SQE1 FLK2

## Learning Outcomes

This article explains fiduciary relationships and their obligations in equity and trust law for SQE1 candidates, including:

- how to define and recognise a fiduciary relationship across common professional and commercial contexts
- the main fiduciary roles (trustees, company directors, solicitors, agents, partners, personal representatives) tested in SQE1
- the strict core duties of loyalty, no-profit, no-conflict and confidentiality, and how they interrelate
- how fiduciary duties differ from duties of care and skill, and why the distinction matters in problem questions
- typical conflict situations, including self-dealing and fair-dealing, and the impact of informed consent or authorisation
- when a fiduciary may keep remuneration or benefits, and the role of charging clauses and statute
- the legal consequences of breach, focusing on account of profits, constructive trusts, rescission and equitable compensation
- third-party liability through knowing receipt, dishonest assistance and trustee de son tort, and how to identify each on the facts
- principal equitable remedies and how courts choose between personal and proprietary responses
- structured steps for analysing SQE1-style multiple-choice scenarios involving fiduciary conflicts, profits and third‑party liability

## 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, with a focus on the following syllabus points:

- 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, partner, personal representative)
- The core fiduciary duties: loyalty, no-profit, no-conflict, confidentiality
- Typical conflict situations: self-dealing and fair-dealing rules
- When remuneration is permitted and the role of charging clauses and Trustee Act 2000
- The consequences and remedies for breach of fiduciary duty (account of profits, constructive trust, rescission, equitable compensation)
- When third parties are liable: knowing receipt, dishonest assistance, and intermeddling (trustee de son tort)
- The limits of defences and the role of informed consent and authorisation

## Test Your Knowledge

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, look more closely at that area during your revision._

1. Which of the following is always a fiduciary relationship?
   a) Landlord and tenant
   b) Trustee and beneficiary
   c) Buyer and seller
   d) Mortgagee and mortgagor

2. Which duty is breached if a trustee uses trust information for personal gain?
   a) Duty of care
   b) Duty of loyalty
   c) Duty of confidentiality
   d) 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.

Fiduciary duties are principally duties of loyalty (no-profit and no-conflict). They are distinct from duties of care and skill, which govern how competently the fiduciary performs functions. Equity enforces fiduciary duties strictly to deter disloyalty and protect beneficiaries and principals. Good faith or honest motives do not excuse a breach of fiduciary duty: if a fiduciary has profited or placed themselves in a position where duty and interest may conflict, equity compels disgorgement or provides proprietary relief.

> **Test Tip:**
> In SQE-style questions on Definition of fiduciary relationships, identify the legal test, the triggering fact, and the consequence before choosing between similar answer options.

### 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.

A fiduciary’s obligations are centred on loyalty. By contrast, duties of reasonable care and skill (for trustees, now framed by the Trustee Act 2000) are not fiduciary in nature. As explained in Bristol and West Building Society v Mothew [1998] Ch 1, fiduciary duties require single‑minded loyalty, whereas negligent performance engages different legal standards and remedies.

### 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.
- **Personal representative and beneficiaries of an estate**: PRs must act for the estate with loyalty and good faith.

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:

![Fiduciary relationships in equity: recognition, principal fiduciary roles, core duties, common breaches, profit authorisation, and equitable remedies.](https://static.pastpaperhero.com/images/sqe1-flk2-the-fiduciary-relationship-and-its-obligations-definition-of-fiduciary-relationships_00.png)

_Fiduciary relationships are identified by trust, confidence, and voluntary assumption of responsibility, with principal roles, duties, breaches, profit authorisation, and remedies._

### 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.

The courts emphasise that human nature may tempt a fiduciary to be swayed by self‑interest. The rule in Bray v Ford [1896] AC 44 confirms the need to prevent conflicts and profits, even where the fiduciary acted in good faith. The merits of a transaction (e.g., fairness or market value) do not cure disloyalty: the duty is strict.

### 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.

Classic illustrations include Keech v Sandford (1726) (trustee renews a lease in their own name and must hold it for the trust) and Boardman v Phipps [1967] 2 AC 46 (fiduciary profits earned using trust information are disgorged). Secret commissions and bribes received by agents or directors are also recoverable on constructive trust (FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45).

### 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.

This rule captures self-dealing and similar scenarios. A trustee cannot act on both sides of a transaction (e.g., selling trust property to themselves). The transaction is voidable at the instance of the beneficiaries, regardless of fairness or open dealing. Where the trustee purchases from a beneficiary, the fair-dealing rule applies: the transaction stands only if full disclosure is made, there is no exploitation of the fiduciary position, and the price is fair.

> **Key Term: self-dealing rule**
> A trustee purchasing trust property is in an automatic conflict; the transaction is voidable by beneficiaries even if apparently fair.
> **Key Term: fair-dealing rule**
> A trustee purchasing a beneficiary’s equitable interest may do so only where there is full disclosure, no advantage is taken of the fiduciary position, and the bargain is fair.

### 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.

This duty continues after the relationship ends. For solicitors and senior employees, misuse of confidential information for personal or third‑party gain risks equitable relief and professional/regulatory consequences.

### 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 court may impose a constructive trust over property acquired in breach.
- Contracts entered into in breach of duty may be set aside (rescission).
- The principal may claim equitable compensation for loss caused by the breach.
- The fiduciary may be restrained by injunction, removed from office, and required to deliver up property or information.

> **Key Term: constructive trust**
> An equitable proprietary remedy imposed by law to require a wrongdoer (or recipient) to hold property for the principal or beneficiary.
> **Key Term: equitable compensation**
> A monetary remedy for loss caused by breach of trust or fiduciary duty, assessed in equity (not identical to common law damages).

