PastPaperHero | The fiduciary relationship and its obligations - Competition with the trust and incidental profits

Learning Outcomes

This article examines fiduciary duties in trusts, focusing on the strict 'no conflict' and 'no profit' rules, competition with trust business, incidental profits, available defences, and principal remedies, including:

The nature and scope of fiduciary obligations owed by trustees and how the strict 'no conflict' and 'no profit' rules regulate their conduct in practice
Practical examples of competition with trust business, diversion of opportunities, and use or misuse of confidential information obtained through the trusteeship
Incidental profits such as director’s fees, commissions, and bribes, and when authorisation in the trust instrument or fully informed beneficiary consent permits retention
Equity’s strict, deterrent approach to fiduciary loyalty, the irrelevance of good faith to liability, and limits on otherwise permitted conduct
Defences and exceptions available to trustees, including charging clauses, informed consent by all sui juris beneficiaries, limited court approval, and statutory remuneration powers
Key remedies for breach of fiduciary duty, including an account of profits, constructive trusts, tracing and proprietary claims, interest, and equitable allowances for skill and effort
Leading authorities consistent with current UK law, including Keech v Sandford, Boardman v Phipps, Re Thomson, Re Macadam, Williams v Barton, and FHR European Ventures v Cedar Capital
Techniques for analysing SQE1-style problem questions involving trustee competition or incidental profits and structuring concise, well-supported exam answers

SQE1 Syllabus

For SQE1, you are required to understand the fundamental principles governing fiduciary relationships and obligations, especially concerning trustees, with a focus on the following syllabus points:

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.
Illustrative case law: Keech v Sandford (renewal of lease), Boardman v Phipps (use of information/opportunity), Re Thomson (competition with trust business), Re Macadam (director’s fees), Williams v Barton (commission), and FHR European Ventures v Cedar Capital Partners (bribes/secret commissions held on constructive trust).
The distinction between self-dealing and fair-dealing; charging clauses and statutory remuneration for professional trustees (Trustee Act 2000); limits of excusal under s 61 Trustee Act 1925 compared to fiduciary profit 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.

Which core principle prevents a trustee from putting their personal interests ahead of the trust's interests?
1. The duty of care
2. The 'no conflict' rule
3. The 'no profit' rule
4. The duty to invest
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?
1. Duty to account
2. Rule against self-dealing
3. 'No profit' rule
4. Power of advancement
Which remedy typically requires a fiduciary to surrender unauthorised gains made from their position?
1. Equitable compensation
2. Rectification
3. Account of profits
4. 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.

These duties operate strictly and prophylactically. Liability does not depend on dishonesty, bad faith, or loss to the trust; equity aims to deter fiduciaries from putting themselves in positions where duty and interest may diverge, and from obtaining unauthorised benefits by reason of their office.

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. As articulated in classic authority, equity takes a strict approach because, “human nature being what it is, there is danger… of the person holding a fiduciary position being swayed by interest rather than by duty” (Bray v Ford [1896] AC 44).

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.

This rule often underpins decisions preventing fiduciaries from acting in ways that compromise impartial judgment—for example, setting up a business in competition with the trust’s business, or acquiring an interest that would make the fiduciary an unsuitable advisor on a matter within the trust’s sphere. Courts may grant injunctive relief to restrain imminent breaches and will order disgorgement of profits if the breach has occurred.

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. This principle is entrenched across categories of fiduciaries (trustees, directors, agents, partners). Where a profit has been made, the standard remedy is an account of profits, sometimes coupled with the imposition of a constructive trust over the profits or assets acquired.

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. Where a will or trust specifically directs a trustee to carry on a settlor’s business or manage shares in a trading company, equity is particularly vigilant to ensure trustees do not undermine that duty by diverting custom, opportunities, or profits.

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. The strictness of the rule means trustees can be restrained from setting up or continuing a competing business and required to account for profits already earned (see Re Thomson [1930] 1 Ch 203).

In practice, “competition” is understood broadly. It may include:

Using trust connections to build a rival customer base.
Diverting business opportunities to the competing venture.
Exploiting privileged access to markets or suppliers gained through the trusteeship.

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.

