Learning Outcomes
This article explores the core principles governing fiduciary relationships and the duties owed by fiduciaries. It details the consequences of breaching these duties and outlines the primary remedies available to beneficiaries, including personal and proprietary claims. For the SQE1 assessments, you will need to identify fiduciary relationships, recognise breaches of fiduciary duties, and understand the characteristics and applicability of remedies such as equitable compensation, account of profits, constructive trusts, and tracing. Your understanding will enable you to analyse factual scenarios and select the appropriate legal principles and remedies in SQE1-style single best answer questions. It also develops fluency with third party liability (knowing receipt and dishonest assistance), the advantages and limits of proprietary claims (including priority on insolvency), the measurement of loss and causation in equitable compensation, the treatment of bribes and secret commissions, and the main limitations and defences (including bona fide purchaser without notice, change of position, laches, limitation, beneficiary consent, exemption clauses, and relief under statute).
SQE1 Syllabus
For SQE1, you are required to understand the nature of fiduciary obligations and the remedies available when those obligations are breached. This involves applying these principles practically to advise clients on potential claims and liabilities, with a focus on the following syllabus points:
- The defining characteristics of a fiduciary relationship.
- The principal fiduciary duties, including loyalty, the no-conflict rule, and the no-profit rule.
- Common ways in which fiduciary duties can be breached.
- The distinction between personal and proprietary remedies for breach of fiduciary duty.
- The application of equitable compensation and account of profits.
- The imposition of constructive trusts as a remedy.
- The principles and limitations of equitable tracing.
- The potential liability of third parties (strangers) for knowing receipt or dishonest assistance.
- The treatment of bribes and secret commissions and their proprietary consequences.
- Choice of remedy and the principle against double recovery (compensation vs disgorgement).
- The measure of equitable compensation and causation (including Target Holdings and AIB Group guidance in commercial bare trust contexts).
- Liability among trustees (joint and several), contribution and indemnity, and interest (simple vs compound).
- Defences and protections: exemption clauses, relief under Trustee Act 1925 s61, beneficiary consent/acquiescence, limitation (s21 Limitation Act 1980) and laches.
- Tracing against innocent volunteers; the bona fide purchaser for value without notice defence; change of position; rateable sharing in mixed funds.
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 of the following is NOT a core fiduciary duty?
- Duty of loyalty
- Duty to maximise profits at all costs
- No-conflict rule
- No-profit rule
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A trustee uses confidential information gained during their trusteeship to make a personal profit buying shares. The trust itself could not have afforded the shares. Which remedy is most likely available to the beneficiaries?
- Damages at common law
- Equitable compensation for loss suffered by the trust
- An account of profits made by the trustee
- Rescission of the share purchase
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What is the primary difference between a personal claim and a proprietary claim for breach of fiduciary duty?
- Personal claims are available only against trustees, while proprietary claims are available against third parties.
- Personal claims seek monetary compensation, while proprietary claims seek recovery of specific property or its substitute.
- Proprietary claims require proof of dishonesty, while personal claims do not.
- Proprietary claims are subject to a six-year limitation period, while personal claims are not.
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Which equitable remedy allows a principal to follow misappropriated property into different forms or into the hands of third parties?
- Equitable compensation
- Account of profits
- Constructive trust
- Tracing
Introduction
A fiduciary relationship is one built on trust and confidence, where one party (the fiduciary) undertakes to act for or on behalf of another (the principal or beneficiary) in circumstances that require loyalty and good faith. Equity imposes strict duties on fiduciaries to ensure they prioritise their principal's interests above their own. Understanding these duties and the consequences of their breach is essential for legal practice, particularly in trusts, company law, and agency. This article examines the key fiduciary obligations and the remedies available when these duties are breached. It also explains how to distinguish compensatory and disgorgement responses, when proprietary remedies (constructive trusts, equitable liens) are appropriate, what limits apply to tracing, and how liability can be imposed on third parties who receive trust assets or assist in breaches.
The Fiduciary Relationship
Equity recognises certain relationships as inherently fiduciary due to their nature, such as trustee-beneficiary, director-company, solicitor-client, and agent-principal. In other situations, a fiduciary relationship can arise based on the specific circumstances, where one party relies on the other's undertaking to act in their best interests.
