not use their position, or information or opportunities gained through that position, to make a personal profit without the fully informed consent of their principal. This rule prevents fiduciaries from exploiting their role for personal gain. Any profit made in breach of this duty must be accounted for to the principal.

The rule applies even if the principal could not have taken the opportunity themselves, and even if the fiduciary’s actions benefitted the principal. Secret commissions, bribes, and profits from exploiting confidential information obtained in the fiduciary role are paradigmatic breaches. Current UK law recognises a proprietary constructive trust over such gains, enabling the principal to claim the asset itself (or its traceable proceeds).

Key Term: Unauthorised Profit
Any financial gain or benefit obtained by a fiduciary by virtue of their position, without the express and informed permission of their principal.

Key Term: Account of Profits
A personal remedy requiring a fiduciary to pay over the net value of unauthorised profits obtained by virtue of their position, stripping the benefit from the breach of duty.

Key Term: Equitable Allowance
A discretionary allowance for skill and effort awarded to a fiduciary who has acted honestly but must disgorge profits; it compensates for work done while still deterring disloyalty.

Illustrative Cases

Case law demonstrates the strictness with which courts enforce these fiduciary duties.

Worked Example 1.1

A trustee manages a trust fund that includes a leasehold property. The lease is due to expire. The landlord refuses to renew the lease for the benefit of the trust (perhaps because the beneficiary is a minor). The trustee then takes the renewal of the lease in their own name. Can the trustee keep the benefit of the new lease?

Answer:
No. This scenario reflects the facts of Keech v Sandford (1726). The court held that the trustee held the new lease on constructive trust for the beneficiary. The trustee breached the no-profit rule by obtaining a benefit (the renewed lease) by virtue of their position as trustee, even though the trust itself could not obtain that benefit. The rule is strictly applied to prevent any possibility of fiduciaries acting in their own interest.

Worked Example 1.2

A solicitor acts for a trust that holds shares in a private company. Through attending company meetings on behalf of the trust, the solicitor gains confidential information about the company's potential for restructuring and profit. The trust does not have the funds or the power to buy more shares. The solicitor, acting in good faith and believing it will also benefit the trust indirectly, purchases additional shares personally, leading to significant personal profit. Must the solicitor account for this profit to the trust?

Answer:
Yes. This mirrors the situation in Boardman v Phipps [1967]. The House of Lords held that the solicitor and another defendant had breached their fiduciary duties. They used information and opportunity acquired through their fiduciary position to make a personal profit. Their honesty and the fact that the trust also benefited were irrelevant. The potential for conflict and the realisation of an unauthorised profit were sufficient for liability. They had to account for their profits (though the court allowed them generous remuneration for their work and skill).

Worked Example 1.3

Trustees hold a shareholding in a company. Several trustees, who are also directors of the company, orchestrate a transaction whereby they and others personally subscribe to a new share issue at a favourable price, later selling at a profit. The trust itself does not subscribe. Are the directors liable to account for profits?

Answer:
Yes. This reflects Regal (Hastings) Ltd v Gulliver. Directors are fiduciaries and must not profit from opportunities obtained through their position. Liability to account arose even though the company did not or could not take up the opportunity, and regardless of the directors’ good faith.

Worked Example 1.4

A trustee decides to purchase trust land at auction using a nominee to avoid “formal conflict”. The price is fair. Can the beneficiary set aside the sale?

Answer:
Yes. This is caught by the self-dealing rule. Using a nominee does not avoid the conflict arising from purchasing trust property. The transaction is voidable at the instance of any interested beneficiary, who may set it aside even if the price was fair.

Worked Example 1.5

An agent negotiating a purchase for a principal receives a secret commission from the seller. Does the principal have a proprietary claim to the commission?

Answer:
Yes. In line with FHR European Ventures LLP v Cedar Capital Partners LLC, bribes and secret commissions received by fiduciaries are held on constructive trust for the principal. The principal has a proprietary remedy over the sum (and traceable substitutes), in addition to a personal account of profits.

Worked Example 1.6

A trustee negotiates with a beneficiary to purchase the beneficiary’s equitable interest for a price. What must the trustee show to uphold the transaction?

Answer:
The trustee must demonstrate fair-dealing: full disclosure of all relevant facts, that they did not take advantage of their position, and that the transaction was fair and honest. If these are not shown, the beneficiary may set the transaction aside.

Defences to Breach of Fiduciary Duty

A fiduciary may avoid liability for what would otherwise be a breach of the no-conflict or no-profit rules if they have obtained the fully informed consent of their principal before acting. Authorisation must be effective as a matter of trust law or, in corporate contexts, company law.

