Learning Outcomes
This article explores the nature of the fiduciary relationship within the context of trusts. It focuses specifically on the core duties owed by trustees, particularly the 'no conflict' and 'no profit' rules. After reading this article, you should be able to identify situations involving potential breaches of fiduciary duty, such as a trustee competing with the trust or making incidental profits, and understand the potential consequences for the trustee. This knowledge is essential for applying fiduciary principles to SQE1 assessment scenarios.
SQE1 Syllabus
For SQE1, you are required to understand the fundamental principles governing fiduciary relationships and obligations, especially concerning trustees. Your revision should focus on:
- The nature of the fiduciary relationship and the core duties of loyalty and good faith.
- The 'no conflict' rule and its application, including situations where a trustee's personal interests may clash with their duties to the trust.
- The 'no profit' rule, preventing trustees from making unauthorised profits from their position, including incidental gains.
- Specific examples of breaches, such as competing with the trust or misuse of trust opportunities/information.
- Available defences, such as authorisation or fully informed consent.
- Remedies for breach of fiduciary duty, including accounting for 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 trustee from putting their personal interests ahead of the trust's interests?
- The duty of care
- The 'no conflict' rule
- The 'no profit' rule
- The duty to invest
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A trustee learns of a lucrative investment opportunity solely because of their position as trustee. The trust cannot afford to take up the opportunity. If the trustee takes the opportunity personally and profits, which rule have they likely breached?
- Duty to account
- Rule against self-dealing
- 'No profit' rule
- Power of advancement
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Which remedy typically requires a fiduciary to surrender unauthorised gains made from their position?
- Equitable compensation
- Rectification
- Account of profits
- Rescission
Introduction
The relationship between a trustee and the beneficiaries of a trust is a fiduciary relationship. This is a relationship built on trust and confidence, where one party (the fiduciary, i.e., the trustee) undertakes to act in the best interests of another (the principal, i.e., the beneficiaries). Equity imposes strict duties on fiduciaries to ensure loyalty and prevent abuse of their position. Two fundamental duties are the 'no conflict' rule and the 'no profit' rule. This article examines these duties, specifically focusing on situations where a trustee might compete with the trust or make incidental profits.
Key Term: Fiduciary Relationship
A relationship where one party (the fiduciary) owes a duty of utmost good faith and loyalty to another party (the principal), requiring the fiduciary to act solely in the principal's best interests.
The Core Fiduciary Duty: Loyalty
The defining obligation of a fiduciary is loyalty. Trustees must act solely in the interests of the beneficiaries and the trust, avoiding any situation where their personal interests could potentially conflict with their duties. This duty underpins the specific 'no conflict' and 'no profit' rules discussed below.
The 'No Conflict' Rule
A trustee must not place themselves in a position where their personal interest conflicts, or potentially may conflict, with their duty to the trust beneficiaries. This is an objective rule; it applies even if the trustee acted honestly or if the trust suffered no loss. The mere possibility of conflict is sufficient to trigger the rule.
Key Term: No Conflict Rule
The principle that a fiduciary must not put themselves in a position where their personal interests conflict, or might possibly conflict, with their duties to their principal.
The 'No Profit' Rule
Alongside the 'no conflict' rule, the 'no profit' rule dictates that a trustee must not make any unauthorised profit from their position as trustee. This includes exploiting opportunities, information, or assets belonging to the trust for personal gain. Again, the rule is applied strictly; the trustee's honesty or the fact that the trust itself could not have made the profit is generally irrelevant.
Key Term: No Profit Rule
The principle that a fiduciary must not obtain any unauthorised benefit or gain by reason of, or by use of, their fiduciary position.
Competition with the Trust
A direct conflict of interest arises if a trustee establishes or engages in a business that competes with a business held by the trust.
Rationale
Operating a competing business places the trustee's personal interest (maximising their own business's profit) in direct opposition to their duty to the trust (maximising the trust business's profit). Equity prevents fiduciaries from being swayed by such competing interests.
Worked Example 1.1
A trust holds a 75% shareholding in 'Coastal Cafes Ltd', which operates a chain of seaside cafes. The sole trustee, Fiona, decides to open her own independent cafe in one of the same towns where Coastal Cafes Ltd operates. Is this permissible?
Answer: No. By opening a competing business in the same market, Fiona places her personal interest in her cafe's success in direct conflict with her duty to maximise the value and success of the trust's shareholding in Coastal Cafes Ltd. This constitutes a breach of the 'no conflict' rule. Fiona would be liable to account for any profits made by her competing cafe.