Key Term: Fiduciary Duty
An obligation imposed by equity requiring a person (the fiduciary) to act with utmost loyalty and good faith in the interests of another (the principal or beneficiary), avoiding any conflict between personal interest and duty.
The core duties underpin this relationship:
Duty of Loyalty
This is the fundamental duty requiring the fiduciary to act solely in the best interests of the principal within the scope of their relationship. The fiduciary must not allow personal interests to influence their actions regarding the principal's affairs. The standard is strict: good faith or honest motives are not a defence to a conflict or unauthorised profit; authorisation requires fully informed consent from all sui juris beneficiaries or express authority in the instrument or by the court.
No-Conflict Rule
A fiduciary must not place themselves in a position where their personal interests conflict, or potentially conflict, with their duty to the principal. This rule is strictly applied to prevent the fiduciary from being swayed by personal considerations. Self-dealing (buying trust property) is classically voidable at the instance of any beneficiary, irrespective of price or fairness, although exceptional facts may affect relief. Transactions at arm’s length with beneficiaries (fair-dealing) may stand if the fiduciary shows full disclosure, fairness, and no abuse of position.
No-Profit Rule
A fiduciary must not make an unauthorised profit from their position or from information or opportunities acquired through their role. Any profit made in breach of this duty belongs in equity to the principal. The trust is entitled to require an account of profits and, where appropriate, a proprietary remedy over assets representing the profit. Courts may allow an allowance to the fiduciary for skill and effort in exceptional cases where the trust has also benefited.
Duty of Confidentiality
Fiduciaries often gain access to sensitive information belonging to their principal. They have a duty not to disclose this information or use it for their own benefit without the principal's informed consent. Misuse of confidential information can breach both the no-profit and no-conflict duties.
Breach of Fiduciary Duty
A breach occurs if a fiduciary fails to comply with any of their duties. This can happen through a positive act (like making an unauthorised profit) or an omission (like failing to disclose a conflict of interest). Establishing a breach involves identifying the fiduciary relationship, the specific duty owed, and the failure to meet the required standard.
Common Breaches
- Self-dealing: A transaction where the fiduciary acts on behalf of both themselves and the principal without informed consent (e.g., a trustee purchasing trust property). Such transactions are typically voidable by the principal.
- Fair-dealing: A transaction where the fiduciary purchases the principal's beneficial interest. This is permissible only if the fiduciary can show full disclosure, fair price, and no abuse of position.
- Unauthorised Profits: Making profits from the fiduciary position without the principal's informed consent (e.g., accepting secret commissions or bribes).
- Competing with the Principal: Setting up a business that competes directly with the principal's business within the scope of the fiduciary relationship.
- Misuse of Information: Using confidential information or opportunities obtained through the fiduciary role for personal gain.
In practice, the strict rules apply irrespective of whether the trust could have taken the opportunity itself or had funds to do so; the question is whether the opportunity properly belonged to the trust and arose by reason of the fiduciary position. Where the fiduciary’s conduct has enhanced the value of property later recovered for the trust, an allowance for skill and effort may be awarded at the court’s discretion.
Third Party Liability
Strangers to the trust (third parties) can sometimes be held liable as if they were fiduciaries (constructive trustees) if they become involved in a breach. This typically occurs through:
- Knowing Receipt: Receiving trust property transferred in breach of trust with sufficient knowledge that the transfer was wrongful, making it unconscionable to retain the property.
- Dishonest Assistance: Assisting a fiduciary in a breach of trust with a dishonest state of mind (judged objectively).
Key Term: Knowing Receipt
A form of recipient liability where a person receives trust property (or its traceable proceeds) for their own benefit, in circumstances where their knowledge makes it unconscionable for them to retain it.Key Term: Dishonest Assistance
Accessory liability for a person who, without receiving trust property, assists a trustee or fiduciary to commit a breach with dishonesty assessed against the standards of ordinary decent people, given the person’s knowledge of the facts.
A third route is intermeddling:
Key Term: Trustee de son tort
A person who, without authority, assumes the functions of a trustee and causes loss becomes liable as if a trustee.
Third parties retain powerful defences. A bona fide purchaser of a legal interest for value without notice takes free of equitable interests; an innocent volunteer may also raise change of position to resist restitutionary claims if inequitable to require repayment.
Key Term: Bona fide purchaser for value without notice
The holder of a legal estate acquired for value in good faith without notice (actual, constructive, or imputed) of equitable interests; they take free of those equitable interests.
