The fiduciary relationship and its obligations - Duty not to...

Learning Outcomes

This article explores the nature and operation of fiduciary obligations in equity, with a particular focus on the strict duty not to profit from a fiduciary position, including:

• identifying when a fiduciary relationship arises in trusts, company law and other professional contexts for SQE1 purposes;
• distinguishing the no-profit rule from the no-conflict rule and explaining their shared policy rationale;
• applying leading authorities such as Keech v Sandford, Boardman v Phipps and FHR European Ventures to typical examination fact patterns;
• analysing when use of information, opportunities, bribes, secret commissions, or competing businesses constitutes an unauthorised profit;
• evaluating how the self-dealing and fair-dealing rules regulate transactions between trustees and beneficiaries;
• determining when directors’ fees, referral commissions, and professional remuneration must be accounted for and when they may properly be retained;
• assessing the role of authorisation, informed consent, court approval and statutory powers as potential defences or exceptions;
• selecting appropriate equitable remedies, including account of profits, constructive trusts, tracing and equitable allowances, and articulating these clearly in SQE1 problem-style answers.

SQE1 Syllabus

For SQE1, you are required to understand the core principles governing fiduciary relationships and the associated duties, especially as they apply in the context of trusts and company directorships, with a focus on the following syllabus points:

• The definition and characteristics of a fiduciary relationship.
• The scope and strictness of the duty not to profit from a fiduciary position (the 'no-profit rule').
• The related duty to avoid conflicts of interest.
• Key case law illustrating these principles (e.g., Keech v Sandford, Boardman v Phipps).
• Exceptions to the no-profit rule, such as informed consent or authorisation.
• The consequences of breaching this duty, including liability to account and the potential imposition of a constructive trust.
• Treatment of bribes and secret commissions (e.g., FHR European Ventures v Cedar Capital Partners).
• Directors’ fees and remuneration obtained by virtue of a trusteeship or other fiduciary post, and the limited circumstances in which they may be retained.
• The self‑dealing and fair‑dealing rules, including the court’s discretion to authorise transactions exceptionally.

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 relationships are typically considered fiduciary?
   1. Trustee and beneficiary
   2. Company director and company
   3. Solicitor and client
   4. All of the above
2. A trustee uses information gained during their trusteeship to buy shares personally, making a significant profit. The trust itself could not have afforded the shares. Is the trustee liable to account for the profit?
   1. No, because the trust suffered no loss.
   2. No, because the trustee acted honestly.
   3. Yes, because the trustee profited from their fiduciary position without authorisation.
   4. Yes, but only if the trustee acted dishonestly.
3. What is the primary remedy when a fiduciary makes an unauthorised profit?
   1. Damages for negligence
   2. An injunction
   3. An account of profits (often secured by a constructive trust)
   4. Rescission of the trust
4. Can a trustee purchase trust property?
   1. Yes, if they pay a fair market price.
   2. Yes, if the other trustees agree.
   3. No, unless authorised by the trust instrument, the court, or all fully informed beneficiaries (the 'self-dealing' rule).
   4. No, under any circumstances.

Introduction

Equity imposes strict duties on individuals who occupy positions of trust and confidence relative to others. Such individuals are termed 'fiduciaries'. Central to these duties is the obligation of loyalty, which demands that fiduciaries act solely in the best interests of those they serve (their 'principals'). This article examines one of the core aspects of this loyalty: the duty not to profit from the fiduciary position without proper authorisation. Understanding this principle is essential for advising clients in various contexts, including trusts, company law, and agency, and is a key area assessed in SQE1.

The strict approach has a prophylactic purpose. Courts apply the no‑profit and no‑conflict rules inflexibly to deter fiduciaries from allowing self‑interest to influence decision‑making. It is not a question of morality or fault; it is a structural control designed to protect beneficiaries, companies and other principals from the risk associated with the fiduciary’s discretionary power.

The Nature of a Fiduciary Relationship

A fiduciary relationship arises where one party (the fiduciary) undertakes to act for or on behalf of another (the principal) in circumstances that engender trust and confidence. This relationship gives the fiduciary power and discretion that could potentially be misused to the detriment of the principal.

