Learning Outcomes
This article explains the nature of a fiduciary relationship and outlines the fundamental duties owed by fiduciaries. It focuses on identifying trustees, agents, and company directors as key examples of fiduciaries and details their specific obligations. Upon completion, you should be able to identify fiduciary relationships in practice scenarios and apply the relevant duties, particularly those concerning trustees, agents, and directors under the Companies Act 2006, to SQE1 assessment questions.
SQE1 Syllabus
For SQE1, you are required to understand the core principles of fiduciary duties and be able to identify when such relationships arise, particularly in the contexts of trusts, agency, and company law. You will need to apply your knowledge of the duties owed by fiduciaries to specific factual scenarios, distinguishing the general duties from the particular obligations of trustees, agents, and company directors.
As you revise this topic, focus on:
- The characteristics defining a fiduciary relationship.
- The principal duties owed by fiduciaries: loyalty, avoiding conflicts of interest, and not profiting from the position.
- How to identify trustees, agents, and company directors as fiduciaries.
- The specific duties of trustees towards beneficiaries and the trust.
- The duties of agents towards their principals.
- The general duties of company directors as codified in the Companies Act 2006.
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 best describes the core duty fundamental to all fiduciary obligations?
- The duty to exercise reasonable care and skill.
- The duty to account for all transactions.
- The duty of undivided loyalty.
- The duty to maintain confidentiality.
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An agent, acting for a principal selling a property, discovers valuable minerals under the land but does not disclose this to the principal, instead arranging for a friend to buy the property cheaply. Which fiduciary duty has the agent primarily breached?
- Duty to act within authority.
- Duty to account.
- Duty of loyalty (including the duty not to profit and avoid conflicts).
- Duty of confidentiality.
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Under the Companies Act 2006, to whom do company directors primarily owe their statutory duties?
- The shareholders individually.
- The company itself.
- The company's creditors.
- The employees of the company.
Introduction
Certain relationships in law demand a higher level of trust and confidence than others. Where one party (the fiduciary) undertakes to act for or on behalf of another (the principal or beneficiary) in circumstances giving rise to a relationship of trust and reliance, the law imposes strict duties on the fiduciary. These duties, known as fiduciary duties, are designed to ensure the fiduciary acts solely in the interests of the person to whom the duties are owed. The concept permeates various areas of law, notably trusts, agency, and company law, and understanding it is fundamental for legal practice.
Key Term: Fiduciary Relationship A relationship where one party (the fiduciary) is bound to act in the best interests of another party (the principal or beneficiary), placing that party's interests above their own.
The essence of the fiduciary relationship is loyalty. From this central obligation flow other specific duties designed to protect the principal or beneficiary from potential abuse of the fiduciary's position.
Core Fiduciary Obligations
Although the specific context shapes the precise application of duties, several fundamental obligations are common to all fiduciary relationships.
Duty of Loyalty
The most important duty is that of loyalty. The fiduciary must act honestly, in good faith, and solely in the best interests of the principal or beneficiary. Personal interests must not influence the fiduciary's conduct in relation to the matter at hand.
No-Conflict Duty
Fiduciaries must avoid situations where their personal interest conflicts, or might possibly conflict, with their duty to the principal or beneficiary. This 'no-conflict' rule is applied rigorously to prevent the fiduciary's judgment being compromised. This duty encompasses two aspects:
- Conflict between the fiduciary's duty and their personal interest.
- Conflict between the fiduciary's duties to two different principals (where applicable).
No-Profit Duty
A fiduciary must not exploit their position to make an unauthorised personal profit. Any benefit or gain obtained through the fiduciary position, using the principal's property, information, or opportunities, must be accounted for to the principal, unless the profit has been properly authorised (e.g., through informed consent).
Worked Example 1.1
Scenario: Sarah is a trustee of a family trust that owns several properties. She learns that a property adjacent to one owned by the trust is for sale at a low price due to a forced sale. Recognising its potential value if combined with the trust's property, Sarah purchases the adjacent property in her own name without informing the beneficiaries.
Question: Has Sarah breached her core fiduciary duties?
Answer: Yes. Sarah has breached her duty of loyalty by prioritising her personal gain over the potential benefit to the trust. She has breached the no-conflict rule by putting her personal interest in acquiring the property ahead of her duty to consider the opportunity for the trust. She has also breached the no-profit rule by exploiting information and opportunity gained through her position as trustee for personal profit without authorisation.
Identifying Specific Fiduciaries
While the specific circumstances of a relationship can give rise to fiduciary duties, certain roles are inherently fiduciary. Key examples for SQE1 include trustees, agents, and company directors.
Trustees
Trusteeship is a classic fiduciary role. Trustees hold legal ownership of trust assets but are strictly bound to manage them for the benefit of the beneficiaries according to the terms of the trust.
Key Term: Trust An equitable obligation binding a person (the trustee) to deal with property over which they have control (the trust property) for the benefit of persons (the beneficiaries or cestuis que trust) of whom they may themselves be one, and any one of whom may enforce the obligation.