Remedies for Breach of Fiduciary Duty
Where a breach of fiduciary duty causes loss to the principal or results in an unauthorised gain for the fiduciary, equity provides a range of remedies. The choice of remedy depends on the nature of the breach, the consequences, and the principal's objectives. Remedies can be personal (against the fiduciary) or proprietary (against specific property). In many cases, the claimant may elect between compensation for loss and disgorgement of profit, but cannot obtain double recovery for the same breach.
Personal Remedies
These remedies target the fiduciary personally, aiming to compensate the principal for loss or strip the fiduciary of gains.
Equitable Compensation
This remedy aims to restore the principal to the position they would have been in had the breach not occurred. It is similar to common law damages but is more flexible, assessed at the time of judgment, and not subject to common law rules like remoteness or contributory negligence. Causation is still required – the loss must flow directly from the breach. For misapplication or failure to preserve trust assets, compensation typically reflects the value that should have been preserved (often measured strictly), although in some commercial bare trust contexts the courts analyse whether the loss was actually caused by the breach.
Where the trust is a bare, purpose-specific vehicle in a commercial transaction and funds would have been disbursed in any event, the court may confine compensation to the loss caused by the breach rather than restoring the entire fund. By contrast, for breaches of investment duties and failures to diversify, compensation reflects the difference between the position actually achieved and that which should have been achieved with proper care.
Key Term: Equitable Compensation
A monetary remedy awarded by equity to compensate a principal for loss suffered due to a fiduciary's breach of duty, aiming to restore the principal to their pre-breach position.
Courts may award interest. Simple interest is common; compound interest may be granted where the breach involved fraud or unauthorised profits.
Account of Profits
This requires the fiduciary to surrender any unauthorised profits made as a result of the breach. The principal does not need to prove they suffered a loss; the focus is on preventing the fiduciary's unjust enrichment. Where the profit has been used to acquire specific property, the court may impose a constructive trust over that property.
Allowances: where disgorgement would otherwise be oppressive and the trust has also benefited, courts may allow a reasonable allowance for the fiduciary’s skill and effort before ordering payment of the net profit.
Key Term: Account of Profits
An equitable remedy requiring a fiduciary to disclose and pay over any profits made through a breach of their duty, irrespective of whether the principal suffered a loss.
Proprietary Remedies
These remedies attach to specific property or its proceeds, allowing the principal to assert ownership rights. They are particularly valuable if the fiduciary is insolvent, as they give the principal priority over general creditors and capture increases in value in the property.
Constructive Trust
Equity may impose a constructive trust over property acquired by the fiduciary in breach of duty (e.g., a bribe received or an asset purchased with misappropriated funds). This means the fiduciary holds the legal title to the property on trust for the principal, who holds the beneficial interest. Secret commissions and bribes are treated as held on trust from the time of receipt.
Key Term: Constructive Trust
A trust imposed by equity, regardless of the parties' intentions, to prevent unjust enrichment or unconscionable conduct, often used as a remedy for breach of fiduciary duty.
Equitable Lien or Charge
Where trust property has been used to acquire or improve an asset belonging to the fiduciary, the principal may be entitled to an equitable lien or charge over that asset to secure the amount owed, without taking a beneficial share of the asset. This is useful if the property has decreased in value, or the claimant prefers a security rather than co-ownership.
Key Term: Equitable Lien
A non-possessory security right over specific property to secure repayment or reimbursement where trust assets were used to acquire or improve it.
In some cases where misapplied funds discharge a secured debt, the court may allow subrogation to the discharged security.
Tracing
This is not a remedy itself but an evidential process that allows the principal to identify and follow their property (or its value) as it changes form or passes into the hands of others. Successful tracing enables a proprietary claim to be asserted against the identified property or its substitute.
Key Term: Tracing
The equitable process of identifying property or its value as it is substituted for other property or passes into different hands, enabling a proprietary claim.
Key equitable tracing rules:
- Into unmixed substitutions, the claimant can claim the asset or its proceeds.
- Into assets bought using mixed funds (trustee’s money and trust money), beneficiaries may elect a proportionate share or an equitable lien/charge; where the trustee bought before dissipating mixed funds, equity may treat the asset first as representing trust money.
- Into a trustee’s mixed bank account, the trustee is presumed to spend their own money first; but if the trustee buys an asset and later dissipates the remaining balance, beneficiaries may assert that the asset represents trust funds to prevent manipulation.