Key Term: Fiduciary
A person who holds a position of trust and confidence regarding another person (the principal) and is legally bound to act in the principal's best interests. Examples include trustees, company directors, agents, business partners, senior employees entrusted with confidential information, and solicitors.

Key Term: Principal
The person to whom fiduciary duties are owed (e.g., a beneficiary in a trust, a company in relation to its directors).

Equity imposes stringent duties on fiduciaries primarily to prevent the abuse of the power and discretion entrusted to them. The overarching duty is one of undivided loyalty. In practice, the courts ask whether the person has undertaken to act for another in circumstances giving rise to legitimate expectation of loyalty. Where such an undertaking exists, strict duties attach even if there is no contract and even if no harm has occurred.

The Core Fiduciary Duties: No Conflict and No Profit

Two fundamental rules underpin the fiduciary's duty of loyalty:

1. The No-Conflict Rule: Fiduciaries must not place themselves in a position where their personal interests conflict, or may possibly conflict, with their duty to the principal.
2. The No-Profit Rule: Fiduciaries must not make a secret or unauthorised profit from their position.

These rules are often intertwined; profiting from the position frequently involves a conflict of interest. This article focuses primarily on the no-profit rule, but its connection to the no-conflict rule is important. The strictness of both rules is grounded in the long‑standing statement that equity bars a fiduciary from making a profit and from entering into a position of conflict because human nature may be swayed by interest rather than duty; strict deterrence protects those whom the fiduciary must serve.

The Duty Not to Profit (The No-Profit Rule)

This is a strict equitable principle prohibiting a fiduciary from obtaining any unauthorised benefit by reason of, or by use of, their fiduciary position or opportunities or knowledge resulting from it.

Key Term: No-Profit Rule
The equitable rule that a fiduciary must not make any unauthorised profit from their fiduciary position.

The rule is applied inflexibly by the courts. Key aspects include:

• Strict Liability: The fiduciary's liability does not depend on proof of fraud, bad faith, or dishonesty. Even if the fiduciary acted honestly and believed they were acting in the principal's best interests, they may still be liable.
• Irrelevance of Loss: Liability arises even if the principal suffered no loss or could not have taken advantage of the opportunity themselves.
• Deterrence: The primary rationale is prophylactic – to deter fiduciaries from being swayed by personal interest rather than their duty.

Illustrative Case Law

Two landmark cases demonstrate the strict application of the no-profit rule.

Keech v Sandford (1726)

• Facts: A trustee held a lease of the profits of a market on trust for an infant beneficiary. The landlord refused to renew the lease for the benefit of the infant. The trustee then took the renewal in his own name.
• Held: The court ruled that the trustee held the renewed lease on constructive trust for the infant beneficiary.
• Principle: A fiduciary cannot retain a benefit obtained through their position, even if the principal could not have obtained that benefit directly.

Boardman v Phipps [1967]

• Facts: Boardman (solicitor to a trust) and Tom Phipps (a beneficiary) used information obtained while acting for the trust to acquire shares in a company personally. The trust itself lacked the power to buy more shares. They acted honestly, believing it benefited the trust, and both they and the trust made significant profits.
• Held: The House of Lords held (by a majority) that Boardman and Phipps were liable to account to the trust for the profits they personally made. They had used information and opportunity derived from their fiduciary positions.
• Principle: The liability arises from the mere fact of making a profit through the fiduciary position without the fully informed consent of the principals (the beneficiaries), irrespective of good faith or lack of loss to the principal.

These cases are regularly applied to modern contexts. For example, where a fiduciary receives a commission or facilitation fee in connection with their role, the profit must ordinarily be disgorged.

Worked Example 1.1

Sarah is a trustee of the Miller Family Trust, which holds shares in TechStart Ltd. Through attending board meetings as a representative of the trust's shareholding, Sarah learns confidential information about TechStart's upcoming product launch, which is likely to significantly increase its share price. Using this information, Sarah buys shares in TechStart Ltd for her personal portfolio before the news becomes public. The shares subsequently triple in value. Advise Sarah.

Answer:
Sarah has breached her fiduciary duty. She used confidential information, acquired solely because of her position as trustee, to make a personal profit. This falls foul of the no-profit rule, as demonstrated in Boardman v Phipps. It is irrelevant that Sarah may have acted without intending to harm the trust or that the trust itself may also have benefited from the share price increase. Sarah is liable to account for the profit she made; the shares she bought will likely be held on constructive trust for the beneficiaries of the Miller Family Trust.

