Learning Outcomes
This article explains the nature of the fiduciary relationship, focusing on the strict duty prohibiting fiduciaries from exploiting information or opportunities acquired through their position for personal gain. You will learn about the core 'no-profit' rule, its application through key case law, potential defences, and the remedies available for breach. This understanding is essential for applying these principles to SQE1 scenarios involving trustees and other fiduciaries.
SQE1 Syllabus
For SQE1, you are required to understand the fiduciary relationship and its associated obligations, particularly concerning the misuse of information or opportunities obtained by virtue of the fiduciary position. This includes:
- The nature of the fiduciary relationship and the duty of loyalty.
- The 'no-profit' rule prohibiting fiduciaries from making unauthorised profits.
- The application of the rule to information and opportunities gained through the fiduciary role.
- Key case law illustrating the strictness of the rule (e.g., Boardman v Phipps).
- Potential defences such as authorisation and consent.
- Remedies for breach, including 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 core principle prevents a fiduciary from personally benefiting from their position without authorisation?
- The duty of care
- The no-conflict rule
- The no-profit rule
- The rule against self-dealing
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In Boardman v Phipps, why was the solicitor required to account for profits made from shares purchased using information obtained while acting for the trust?
- He breached the duty of care.
- He acted dishonestly.
- He made an unauthorised profit using information gained from his fiduciary position.
- The beneficiaries did not consent to the purchase.
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A trustee learns of a lucrative investment opportunity solely because of their role as trustee. The trust itself cannot take up this opportunity due to lack of funds. Can the trustee pursue the opportunity personally?
- Yes, if the trust cannot take the opportunity.
- Yes, if the trustee acts honestly and discloses their intention to the co-trustees.
- No, unless they obtain the fully informed consent of all beneficiaries or court authorisation.
- No, because the opportunity arose from the trusteeship.
Introduction
Fiduciary relationships are central to many areas of law, including trusts, company law, and agency. They are characterised by trust and confidence, where one party (the fiduciary) undertakes to act in the best interests of another (the principal or beneficiary). A fundamental element of this relationship is the strict duty of loyalty, which encompasses several specific obligations designed to prevent the fiduciary from abusing their position. This article focuses on one critical aspect: the prohibition against fiduciaries using information or opportunities gained through their position for personal profit without authorisation.
The Fiduciary Duty of Loyalty
The defining characteristic of a fiduciary relationship is the duty of loyalty. This requires the fiduciary to act in good faith and solely in the interests of their principal, subordinating their own personal interests.
Key Term: Fiduciary A person who holds a legal or ethical relationship of trust with one or more other parties (principal or beneficiary). The fiduciary is obligated to act in the best interests of the other party. Examples include trustees, company directors, agents, and solicitors.
From this overarching duty of loyalty stem two fundamental rules relevant to this topic: the 'no-conflict' rule and the 'no-profit' rule. While distinct, they often overlap. The no-conflict rule prevents a fiduciary from placing themselves in a position where their personal interests conflict, or may possibly conflict, with their duty to the principal. The no-profit rule specifically prohibits a fiduciary from obtaining an unauthorised benefit by reason of their position.
Key Term: No-Profit Rule The principle that a fiduciary must not make any unauthorised profit from their position or from information or opportunities acquired through that position.
Exploiting Information or Opportunities
Equity adopts a strict approach to fiduciaries who exploit information or opportunities obtained through their fiduciary role. The core principle is that any profit derived from such information or opportunity belongs in equity to the principal, even if the fiduciary acted honestly, the principal suffered no loss, or the principal could not have taken advantage of the opportunity themselves.
The Strict Application
The rule is applied inflexibly to deter fiduciaries from being swayed by self-interest. The mere fact that information or an opportunity came to the fiduciary's attention because of their position is often enough to engage the rule.
Key Case Law Examples
Two landmark cases illustrate the rigour of this principle:
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Keech v Sandford (1726): A trustee held a lease of a market on trust for an infant beneficiary. When the lease expired, the landlord refused to renew it for the benefit of the infant. The trustee then took the renewal in his own name. The court held that the trustee held the renewed lease on constructive trust for the beneficiary. The trustee was prohibited from benefiting personally from an opportunity arising from his trusteeship, even though the trust could not have obtained the renewal.
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Boardman v Phipps [1967]: A solicitor acting for a trust (Boardman) and a beneficiary (Tom Phipps) used information obtained while representing the trust to acquire shares in a company personally. They believed they had the consent of the trustees (though not all beneficiaries) and acted in good faith, significantly benefiting both themselves and the trust through their actions. The House of Lords held they were liable to account to the trust for the profits they made. They had profited from information and opportunities that came to them through their fiduciary positions. Their honesty and the benefit to the trust were irrelevant.
Key Term: Unauthorised Profit Any personal financial gain or other advantage obtained by a fiduciary through their position without the fully informed consent of the principal or other valid authorisation (e.g., court order, trust instrument provision).