- Where funds from several trusts (or a trust and an innocent volunteer) are mixed in a bank account, the default is the first-in, first-out rule, although the court may prefer a rateable (pari passu) solution if FIFO is impractical or unjust.
Key Term: Lowest Intermediate Balance
A rule limiting a tracing claim into a mixed bank account to the lowest balance after payment in; later additions of the trustee’s money are not treated as restoring the trust funds.Key Term: Backward Tracing
Recognising the use of trust funds to repay a loan used to buy property as supporting a proprietary claim to that property where the steps form a coordinated scheme.
Limitations on Tracing:
- The property must be identifiable. Tracing is lost if the property is dissipated (e.g., spent on a holiday) or its value destroyed.
- Tracing cannot be asserted against a bona fide purchaser for value without notice ('equity's darling').
- It may be inequitable to trace against an innocent volunteer, particularly if they have changed their position in reliance on the receipt of the property.
Key Term: Change of Position
A defence available to an innocent recipient who has, in good faith, changed their circumstances in reliance on the receipt such that it would be inequitable to require full restitution.
Worked Example 1.1
Scenario: A company director learns of a profitable opportunity to acquire land adjacent to the company's factory during a board meeting. The company decides not to pursue the opportunity due to lack of funds. The director, without disclosing their intention to the board or obtaining consent, purchases the land personally and later sells it at a significant profit.
Question: What remedies might the company seek against the director?
Answer:
The director has breached their fiduciary duty (no-conflict and no-profit rules) by exploiting an opportunity derived from their position for personal gain. The company could seek an account of profits, requiring the director to surrender the profit made from the land sale. Alternatively, if the director still owned the land, the company might seek a declaration that the director holds the land on constructive trust for the company. An allowance for skill and effort may be considered, but only after disgorgement has been determined.
Worked Example 1.2
Scenario: A trustee misappropriates £50,000 from the trust fund. They mix this with £50,000 of their own money in their personal bank account. They then use £60,000 from the account to buy shares in their own name. The remaining £40,000 is spent on living expenses. The shares are now worth £75,000.
Question: Using equitable tracing rules, what is the beneficiary's strongest proprietary claim?
Answer:
The trustee has mixed trust funds with their own. Applying the rule in Re Hallett's Estate, the trustee is deemed to spend their own money first. However, applying the rule often associated with Re Oatway, where an investment is made before dissipation, the beneficiary can claim the investment represents trust money. Here, the £60,000 shares purchase likely comprises £10,000 of the trustee's money and £50,000 of trust money. The beneficiaries can trace into the shares. As the shares have increased in value, they should claim a proportionate share (50/60ths or 5/6ths) of the current value, which is £62,500 (5/6 x £75,000). They also have a personal claim against the trustee for any shortfall.
Worked Example 1.3
Scenario: A trustee receives a £40,000 secret commission from an investment firm for placing trust business with it. The trust portfolio has performed well; there is no loss to the trust. The trustee has spent £10,000 of the commission and holds £30,000 in a savings account.
Question: What remedies are available to the beneficiaries?
Answer:
The commission is an unauthorised profit made by a fiduciary. The beneficiaries can require an account of profits, compelling the trustee to pay £40,000. They can also assert a constructive trust over the £30,000 balance (and trace into any substitutes). The absence of loss is immaterial to disgorgement; the purpose is to strip unauthorised profit. Interest (including compound interest in an appropriate case) may be awarded.
Worked Example 1.4
Scenario: A supplier receives £85,000 mistakenly transferred from trust funds by a rogue trustee to settle the trustee’s personal invoice. The supplier knows the payer is the trustee but does not enquire further. The supplier uses the money to expand its business and cannot refund the full amount without hardship.
Question: Can beneficiaries bring a claim for knowing receipt?
Answer:
Knowing receipt requires (i) disposal of trust property in breach of trust, (ii) beneficial receipt by the defendant of assets representing the trust property, and (iii) knowledge making it unconscionable to retain the benefit. The supplier benefitted from the receipt; the issue is knowledge. If the supplier’s state of knowledge (actual or constructive) was such that it was unconscionable to retain the funds, recipient liability arises and a personal order to repay can be made. If the supplier is merely an innocent volunteer, they may raise change of position. A proprietary claim via tracing may also be explored if there is an identifiable substitute, but any bona fide purchaser for value without notice would defeat a proprietary claim.