Informed Consent

The principal (e.g., all beneficiaries of a trust, if sui juris and between them absolutely entitled; the company, via shareholders or properly authorised directors, for a director) can authorise the fiduciary to act in a situation involving a potential conflict or personal profit. For the consent to be valid, the fiduciary must make full disclosure of all material facts to the principal before the transaction takes place. Disclosure must include the nature of the conflict, the opportunity, the fiduciary’s intended participation, and potential profit. In corporate contexts, the Companies Act 2006 provides for board or member authorisation of conflicts if permitted by the company’s constitution; disclosure of interests in proposed transactions is also required. Authorisation cannot validate fraud or dishonesty.

Key Term: Informed Consent
Agreement given by a principal to a fiduciary to proceed with a course of action despite a potential conflict of interest or personal profit, based on full disclosure of all relevant facts by the fiduciary.

Key Term: Sui Juris
A person of full age and capacity. Beneficiaries must be sui juris to validly consent or authorise a fiduciary’s conflicting conduct.

The scope of consent matters. A general charging clause permitting professional trustees to charge for services authorises remuneration but not conflicted dealings in trust opportunities. Similarly, disclosure to one beneficiary will not bind those who did not consent unless they are represented or the trust instrument so provides.

Authorisation by Trust Instrument or Court

In the context of trusts, the trust instrument itself may contain a clause authorising trustees to act in certain situations that would otherwise constitute a breach (e.g., charging clauses allowing professional trustees to be paid; provisions permitting certain transactions). Alternatively, the court has jurisdiction to authorise particular transactions in advance where it is expedient for the trust, but this will be exercised cautiously and cannot authorise fraud or remove the core duty of loyalty. Court approval or beneficiary approval will not protect a trustee who failed to make full disclosure, nor will it cure transactions caught by the self-dealing rule unless the beneficiaries (being sui juris and absolutely entitled) consent.

Worked Example 1.7

A trustee wishes to take up a lucrative joint venture using confidential information acquired as trustee. The trust instrument contains a professional charging clause, and the trustee discloses their plan to adult beneficiaries, all of whom consent. Is the trustee protected?

Answer:
Yes, if the disclosure was full and the beneficiaries are sui juris and between them absolutely entitled, their fully informed consent authorises the trustee to proceed. A professional charging clause alone would not suffice; it permits remuneration for services, not exploitation of trust opportunities. The trustee must account for any profits unless properly authorised.

Remedies for Breach

Where a fiduciary breaches the no-conflict or no-profit rule, equity provides remedies aimed at stripping the fiduciary of the unauthorised gain and/or compensating the principal for any loss. These remedies include personal and proprietary responses. Courts may also award equitable allowances to reflect honest skill and effort in generating profits that must be disgorged.

Revision Tip

Distinguish between personal claims against the fiduciary (requiring them to pay money from their own assets) and proprietary claims (asserting ownership over specific assets acquired by the fiduciary through the breach). Proprietary claims are advantageous if the fiduciary is insolvent or the asset has increased in value.

Account of Profits

This is a personal remedy requiring the fiduciary to pay over to the principal the value of the unauthorised profit they have made. The aim is to prevent the fiduciary from retaining any benefit derived from the breach. The principal does not need to prove they suffered a loss. The amount is typically net profit after deducting expenses not tainted by breach; courts may, in appropriate cases, award an equitable allowance for skill and effort, as recognised in Boardman v Phipps.

Where profits are obtained through a series of linked transactions, set-off is generally not permitted between gains and losses; however, if the transactions form one linked scheme, the court may consider them together to avoid artificial outcomes.

Constructive Trust

This is a proprietary remedy. Where a fiduciary acquires property as a result of their breach (e.g., the renewed lease in Keech or shares acquired through misuse of information), the court may hold that the fiduciary holds that property on constructive trust for the principal. This means the principal becomes the beneficial owner of the property and may trace its proceeds. The Supreme Court has confirmed that bribes and secret commissions taken by fiduciaries are held on constructive trust for the principal, reinforcing the availability of proprietary remedies.

Key Term: Constructive Trust
A trust imposed by law as an equitable remedy, regardless of the parties' intentions, typically where a person holding legal title to property cannot in good conscience retain the beneficial interest (e.g., due to acquiring it through a breach of fiduciary duty).

Key Term: Proprietary Remedy
A remedy that recognises the claimant’s beneficial ownership of property (or its traceable proceeds), enabling recovery of the asset itself and priority in insolvency.