Scope of the No-Profit Rule

The no-profit rule extends beyond simply taking trust property. It covers various scenarios:

• Exploiting Opportunities: Using knowledge or opportunities gained through the fiduciary role for personal advantage (Boardman v Phipps). This includes corporate opportunities that arise in the course of the fiduciary’s role.
• Receiving Bribes or Secret Commissions: Accepting payments from third parties in connection with the fiduciary role. In FHR European Ventures LLP v Cedar Capital Partners LLC [2014], the Supreme Court confirmed that such benefits (including bribes and secret commissions) are held on constructive trust for the principal, enabling a proprietary claim and tracing.
• Directors' or Officeholder Fees: Receiving remuneration as a director or officer if the appointment was obtained by virtue of the fiduciary position (e.g., a trustee uses voting power attached to trust shares to be appointed). Unless independently appointed or expressly authorised, such fees must be accounted for.
• Referral or Professional Commissions: If a fiduciary directs work to their firm or receives a commission in connection with their fiduciary role, the benefit is ordinarily held on trust.
• Competing with the Principal: Setting up or operating a business in competition with the principal’s business can amount to a breach of loyalty (e.g., Re Thomson).
• Self-Dealing: Purchasing trust property from the trust or selling personal property to the trust (see below).
• Post‑retirement or “maturing” opportunities: A fiduciary may be liable where a profit after office stems from an opportunity or information acquired during office.

Within this strict framework, equity may, in rare cases, grant an equitable allowance to an honest fiduciary for skill and effort that created the profit, but this does not alter the duty to account; it mitigates the impact to reflect genuine value contributed.

The Self-Dealing Rule

A specific application of the no-conflict and no-profit rules is the 'self-dealing' rule. This prohibits a trustee from purchasing trust property or selling their own property to the trust.

Key Term: Self-Dealing Rule
The rule prohibiting a trustee from buying trust property from, or selling their own property to, the trust, due to the fundamental conflict of interest.

Such transactions are voidable by the beneficiaries as of right, regardless of whether the price was fair or the trustee acted honestly. The trustee cannot be both buyer and seller in the same transaction.

Attempts to circumvent the rule by using a nominee or by resigning shortly before the purchase are ineffective; equity looks to substance over form. The transaction remains voidable if, in reality, the trustee (or recent ex‑trustee acting to evade the rule) is on both sides.

In exceptional cases, the court can authorise a transaction that would otherwise be caught by the self‑dealing rule where it is clearly in the interests of the beneficiaries and adequate safeguards exist, such as sale by public auction with all material facts disclosed.

The Fair-Dealing Rule

This rule applies where a trustee purchases the beneficial interest of a beneficiary (not the trust property itself). Such transactions are not automatically voidable but can be set aside unless the trustee can demonstrate they acted fairly, paid full value, and made full disclosure of all material facts to the beneficiary.

Independent advice for the beneficiary is not a rigid legal requirement but is powerful evidence of fairness. The burden is on the trustee to prove that there was no abuse of position and that the beneficiary’s consent was fully informed.

Worked Example 1.2

David is a trustee of a trust holding a valuable painting. David is also an art collector and wishes to purchase the painting for his personal collection. He obtains two independent valuations confirming a fair market price and purchases the painting from the trust at that price, informing his co-trustee but not the beneficiaries.

Is this transaction valid?

Answer:
No, the transaction is voidable by the beneficiaries under the self-dealing rule. David, as trustee, cannot purchase trust property. It is irrelevant that he paid a fair market price or informed his co-trustee. The beneficiaries can choose to set aside the sale. David should have sought either the fully informed consent of all adult beneficiaries or court approval.

Worked Example 1.3

Ben is the beneficiary of a trust, holding a remainder interest in a share portfolio currently valued at £100,000. He needs cash urgently and offers to sell his interest to one of the trustees, Fiona, for £80,000. Fiona, knowing the portfolio is likely to increase in value significantly soon, accepts the offer after fully explaining the potential increase to Ben.

Can this transaction be set aside?