Worked Example 1.1
Anna is a director of Tech Innovations Ltd. Through a board meeting discussing potential acquisitions, she learns confidential details about a struggling competitor, Innovate Solutions Ltd, which has valuable patents but poor management. Tech Innovations Ltd decides not to pursue an acquisition. Anna, seeing a personal opportunity, resigns from her directorship and uses the confidential information to acquire Innovate Solutions Ltd herself, later selling its patents for a substantial profit. Has Anna breached her fiduciary duty?
Answer: Yes. Anna acquired the confidential information and the opportunity solely due to her position as a director (a fiduciary role). Even though Tech Innovations Ltd decided against the acquisition and she resigned, she exploited information gained during her directorship for personal profit. This constitutes a breach of the no-profit rule. She would likely be required to account for the profit made.
Information as Trust Property
In Boardman v Phipps, some judges suggested that confidential information obtained by a fiduciary can itself be treated as trust property. If a fiduciary uses this 'property' for personal gain, they are effectively using trust assets for their own benefit, triggering liability.
Worked Example 1.2
Ben is a trustee of a family property trust. The trust owns several investment properties. While reviewing potential new properties for the trust, Ben discovers, through a surveyor's report commissioned by the trust, that an adjacent plot of land not owned by the trust is likely to receive planning permission for development, significantly increasing its value. The trust cannot afford to purchase this plot. Ben purchases the plot himself using his own funds and later sells it at a large profit after planning permission is granted. Is Ben liable?
Answer: Yes. The information about the development potential came to Ben solely because of his role as trustee and through a report paid for by the trust. Even if the trust could not purchase the land, Ben exploited information gained through his fiduciary position for personal profit. He is likely liable to account for the profit to the trust.
Defences and Authorisation
The strict rules against fiduciaries profiting from their position can be disapplied if the fiduciary's actions are properly authorised.
- Authorisation in Trust Instrument/Constitution: The document creating the fiduciary relationship (e.g., trust deed, company articles) may expressly permit the fiduciary to take certain profits or engage in potentially conflicting transactions.
- Fully Informed Consent: The principal(s) (e.g., all beneficiaries of a trust, if sui juris and acting together; the company shareholders) may consent to the fiduciary retaining a profit or acting despite a conflict, provided they give their fully informed consent after full disclosure of all material facts by the fiduciary. Obtaining this consent can be complex, especially with multiple beneficiaries.
- Court Order: In appropriate circumstances, the court may authorise a fiduciary to enter into a transaction that would otherwise constitute a breach.
Exam Warning
Do not assume that honesty or the fact that the principal suffered no loss is a defence. The no-profit rule operates strictly. The key is whether the profit was authorised. Without proper authorisation (via the creating instrument, fully informed consent, or court order), the fiduciary is liable.
Remedies for Breach
Where a fiduciary breaches the no-profit rule by exploiting information or opportunities, the principal has several potential remedies:
- Account of Profits: The fiduciary must pay over to the principal the unauthorised profit they have made. This remedy focuses on stripping the fiduciary of the gain, irrespective of whether the principal suffered a loss.
- Constructive Trust: The court may declare that the fiduciary holds the profit or any asset acquired with it on constructive trust for the principal. This gives the principal a proprietary claim to the profit or asset, which is advantageous if the asset has increased in value or if the fiduciary is insolvent.
Key Term: Account of Profits An equitable remedy requiring a defendant (e.g., a fiduciary in breach) to surrender profits made from their wrongful conduct to the claimant (e.g., the principal or trust).
Key Term: Constructive Trust A trust imposed by equity in certain circumstances where it would be unconscionable for the legal owner of property to assert beneficial ownership, often used as a remedy for breach of fiduciary duty.
Worked Example 1.3
Following the scenario in Worked Example 1.1, Anna made a profit of £500,000 from selling the patents of Innovate Solutions Ltd. What remedies might Tech Innovations Ltd seek?
Answer: Tech Innovations Ltd could seek an account of profits, requiring Anna to pay the £500,000 profit to the company. Alternatively, if Anna used the profit to acquire other assets (e.g., shares, property), the company might seek a declaration that Anna holds those assets on constructive trust for the company. This would be particularly beneficial if those assets have increased in value.
Key Point Checklist
This article has covered the following key knowledge points:
- Fiduciaries owe a strict duty of loyalty, encompassing the 'no-profit' rule.
- The no-profit rule prohibits fiduciaries from making unauthorised profits from information or opportunities gained through their position.
- The rule applies strictly, regardless of the fiduciary's honesty, lack of loss to the principal, or the principal's inability to exploit the opportunity.
- Key cases like Keech v Sandford and Boardman v Phipps demonstrate the strict application of the rule.
- Defences are limited primarily to authorisation within the governing instrument, fully informed consent from the principal(s), or a court order.
- Remedies for breach include an account of profits and the imposition of a constructive trust.
Key Terms and Concepts
- Fiduciary
- No-Profit Rule
- Unauthorised Profit
- Account of Profits
- Constructive Trust