Interest may also be awarded. Courts frequently award compound interest on profits obtained in breach of fiduciary duty to reflect the time value of money and deter disloyalty.

Worked Example 1.8

A trustee uses trust information to buy a block of shares, later selling at a substantial profit. The beneficiaries claim a constructive trust over the shares and proceeds. The trustee argues for an account of profits only. What is the likely outcome?

Answer:
Beneficiaries may elect between remedies where appropriate. Given that the shares were acquired through misuse of trust information, a constructive trust is likely to be imposed, enabling a proprietary claim to the shares (and traceable proceeds). Alternatively, they could seek an account of profits; the choice may depend on insolvency risk and asset appreciation.

Worked Example 1.9

A fiduciary receives a secret commission while negotiating a purchase. The principal seeks compound interest on the sum. Is that available?

Answer:
Yes. In profit-stripping claims against fiduciaries, courts commonly award compound interest to reflect commercial reality and deter breaches. The principal may also assert a proprietary claim over the commission.

Additional Applications of the Duty

Although trusteeship is the classic example, fiduciary obligations apply widely.

• Company directors owe fiduciary duties to their company. Under Companies Act 2006, directors must avoid conflicts of interest (s 175) and declare interests in proposed transactions (s 177). Conflicts can be authorised by the board or members if permitted by the company’s constitution. Directors are liable to account for unauthorised profits, and corporate opportunities cannot be appropriated without authorisation.
• Solicitors and agents act as fiduciaries in the context of their mandates and must not accept secret payments or exploit confidential information obtained while acting for a client.
• Personal representatives (executors and administrators) are fiduciaries and are subject to the no-conflict and no-profit rules in administering estates; incidental profits and self-dealing are restricted unless properly authorised.

Key Term: Directors’ Conflict Authorisation (Companies Act)
Company law permits board or member authorisation of certain conflicts if the company’s constitution allows it and proper disclosure is made; authorisation cannot validate fraud or dishonesty.

Practical Boundaries and Examples

The following examples help delineate the scope of fiduciary obligations.

• Remuneration: Professional trustees may be paid if authorised by the trust instrument or statute; lay trustees are generally unpaid but may be reimbursed for proper expenses. Remuneration arrangements must be consistent with the duty of loyalty and not entitle fiduciaries to profit from trust opportunities.
• Purchasing trust property: Self-dealing transactions are voidable at the instance of beneficiaries; the trustee cannot circumvent the rule by resigning shortly before purchase or using a nominee.
• Competing business: Fiduciaries may not compete with their principal’s business where doing so risks compromising their duty. They must not exploit confidential information or business opportunities obtained through their role unless properly authorised.

Worked Example 1.10

An executor is directed by the will to continue the testator’s yacht brokerage for the benefit of a beneficiary. The executor sets up a competing brokerage under their own name shortly thereafter. Is this permitted?

Answer:
No. Competing with the estate’s business places the executor in a position of conflict. It breaches the fiduciary duty of loyalty and risks misuse of information or opportunities. The executor must refrain from competition unless properly authorised; any profits may be subject to account.

Key Point Checklist

This article has covered the following key knowledge points:

• Fiduciary relationships impose a strict duty of loyalty.
• Fiduciaries must avoid conflicts between personal interest and duty (no-conflict rule).
• Fiduciaries must not make unauthorised profits from their position (no-profit rule).
• These rules are strictly applied; good faith or lack of loss to the principal is generally irrelevant.
• Key cases illustrating these principles include Keech v Sandford, Boardman v Phipps, and Regal (Hastings) Ltd v Gulliver, with proprietary remedies for bribes confirmed in FHR European Ventures.
• Liability can be avoided through the fully informed consent of the principal or prior authorisation (e.g., in a trust deed or by court order), with proper disclosure.
• The self-dealing rule renders trustee purchases of trust property voidable; the fair-dealing rule requires proof of fairness in purchases of beneficiaries’ interests.
• Remedies include account of profits (personal) and constructive trust (proprietary), with compound interest often awarded in fiduciary profit cases.
• Courts may award equitable allowances where appropriate to reflect honest skill and effort.
• Directors’ fiduciary duties and conflict authorisation operate under Companies Act 2006 and remain relevant to business contexts.

Key Terms and Concepts

• Fiduciary
• Conflict of Interest
• Unauthorised Profit
• Informed Consent
• Constructive Trust
• Self-Dealing
• Fair-Dealing
• Account of Profits
• Equitable Allowance
• Proprietary Remedy
• Sui Juris
• Directors’ Conflict Authorisation (Companies Act)