Answer:
Possibly not. This involves the fair-dealing rule, as Fiona is buying the beneficial interest from Ben, not trust property. The transaction can stand if Fiona can show she acted fairly, paid a fair price (which might be debatable given the known potential for increase), and made full disclosure. Here, she disclosed the potential increase. If £80,000 was considered a fair price for a future interest given the risks and time value of money, and Ben freely consented after full disclosure, the transaction might be upheld.

Worked Example 1.4

A family trust holds 35% of the shares in Alpha Ltd. Using those votes, trustee Carl secures his election to Alpha’s board and receives director’s fees. The trust deed is silent on trustees retaining such fees. Must Carl account to the trust?

Answer:
Yes, unless Carl can show he would have been appointed independently of the trust’s share votes, the fees arise “by virtue of” his fiduciary position and must be accounted for to the trust. If he can prove independent appointment (or if there is express authorisation or fully informed beneficiary consent), he may retain them.

Worked Example 1.5

Trustee Nora places investments through a brokerage where she is a partner and receives a commission on trades undertaken for the trust. She discloses the arrangement to her co‑trustee but not to the beneficiaries. Must she hand over the commission?

Answer:
Yes. Commissions and similar benefits obtained by reason of the trusteeship must be accounted for to the trust unless fully authorised. Disclosure to a co‑trustee is insufficient; it is the principal (the beneficiaries) who must give fully informed consent, or the authority must appear in the trust instrument or be conferred by the court.

Worked Example 1.6

Executor‑trustee P was directed to continue the deceased’s boat‑brokerage business for the benefit of a daughter. Within months, P sets up a competing brokerage. The trust business experiences lost opportunities. What remedies are available?

Answer:
P is in breach of fiduciary duty by competing with the trust business. The court may grant an injunction restraining the competition and order an account of profits in respect of gains made by P’s competing business that are attributable to the breach.

Worked Example 1.7

A managing director obtains a lucrative mining licence opportunity for the company but the company is unable to proceed. With full knowledge and blessing of the company’s board, the director pursues the opportunity in a separate venture and profits. Is the director liable to account?

Answer:
Where a fiduciary’s pursuit of an opportunity proceeds with fully informed authorisation by the principal and there is no deprivation of a corporate opportunity without consent, the fiduciary may be permitted to retain profits. The critical features are full disclosure and genuine informed authorisation by the proper decision‑makers.

Exceptions and Defences

A fiduciary may be permitted to profit from their position or enter into transactions involving potential conflicts if they obtain proper authorisation.

• Authorisation by the Trust Instrument: The trust deed (or will) creating the fiduciary relationship may expressly permit certain profits (e.g., a charging clause allowing professional trustees remuneration) or transactions. A clause authorising retention of directors’ fees is effective if clearly drafted.
• Informed Consent of the Principal(s): The fiduciary may profit if they make full disclosure of all relevant facts to the principal(s) (all beneficiaries if a trust, provided they are adult and sui juris) and obtain their freely given, informed consent. Consent must relate specifically to the proposed profit or transaction; generic or uninformed approval is insufficient.
• Court Authorisation: The court has an established jurisdiction to authorise a fiduciary to act in a way that would otherwise constitute a breach, particularly where it is beneficial to the trust (e.g., authorising a sale of trust property to a trustee on transparent terms, or conferring administrative powers necessary for effective management). The court’s focus is whether authorisation is expedient and safeguards beneficiary interests.
• Statutory Authority: Some statutes may authorise conduct that would otherwise be a breach. In particular, professional trustees (and trust corporations) may charge reasonable remuneration in defined circumstances under the Trustee Act 2000 where the deed is silent and written consent is obtained from co‑trustees.

Transactions that are otherwise validly authorised can still be scrutinised for fairness. A fiduciary must be able to demonstrate that disclosure was full and frank and that the principal’s consent was free from undue influence or pressure.

Separate from authorisation, an exemption clause in the trust instrument may exclude liability for certain breaches of trust. Such clauses do not normally authorise profits; instead they may protect trustees against negligence. They cannot exclude liability for fraud or dishonesty. They do not excuse the core obligation of loyalty.

Exam Warning

Be cautious when assessing consent. For beneficiaries' consent to be valid defence for a trustee, ALL beneficiaries must be adults (sui juris) and must give fully informed consent after full disclosure of all material facts by the trustee. Partial or uninformed consent is insufficient.