Breaches also expose third parties to liability in some circumstances:

- A recipient who knowingly receives trust property transferred in breach of trust/fiduciary duty may be liable (knowing receipt).
- A person who dishonestly assists a breach may be liable in equity (dishonest assistance).
- A person who intermeddles with trust administration and causes loss can be treated as a trustee de son tort.

> **Key Term: knowing receipt**
> Recipient liability where a person receives trust/fiduciary property and their knowledge makes it unconscionable to retain the benefit.
> **Key Term: dishonest assistance**
> Accessory liability where a person dishonestly assists a breach of trust or fiduciary duty; the claim is personal, not proprietary.
> **Key Term: trustee de son tort**
> A person who, without authority, assumes control of trust affairs and causes loss, thereby incurring trustee‑like liability.

### 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.

### Worked Example 1.4

A trustee retires, and soon after their nominee buys trust property at auction for them personally. Beneficiaries later discover the link. What is the remedy?

> **Answer:**
> The self‑dealing rule applies. Even using a nominee or timing retirement does not avoid the automatic conflict. The sale is voidable at the beneficiaries’ option, and any profit must be disgorged or the property returned.

### Worked Example 1.5

A trust holds a substantial shareholding in a company. A trustee becomes a director using votes available through the trust and receives director’s fees. Must the trustee account?

> **Answer:**
> Ordinarily, yes. Director’s fees obtained through the fiduciary position must be accounted for to the trust unless a charging clause authorises retention, the directorship pre‑dated the trusteeship, or appointment was independent of trust votes.

### 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.
- **Constructive trust**: Property acquired in breach is held for the principal, enabling recovery and tracing.
- **Rescission**: The principal may set aside contracts entered into in breach of duty.
- **Equitable compensation**: Monetary compensation for loss caused by breach, assessed on equitable principles.

Where loss is in issue (e.g., negligent trust administration alongside or apart from fiduciary wrongdoing), equitable compensation considers causation and the nature of the breach. In commercial trusts operated to facilitate transactions (e.g., solicitors holding completion monies), courts have emphasised loss caused by the breach rather than a strict, automatic reconstitution of the fund (see AIB Group (UK) plc v Mark Redler & Co Solicitors [2014] UKSC 58). However, for fiduciary profits and conflicts, deterrence and disgorgement remain central, and honesty or fairness of terms does not prevent relief.

> **Key Term: rescission**
> Equitable setting aside of a transaction tainted by breach of duty or misrepresentation, restoring parties (as far as possible) to their pre‑contract positions.

Alongside proprietary and personal remedies, the court may grant injunctions to prevent competitive conduct (e.g., where trustees seek to compete with a trust‑owned business), and remove or replace fiduciaries whose conduct endangers proper administration.

> **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. Honesty is not a defence to disgorgement of unauthorised profits. By contrast, equitable compensation depends on proven loss and equitable causation principles.

### When Is a Fiduciary Allowed to Profit?

A fiduciary may only profit from their position if:

- The trust instrument or contract expressly authorises it (e.g., a charging clause).
- All beneficiaries or principals, being adults with full capacity, give fully informed consent.
- The court authorises the profit (e.g., where specialist skills are needed and remuneration is in the beneficiaries’ interests).
- Statute authorises reasonable remuneration (e.g., Trustee Act 2000 for trust corporations or professional trustees, subject to conditions).

> **Key Term: informed consent**
> Consent given by adult, capacitated beneficiaries or principals with full disclosure of material facts, nature of the conflict or profit, and potential consequences.

Otherwise, any profit must be surrendered. Charging clauses and statutory remuneration must be construed strictly; reimbursement for proper expenses is distinct from remuneration.

### 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 and avoid conflicts (e.g., Companies Act 2006 s175) and unauthorised benefits (e.g., s176). Both must avoid conflicts and unauthorised profits, and both are subject to remedies including account of profits and constructive trusts over gains such as bribes and secret commissions.

### Third-Party Liability in Fiduciary Contexts

Third parties can be liable even if they are not fiduciaries:

- **Knowing receipt**: A recipient of trust/fiduciary property may be liable where their knowledge makes it unconscionable to retain the benefit. Relief can include a constructive trust, delivery up, and/or a personal restitutionary order.
- **Dishonest assistance**: A person who assists a breach and fails the objective honesty test (would an honest person, with the defendant’s knowledge and experience, have acted differently?) is personally liable to account for resulting loss, with possible injunctions and ancillary orders.
- **Intermeddling**: A person who takes on trust management functions without authority and causes loss may be treated as a trustee de son tort and personally liable.

Courts distinguish recipient claims (often proprietary) from accessory claims (personal). In both categories, the availability of tracing depends on whether trust assets or their substitutes can be identified in the defendant’s hands.

## 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
- How self-dealing and fair-dealing operate and why fairness does not cure conflict
- The circumstances in which a fiduciary may be permitted to profit (charging clauses, statutory remuneration, informed consent, court authorisation)
- The consequences and remedies for breach (account of profits, constructive trust, rescission, equitable compensation)
- Distinguishing fiduciary disgorgement from loss-based equitable compensation
- Third-party liability: knowing receipt, dishonest assistance, and trustee de son tort
- Practical reliefs including injunctions, removal, and delivery up of property or information

## Key Terms and Concepts

- fiduciary relationship
- duty of loyalty
- no-profit rule
- account of profits
- no-conflict rule
- duty of confidentiality
- self-dealing rule
- fair-dealing rule
- constructive trust
- equitable compensation
- rescission
- knowing receipt
- dishonest assistance
- trustee de son tort
- informed consent


The fiduciary relationship and its obligations - Definition of fiduciary relationships