Worked Example 1.2

A testator’s will directs the trustee, Sam, to continue the testator’s yacht brokerage for the benefit of the testator’s daughter. Six months later, Sam forms “Harbour Brokers Ltd” to trade separately in the same port, whilst continuing to act as trustee of the will trust. What is Sam’s position?

Answer:
Sam’s actions breach the ‘no conflict’ rule by competing with the trust business he was directed to run. On authority (Re Thomson), Sam can be restrained from continuing the competing venture and must account to the trust for profits earned from Harbour Brokers Ltd insofar as they flowed from the breach.

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. This covers benefits obtained because the trustee is in office (e.g., a paid directorship obtained by voting trust shares), and “side payments” such as secret commissions.

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. A trustee who uses trust votes to secure a directorship must account for any director’s remuneration (Re Macadam [1946] Ch 73), unless expressly authorised.
Commissions/Bribes: Secret payments received from third parties for placing trust business with them. Such payments are held on constructive trust for the beneficiaries; the trustee must surrender the benefit (Williams v Barton [1927] 2 Ch 9; FHR European Ventures LLP v Cedar Capital Partners [2014] UKSC 45).
Use of Information/Opportunity: Profiting from information or opportunities that came to the trustee solely because of their role. Liability arises even if the trust could not, or would not, have taken the opportunity (Boardman v Phipps [1967] 2 AC 46).

Where the directorship pre-dates the trusteeship, or the trustee was appointed independently of the trust’s voting power, fees received may be retained. Where the trust instrument contains a charging clause, or the beneficiaries consent with full information, retention of remuneration may be authorised.

Commissions and Bribes: Contemporary Position

The Supreme Court has confirmed that bribes and secret commissions accepted by a fiduciary in breach of duty are held on constructive trust for the principal (FHR European Ventures LLP v Cedar Capital Partners). This gives beneficiaries a proprietary claim to the payment and any traceable proceeds, and priority in insolvency. This modern rule removes previous uncertainty and applies squarely to trustees.

Director’s Fees and Office Benefits

Where trustees use the trust’s shareholding to procure a board seat, a salary or fee derived from that appointment is treated as an unauthorised profit. The trustee must account for it to the trust unless authorised. Where a trustee would have been appointed without reliance on trust votes, the fee may be retained. Similarly, a seat obtained before the trusteeship may allow retention of earnings if there is no misuse of trust position.

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 1.3

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.

Worked Example 1.4

The trustees of a discretionary trust use the trust’s 40% shareholding to vote one trustee, Asha, onto the board of Delta Ltd. Asha receives a director’s salary. Delta’s shareholders approve the appointment by a slim margin that depended on the trust’s votes. Must Asha account for the salary?

Answer:
Yes. Asha obtained the directorship by reason of her trust position. The salary is an unauthorised profit and must be accounted to the trust unless expressly authorised by the trust instrument or by fully informed consent of all beneficiaries.

Worked Example 1.5

A trustee arranges for the trust’s portfolio insurer to place a large policy and receives a “finder’s fee” unknown to the other trustees and beneficiaries. Is the payment recoverable?

Answer:
Yes. Secret commissions received by a fiduciary for placing trust business are held on constructive trust for the beneficiaries (FHR European Ventures; Williams v Barton). The trustee must surrender the fee and any traceable proceeds.

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. Where a profit is made, the starting point is disgorgement, though equity may grant a reasonable allowance for skill and effort in appropriate cases.

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. The available defences are narrow and must be evidenced precisely.

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, retain director’s fees, or undertake competing work in specified circumstances). Charging clauses and express authorisation must be interpreted strictly; any ambiguity will typically be resolved against the trustee.
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; the trustee must explain the nature of the conflict, the proposed conduct, and potential consequences.
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. Courts exercise this power sparingly, and only where it is expedient and consistent with the trust’s best interests.

Professional remuneration may be authorised by statute. Under the Trustee Act 2000, a trust corporation may charge reasonable remuneration. Other professional trustees (who are not sole trustees) may charge reasonable remuneration with the written consent of co-trustees, provided the trust instrument does not otherwise deal with remuneration.

Key Term: Account of Profits
An equitable remedy requiring a fiduciary to disgorge gains obtained in breach of fiduciary duty, calculated so the principal receives the benefit of profits made by reason of the breach.