Remuneration and allowances

The general rule is that a trustee may not charge for services unless permitted by the instrument, statute or fully informed beneficiary consent. Where a fiduciary must account for profits, the court has a discretion in exceptional cases to award an equitable allowance for skill and effort which created the profit (as occurred in Boardman v Phipps). An allowance does not negate the breach; it recognises value added in achieving the gains surrendered.

Consequences of Breach: Constructive Trust

Where a fiduciary makes an unauthorised profit in breach of duty, equity typically requires them to account for that profit to the principal. The profit is often deemed to be held on a constructive trust for the principal.

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 against another person. It can arise, for example, over unauthorised profits made by a fiduciary.

Key Term: Account of Profits
An equitable remedy requiring a defendant (e.g., a fiduciary) to surrender profits made through their wrongful conduct (e.g., breach of fiduciary duty) to the claimant (the principal).

This means the principal acquires a proprietary interest in the profit or any property acquired with it. This is advantageous if the fiduciary becomes bankrupt, as the principal can claim the specific property ahead of general creditors. It also allows the principal to benefit from any increase in the value of property acquired with the profit.

A claim to bribes or secret commissions is proprietary in nature; following FHR European Ventures, such benefits are held on constructive trust for the principal from the moment of receipt. The proprietary character empowers tracing into substitutes and gives priority over unsecured creditors.

In some cases, especially where the profit has been dissipated and no substitute exists, the principal may instead (or in addition) seek a personal account of profits. Interest may be ordered on sums due; compound interest can be awarded where appropriate to reflect wrongful profit‑taking. Where the fiduciary mixed their own time and skill in generating the profits, the court may grant an equitable allowance, calibrated to avoid unjustly enriching the principal with the full benefit of the fiduciary’s endeavours while still vindicating the strict duty.

Directors’ fees and earnings

Where a fiduciary has taken remunerated office by reason of their fiduciary position (for example, a trustee becoming a company director through votes attached to trust shares), remuneration is ordinarily held on constructive trust for the principal unless independent appointment or express authorisation applies. The same principle applies to referral fees, brokerage commission and other benefits obtained because of fiduciary office. Where the fiduciary would have been appointed regardless of the fiduciary position, the justification for disgorgement falls away.

Competition with the principal

Where a fiduciary sets up a competing business, the court can restrain competition and order an account of profits. Competition cases often engage both no‑conflict and no‑profit principles. The duty may continue during the period of appointment or agency, and prohibitions can extend to misuse of confidential information in the course of post‑termination competition.

Limitations and relief

Claims to recover trust property or its proceeds from a trustee are not time‑barred, and there is no limitation period for fraudulent breaches. In other contexts a six‑year period may apply. The court can relieve a trustee from personal liability under statutory discretion where the trustee acted honestly and reasonably and ought fairly to be excused; this is rarely engaged in deliberate profit cases and does not excuse accounting for unauthorised profits.

Key Point Checklist

This article has covered the following key knowledge points:

• Fiduciary relationships are based on trust and confidence, imposing a duty of loyalty.
• Core fiduciary duties include the no-conflict rule and the no-profit rule.
• The no-profit rule strictly prohibits fiduciaries from making unauthorised profits from their position.
• Liability is strict; good faith or lack of loss to the principal are generally irrelevant (Keech v Sandford, Boardman v Phipps).
• The rule covers exploitation of opportunities, information, secret commissions, and director's fees obtained through the fiduciary role (reinforced by FHR European Ventures on bribes/commissions).
• The self-dealing rule prevents trustees buying trust property; the fair-dealing rule governs trustees buying a beneficiary's interest.
• Exceptions exist where there is authorisation by the trust instrument, court, statute, or the fully informed consent of all principals.
• Unauthorised profits are typically held on constructive trust for the principal, who can demand an account of profits and may trace into substitutes.
• Equitable allowances may, exceptionally, reward honest fiduciaries for skill and effort while still requiring disgorgement.
• Competing with the principal can be restrained and profits from competition must be accounted for.

Key Terms and Concepts

• Fiduciary
• Principal
• No-Profit Rule
• Self-Dealing Rule
• Constructive Trust
• Account of Profits