Related Topic: Remedies 🔗
Breaches of fiduciary duty can lead to personal liability for the trustee, requiring them to account for profits or compensate for losses.
Incidental Profits and Unauthorised Gains
Trustees must account for any unauthorised profit obtained by virtue of their trusteeship, even if the profit arises incidentally and without dishonest intent.
Sources of Incidental Profit
Common examples include:
- Director's Fees: Fees received for being a director of a company where the directorship was obtained only because the trust holds shares in that company.
- Commissions/Bribes: Secret payments received from third parties for placing trust business with them.
- Use of Information/Opportunity: Profiting from information or opportunities that came to the trustee solely because of their role.
The Strict Approach: Boardman v Phipps
The leading case, Boardman v Phipps [1967] 2 AC 46, illustrates the strictness of the 'no profit' rule. In this case, a solicitor acting for a trust (Boardman) and a beneficiary (Tom Phipps) used information gained while acting for the trust to acquire shares personally in a company in which the trust also held shares. They acted honestly, improved the company's performance significantly, and both the trust and they themselves profited.
Despite their good faith and the benefit to the trust, the House of Lords held they had breached their fiduciary duty. They had profited from information and opportunity that came to them through their fiduciary positions. They were required to account for their personal profits to the trust (though the court awarded them generous remuneration for their work and skill).
Worked Example 1.2
A trustee manages a trust fund that includes a large portfolio of commercial properties. Through managing these properties, the trustee learns confidential information that a major new transport hub is planned nearby, which will significantly increase property values in the area. The trustee uses this information to buy an adjacent property for herself. The trust did not have sufficient funds to purchase this property itself. Has the trustee breached her duty?
Answer: Yes. The trustee used confidential information obtained solely through her position as trustee for personal gain. This is a breach of the 'no profit' and 'no conflict' rules, even if the trust could not have purchased the property itself. The trustee will likely be required to hold the purchased property (or any profit made from its sale) on constructive trust for the beneficiaries.
Key Term: Constructive Trust
A trust imposed by equity in certain circumstances where it would be unconscionable for the legal owner of property to retain the beneficial interest, often used as a remedy for breach of fiduciary duty.
Revision Tip
Remember that the fiduciary's state of mind (honesty or intention) is generally irrelevant to liability for breach of the 'no conflict' and 'no profit' rules. The rules are applied strictly to deter fiduciaries from potentially compromising their loyalty.
Defences to Breach of Fiduciary Duty
A trustee may avoid liability for an apparent breach of the 'no profit' or 'no conflict' rules if they have a valid defence.
- Authorisation by Trust Instrument: The trust deed itself may expressly permit the trustee to engage in certain activities that would otherwise constitute a breach (e.g., allowing a professional trustee to charge fees, or permitting a specific conflict).
- Informed Consent of Beneficiaries: If all beneficiaries are sui juris (adult and mentally capable) and give their fully informed consent to the trustee's actions before the act occurs, the trustee will not be liable to those consenting beneficiaries. Full disclosure of all material facts by the trustee is essential.
- Court Approval: In some circumstances, a trustee may seek prior approval from the court to engage in a transaction that might otherwise be a breach.
Exam Warning
Consent obtained after the breach, or consent from only some beneficiaries, or consent obtained without full disclosure, will not provide a complete defence.
Remedies
Where a trustee breaches their fiduciary duty by competing with the trust or making an unauthorised profit:
- Account of Profits: The primary remedy is an account of profits, requiring the trustee to surrender the unauthorised profits made to the trust.
- Constructive Trust: Equity may impose a constructive trust over the profits or any property acquired using those profits, meaning the trustee holds the asset(s) for the benefit of the beneficiaries. This is particularly useful if the acquired asset has increased in value or if the trustee is insolvent.
Key Point Checklist
This article has covered the following key knowledge points:
- A fiduciary relationship imposes strict duties of loyalty and good faith.
- The 'no conflict' rule prevents fiduciaries from situations where personal interests clash with their duties.
- The 'no profit' rule prohibits fiduciaries from making unauthorised gains from their position.
- Trustees must not compete with the trust business.
- Incidental profits, such as director's fees obtained through trusteeship or use of trust information/opportunities, must generally be accounted for to the trust.
- Liability is strict; honesty or lack of loss to the trust is usually irrelevant.
- Defences include authorisation by the trust instrument, fully informed consent of all adult beneficiaries, or court approval.
- Remedies include accounting for profits and the imposition of a constructive trust.
Key Terms and Concepts
- Fiduciary Relationship
- No Conflict Rule
- No Profit Rule
- Constructive Trust