Worked Example 1.6

The trust instrument contains a clause allowing any trustee “acting in a professional capacity” to charge reasonable fees for services rendered to the trust. A solicitor-trustee charges hourly rates for drafting documents and advising on investments. Is this permitted?

Answer:
Yes. A charging clause can authorise professional fees. Provided the trustee falls within the clause (e.g., acts in a professional capacity) and fees are reasonable, charges may be retained. Absent authorisation, professional trustees may rely on statutory remuneration where applicable under the Trustee Act 2000.

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. A beneficiary under a disability cannot give valid consent. Authorisation must be clear and unambiguous.

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 fiduciary to surrender the unauthorised profits to the trust. This may include profits from a competing business or earnings derived from office benefits obtained through trust position.
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. Under current law, bribes and secret commissions are held on constructive trust for the principal (FHR European Ventures).
Tracing and Proprietary Claims: Where profits have been converted into other assets, beneficiaries can trace into substituted property. A proprietary claim confers priority in insolvency and allows recovery of the asset or its value. Tracing is available against recipients who are not bona fide purchasers for value without notice.
Interest: Courts may award interest on sums due. Compound interest can be ordered in cases of fiduciary profit to prevent unjust enrichment.
Equitable Allowance: Despite requiring disgorgement, a court may award a reasonable allowance to a fiduciary for skill, effort, and contributions that enhanced value, especially where conduct was open and beneficial to the trust (as in Boardman v Phipps). This is discretionary and fact-sensitive.

Worked Example 1.7

A trustee discloses a potential conflict to beneficiaries and proposes acquiring a nearby warehouse personally, explaining that trust liquidity is insufficient. Only some adult beneficiaries consent. Later, the trustee sells the warehouse at a significant profit. What remedy is available?

Answer:
The trustee must account for profits. Partial consent does not protect against claims by non-consenting beneficiaries. Equity will likely impose a constructive trust over the profit or asset for the non-consenting beneficiaries’ benefit, and an account will determine the sums due to the trust.

Worked Example 1.8

A fiduciary improves the profitability of a company by active management in circumstances analogous to Boardman v Phipps, while making a personal profit that must be disgorged. Can the court recognise the fiduciary’s contribution?

Answer:
Yes. While requiring disgorgement of unauthorised profits, the court may grant an equitable allowance for work and skill that improved the value of trust assets, offsetting the sum to be accounted.

Additional Nuances and Practical Points

Self-Dealing vs Fair-Dealing: Buying trust property is generally voidable at the beneficiaries’ instance (self-dealing), regardless of fairness or open market process. Purchasing a beneficiary’s equitable interest may be permitted if the trustee shows full disclosure, fair price, and absence of undue influence (fair-dealing rule). These rules sit alongside the ‘no conflict’ and ‘no profit’ duties but address different risk profiles.
Good Faith Irrelevant to Liability: The fact that the trustee acted honestly or the trust benefited does not excuse liability under the strict fiduciary rules. The rationale is deterrence and preserving undivided loyalty.
Scope of Profits: An account should capture the full benefit obtained by reason of the breach. In cases of competition, the court may take the net profits of the competing venture that are causally linked to the breach, though courts will avoid double-counting and may allow deductions for expenses and a reasonable allowance.
Limitation and Priority: Claims for recovery of trust property or its proceeds from a trustee are not time-barred by the ordinary six-year limitation (Limitation Act 1980, s 21(1)). Proprietary claims provide priority in insolvency.

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; courts may restrain competition and require an account of profits.
Incidental profits, such as director's fees obtained through trusteeship or use of trust information/opportunities, must generally be accounted for to the trust.
Bribes and secret commissions received by fiduciaries are held on constructive trust for the principal, giving proprietary remedies and tracing rights.
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; professional remuneration may be authorised by statute or charging clause.
Remedies include accounting for profits, constructive trusts, tracing, and interest; equity may award an allowance for skill and effort in appropriate cases.

Key Terms and Concepts

Fiduciary Relationship
No Conflict Rule
No Profit Rule
Constructive Trust
Account of Profits

The fiduciary relationship and its obligations - Competition...