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.
SQE1 Syllabus
For SQE1, your understanding of fiduciary duties, particularly the avoidance of conflicts of interest, is essential within the Trusts syllabus and 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.
Your revision should focus on:
- 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.
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.
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Which of the following relationships does NOT automatically give rise to fiduciary duties?
- Trustee and beneficiary
- Solicitor and client
- Company director and company
- Landlord and tenant.
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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?
- No, because the trust suffered no loss.
- No, because the trust could not have taken the opportunity itself.
- Yes, because the trustee made an unauthorised profit from their position.
- Yes, but only if the trustee acted dishonestly.
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What is the primary remedy sought when a fiduciary makes an unauthorised profit from their position?
- Damages for negligence.
- Rescission of the transaction.
- An account of profits.
- 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.
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.
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.
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.
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.
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.
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).
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.
Informed Consent
The principal (e.g., all beneficiaries of a trust, if sui juris and between them absolutely entitled; the company, via shareholders, 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.
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.
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). Alternatively, the court has its own jurisdiction to authorise a fiduciary to act, although this is exercised cautiously.
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.
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.
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 the shares in Boardman), 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.
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 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 and Boardman v Phipps.
- 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).
- Remedies include account of profits (personal) and constructive trust (proprietary).
Key Terms and Concepts
- Fiduciary
- Conflict of Interest
- Unauthorised Profit
- Informed Consent
- Constructive Trust