Key Term: Trustee The legal owner of trust property who is obliged to administer it for the benefit of the beneficiaries in accordance with the trust terms and fiduciary duties.
Key duties specific to trustees include:
- Duty to comply with trust terms: Trustees must administer the trust according to the provisions set out in the trust instrument (e.g., will or trust deed).
- Duty of care: They must exercise reasonable care and skill in all aspects of trust administration (s.1 Trustee Act 2000).
- Duty to act impartially: They must balance the interests of different beneficiaries (e.g., life tenants and remaindermen) fairly.
- Duty not to profit / Self-dealing rule: Trustees cannot purchase trust property (self-dealing) or sell their own property to the trust without authorisation (court order, trust instrument, or fully informed consent of all adult beneficiaries). This is a strict application of the no-conflict and no-profit rules (Keech v Sandford).
Agents
An agent is authorised to act on behalf of a principal, often creating or affecting legal relations between the principal and third parties. This relationship inherently involves trust and confidence, making it fiduciary.
Key Term: Agent A person who acts on behalf of another (the principal) with authority, express or implied, to create legal relations between the principal and third parties.
Key duties specific to agents include:
- Duty to obey instructions: Agents must follow the lawful instructions of their principal.
- Duty to act within authority: Agents must not exceed the actual or apparent authority granted by the principal.
- Duty of care and skill: Agents must exercise reasonable care and skill in performing their functions.
- Duty not to delegate: Generally, an agent must perform their duties personally unless authorised to delegate.
- Duty to account: Agents must keep accurate accounts of all transactions and money received or paid on the principal's behalf.
- Core fiduciary duties: Agents must act loyally, avoid conflicts of interest, and not make secret profits.
Worked Example 1.2
Scenario: David appoints Eleanor as his agent to sell his collection of antique stamps. Eleanor knows David wants at least £10,000. Eleanor finds a buyer, Fiona, willing to pay £12,000. Fiona also offers Eleanor a £500 'bonus' if the sale goes through at £11,000. Eleanor presents only the £11,000 offer to David, recommending he accept it, which he does. Eleanor receives the £500 bonus from Fiona.
Question: What breaches of duty has Eleanor committed?
Answer: Eleanor has breached her core fiduciary duties: loyalty (by not securing the best price of £12,000 for David), no-conflict (her interest in the bonus conflicted with David's interest in the price), and no-profit (making a secret £500 profit). She also breached her specific agent's duty to act in David's best interests and possibly the duty to account fully.
Company Directors
Directors are entrusted with the management of a company's business. They occupy a fiduciary position in relation to the company itself. Their primary duties are now largely codified in the Companies Act 2006.
Key Term: Company Director A person appointed to direct and manage the business of a company.
The general duties of directors under the Companies Act 2006 (ss.171-177) incorporate the traditional fiduciary principles:
- Duty to act within powers (s.171): Act in accordance with the company’s constitution.
- Duty to advance the success of the company (s.172): Act in good faith to advance the company's success for the benefit of its members as a whole, considering various stakeholder factors (employees, environment, etc.). This reflects the core duty of loyalty.
- Duty to exercise independent judgment (s.173): Directors must use their own judgment.
- Duty to exercise reasonable care, skill and diligence (s.174): Combines objective and subjective tests.
- Duty to avoid conflicts of interest (s.175): Directors must avoid situations where their interests conflict or may conflict with the company's interests, especially regarding company property, information, or opportunities. This is a key fiduciary duty. Authorisation for conflicts may be possible under the company's constitution or by the board (if permitted).
- Duty not to accept benefits from third parties (s.176): Prevents secret profits or bribes.
- Duty to declare interest in proposed or existing transactions or arrangements (s.177 & s.182): Requires transparency regarding personal interests in company dealings.
Exam Warning
Remember that directors owe their duties primarily to the company, not directly to individual shareholders or creditors (though creditor interests become more relevant if the company is nearing insolvency). Distinguishing the entity to whom the duty is owed is essential in problem questions.
Key Point Checklist
This article has covered the following key knowledge points:
- A fiduciary relationship is based on trust and confidence, requiring the fiduciary to act loyally in the best interests of the principal or beneficiary.
- Core fiduciary duties include loyalty, the no-conflict rule, and the no-profit rule.
- Trusteeship is a classic fiduciary role, with specific duties including compliance with the trust terms and the self-dealing rule.
- Agents act on behalf of principals and owe fiduciary duties including acting within authority and avoiding secret profits.
- Company directors owe statutory duties to the company under the Companies Act 2006, which incorporate traditional fiduciary principles like avoiding conflicts of interest (s.175) and advancing the company's success (s.172).
- Breaches of fiduciary duty can lead to personal liability (e.g., accounting for profits) and proprietary remedies (e.g., a constructive trust over property obtained through the breach).
Key Terms and Concepts
- Fiduciary Relationship
- Trust
- Trustee
- Agent
- Company Director