Worked Example 1.5
Scenario: A trustee’s accountant structures transfers to place trust money into an offshore account and then into an investment held by the trustee. The accountant knows the money is trust money and that the trustee is breaching duty, and ensures the transfers leave no obvious trail.
Question: What liability does the accountant face?
Answer:
The accountant has dishonestly assisted a breach of trust. Dishonesty is judged objectively by the standards of ordinary decent people given the assistant’s knowledge of the facts. A personal order to make good the loss is available. As the accountant did not receive trust property, a proprietary claim and tracing against them are not usually available, though the trust can still trace into the assets acquired by the trustee.
Worked Example 1.6
Scenario: A trustee uses £120,000 of trust funds to discharge their personal mortgage and thereby frees up a property now held mortgage-free in their name. The trustee later becomes insolvent.
Question: What proprietary response is available?
Answer:
Equity may grant subrogation to the discharged mortgage or an equitable lien over the property to the extent trust funds discharged the mortgage. This gives security over the asset with priority over unsecured creditors. A constructive trust might be sought, but subrogation or a lien is often the appropriate remedy where payment simply discharged a debt rather than purchased the asset outright.
Worked Example 1.7
Scenario: A trustee takes £500,000 from a purpose-specific bare trust in a commercial transaction and releases it one day earlier than authorised to a seller. The transaction completes on time the next day exactly as contemplated and the assets received match what should have been obtained. The market then collapses a month later causing a large loss.
Question: Is the trustee liable to reconstitute the full fund?
Answer:
In commercial bare trust contexts where the breach (early release) did not cause the ultimate loss because the transaction would have proceeded in any event on the same terms, equitable compensation is generally limited to loss caused by the breach. Here, since correct assets were acquired as contemplated, the later market fall is not caused by the early release. The trustee is likely liable only for any loss directly attributable to the breach (which may be nominal), not to reconstitute the fund in full.
Exam Warning
Distinguishing between personal and proprietary remedies is critical. Proprietary claims offer advantages, especially in insolvency, but depend on identifiable property. Personal claims target the fiduciary's own assets but rank alongside other creditors if the fiduciary is bankrupt. Ensure you identify the most appropriate and effective remedy based on the facts provided in the exam scenario. Also remember the election principle: you may seek compensation for loss or an account of profit, but equity will not permit double recovery for the same breach. Check for defences (bona fide purchaser without notice; change of position; limitation or laches; beneficiary consent) and whether interest (simple or compound) is justified.
Key Point Checklist
This article has covered the following key knowledge points:
- Fiduciary relationships are based on trust and confidence, imposing strict duties of loyalty.
- Core duties include the duty of loyalty, the no-conflict rule, the no-profit rule, and confidentiality.
- Breaches occur when a fiduciary fails in these duties, potentially through self-dealing, making unauthorised profits, or misusing information.
- Remedies for breach can be personal (equitable compensation, account of profits) or proprietary (constructive trust, equitable lien, tracing).
- Equitable compensation aims to restore the principal's loss; the measure depends on the type of breach, with causation analysis especially relevant in commercial bare trust settings.
- An account of profits strips the fiduciary's gain; allowances may be awarded where equitable.
- Proprietary remedies attach to specific assets and provide priority in insolvency, capturing any increase in value; liens and subrogation may be available where trust funds discharge debt.
- Tracing is a process to identify trust property or its substitute, enabling a proprietary claim; rules include presumptions in mixed accounts, limits of the lowest intermediate balance, and exceptions allowing coordinated backward tracing.
- Third parties can be liable for knowing receipt (recipient liability) or dishonest assistance (accessory liability), and intermeddlers can be liable as trustees de son tort.
- Defences and limits include bona fide purchaser without notice, change of position, laches, statutory limitation, relief under Trustee Act 1925 s61, exemption clauses, and beneficiary consent or acquiescence.
- Interest on awards may be simple or compound; double recovery is not allowed.
Key Terms and Concepts
- Fiduciary Duty
- Equitable Compensation
- Account of Profits
- Constructive Trust
- Tracing
- Knowing Receipt
- Dishonest Assistance
- Trustee de son tort
- Equitable Lien
- Bona fide purchaser for value without notice
- Lowest Intermediate Balance
- Backward Tracing
- Change of Position