The fiduciary relationship and its obligations - Definition of fiduciary relationships

Learning Outcomes

After reading this article, you will be able to define a fiduciary relationship, identify the main types of fiduciary roles, and explain the core duties owed by fiduciaries. You will understand the legal consequences of breaching fiduciary obligations and be able to apply these principles to SQE1-style problem questions.

SQE1 Syllabus

For SQE1, you are required to understand the definition and scope of fiduciary relationships, the key duties imposed on fiduciaries, and the remedies available for breach. In your revision, focus on:

  • The definition and identification of fiduciary relationships in equity and trust law
  • The main types of fiduciary roles (e.g., trustee, agent, company director, solicitor)
  • The core fiduciary duties: loyalty, no-profit, no-conflict, confidentiality
  • The consequences and remedies for breach of fiduciary duty

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.

  1. Which of the following is always a fiduciary relationship?
    1. Landlord and tenant
    2. Trustee and beneficiary
    3. Buyer and seller
    4. Mortgagee and mortgagor
  2. Which duty is breached if a trustee uses trust information for personal gain?
    1. Duty of care
    2. Duty of loyalty
    3. Duty of confidentiality
    4. Duty to invest

  3. True or false? A fiduciary may profit from their position if the principal gives fully informed consent.

  4. What is the usual remedy if a fiduciary makes an unauthorised profit from their role?

Introduction

A fiduciary relationship is a central concept in equity and trust law. It arises where one person is entrusted to act for another in circumstances that require trust and confidence. The fiduciary must always put the interests of the other party (the principal or beneficiary) ahead of their own and comply with strict legal duties. Understanding the definition, scope, and consequences of fiduciary relationships is essential for SQE1.

Defining Fiduciary Relationships

A fiduciary relationship exists when one party (the fiduciary) undertakes to act for or on behalf of another (the principal) in a situation that gives rise to trust and confidence.

Key Term: fiduciary relationship
A legal relationship where one person is obliged to act for another with loyalty and good faith, avoiding conflicts and unauthorised profits.

Fiduciary relationships are not limited to one context. They are recognised in various legal settings where trust and reliance are essential.

Common Examples of Fiduciary Relationships

  • Trustee and beneficiary: The trustee manages property for the beneficiary.
  • Agent and principal: The agent acts on behalf of the principal.
  • Company director and company: Directors must act in the company's best interests.
  • Solicitor and client: Solicitors must act loyally for their clients.
  • Partners in a partnership: Partners owe duties to each other and the firm.

In Bristol and West Building Society v Mothew [1998] Ch 1, Millett LJ described a fiduciary as someone who has undertaken to act for or on behalf of another in circumstances that give rise to a relationship of trust and confidence.

Core Duties of a Fiduciary

Fiduciaries are subject to strict duties designed to protect the principal's interests. The main duties are:

Duty of Loyalty

The fiduciary must act solely in the interests of the principal and must not allow personal interests or outside influences to affect their decisions.

Key Term: duty of loyalty
The obligation to act only for the benefit of the principal, not for personal advantage or third parties.

No-Profit Rule

A fiduciary must not profit from their position unless the principal gives fully informed consent. Any unauthorised profit must be handed over to the principal, even if the principal suffers no loss.

Key Term: no-profit rule
The rule that a fiduciary must not make any unauthorised profit from their position.

Key Term: account of profits
A remedy requiring the fiduciary to pay over any unauthorised profits to the principal.

No-Conflict Rule

A fiduciary must avoid situations where their personal interests conflict, or may conflict, with their duty to the principal. Even the possibility of a conflict is enough to breach this duty.

Key Term: no-conflict rule
The rule that a fiduciary must not place themselves in a position where their personal interests and their duty may conflict.

Duty of Confidentiality

A fiduciary must keep information obtained in the course of the relationship confidential and must not use it for personal gain or disclose it without authority.

Key Term: duty of confidentiality
The obligation to keep the principal's information private and not use it for personal benefit.

Breach of Fiduciary Duty

If a fiduciary breaches their duties, equity imposes strict remedies to protect the principal and deter misconduct. The main consequences are:

  • The fiduciary must account for and pay over any unauthorised profit (account of profits).
  • The principal may claim equitable compensation for loss caused by the breach.
  • Contracts entered into in breach of duty may be set aside (rescission).
  • The court may impose a constructive trust over property acquired in breach.

Worked Example 1.1

A trustee purchases land from the trust using inside information about a planned development. The trustee pays full market value. Have they breached a fiduciary duty?

Answer: Yes. The trustee has used their position for personal gain and is in a conflict of interest. The transaction is voidable at the beneficiary's option, and any profit must be paid to the trust.

Worked Example 1.2

A company director receives a secret commission from a supplier for awarding a contract. What is the legal consequence?

Answer: The director has breached the no-profit rule. The commission is held on constructive trust for the company, and the director must pay it over (account of profits).

Worked Example 1.3

A solicitor, after acting for a client, uses confidential information gained during the retainer to benefit a new client. Is this a breach?

Answer: Yes. The solicitor has breached the duty of confidentiality and may be liable to the former client for any loss or unauthorised gain.

Remedies for Breach

The remedies for breach of fiduciary duty are strict and aim to strip away any unauthorised benefit. The main remedies are:

  • Account of profits: The fiduciary must pay over all unauthorised profits.
  • Equitable compensation: The fiduciary must compensate the principal for any loss.
  • Rescission: The principal may set aside contracts entered into in breach of duty.
  • Constructive trust: The court may declare that property acquired in breach is held for the principal.

Exam Warning

For SQE1, remember that a fiduciary may be liable even if they acted honestly or the principal suffered no loss. The focus is on strict enforcement of the duties, not the fiduciary's intention.

When Is a Fiduciary Allowed to Profit?

A fiduciary may only profit from their position if:

  • The trust instrument or contract expressly authorises it.
  • All beneficiaries or principals, being adults with full capacity, give fully informed consent.
  • The court authorises the profit.

Otherwise, any profit must be surrendered.

Comparison: Trustees and Company Directors

Both trustees and company directors are fiduciaries, but the context and scope of their duties may differ. Trustees must act for the benefit of beneficiaries, while directors must act for the company as a whole. Both must avoid conflicts and unauthorised profits.

Key Point Checklist

This article has covered the following key knowledge points:

  • The definition and identification of fiduciary relationships in equity and trust law
  • The main types of fiduciary roles and their core duties
  • The strict duties of loyalty, no-profit, no-conflict, and confidentiality
  • The consequences and remedies for breach of fiduciary duty
  • The circumstances in which a fiduciary may be permitted to profit

Key Terms and Concepts

  • fiduciary relationship
  • duty of loyalty
  • no-profit rule
  • account of profits
  • no-conflict rule
  • duty of confidentiality
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Pleased to share that I have successfully passed the SQE1 exam on 1st attempt. With SQE2 exempted, I’m now one step closer to getting enrolled as a Solicitor of England and Wales! Would like to thank my seniors, colleagues, mentors and friends for all the support during this grueling journey. This is one of the most difficult bar exams in the world to undertake, especially alongside a full time job! So happy to help out any aspirant who may be reading this message! I had prepared from the University of Law SQE Manuals and the AI powered MCQ bank from PastPaperHero.

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Senior Associate at Trilegal