The fiduciary relationship and its obligations - Rules regar...

Learning Outcomes

This article covers the core duties owed by fiduciaries, specifically trustees, the rules preventing conflicts of interest and unauthorised profits, and the specific rules governing transactions where trustees deal with trust property, such as the self-dealing and fair-dealing rules, including:

• The no-conflict and no-profit rules and their strict equitable rationale
• The self-dealing rule and narrow avenues of authorisation (express clauses, fully informed consent of all sui juris beneficiaries, or prior court approval)
• The fair-dealing rule and standards of full disclosure, fair price, and independent judgment, including the relevance (but non-essential nature) of independent advice
• Remedial consequences of breach (rescission of voidable transactions, account of profits, equitable compensation, proprietary claims and tracing) and available defences or relief
• Permitted trustee remuneration versus prohibited profit (charging clauses, statutory remuneration, beneficiary consent, or court authorisation)
• Abstention from competition with trust business and treatment of incidental profits (eg director’s fees and commissions) under the no-profit rule
• Identification of potential breaches and validity of trustee actions, and application of these principles to SQE1-style single best answer questions on trustee conduct and transactions involving trust assets

SQE1 Syllabus

For SQE1, you are required to understand the nature of the fiduciary relationship and the specific obligations it imposes on trustees, particularly concerning potential conflicts of interest and dealings with trust property, with a focus on the following syllabus points:

• The core fiduciary duties, including the 'no-conflict' and 'no-profit' rules.
• The strict rule against self-dealing, where a trustee transacts with the trust.
• The requirements for the fair-dealing rule, where a trustee purchases a beneficiary's interest.
• The consequences of breaching these fiduciary duties.
• The limited circumstances in which trustees may be remunerated.
• How authority can be given to depart from the strict rules (eg, express trust instrument, fully informed consent by all sui juris beneficiaries, or prior court approval).
• Remedies available to beneficiaries (rescission, account of profits, equitable compensation, injunctions, proprietary claims) and the burden of proof in fair-dealing scenarios.
• The relationship between fiduciary breaches and defences or protections (eg, s 61 Trustee Act 1925, limitation under the Limitation Act 1980) where appropriate.

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 equitable maxim best underpins the strict rules preventing trustees from profiting from their position?
   1. Equity looks to the intent rather than the form.
   2. Equity will not suffer a wrong without a remedy.
   3. A fiduciary must not permit a conflict between their personal interest and their duty.
   4. Equity follows the law.
2. A trustee purchases trust property at a public auction for a price above the market valuation. The beneficiaries later discover this. Is the transaction valid?
   1. Yes, because the trustee paid more than market value.
   2. Yes, because the purchase was made transparently at a public auction.
   3. No, the transaction is voidable at the beneficiaries' instance due to the self-dealing rule.
   4. No, unless the trustee obtained prior court approval.
3. Under the 'fair-dealing' rule, which condition is NOT essential for a trustee to validly purchase a beneficiary's equitable interest?
   1. The trustee paid a fair price.
   2. The trustee made full disclosure of all material facts to the beneficiary.
   3. The beneficiary received independent legal advice.
   4. The trustee did not abuse their position or exert undue influence.

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) in circumstances that demand loyalty and good faith. The trustee-beneficiary relationship is a prime example. Trustees hold legal title to trust property but must manage it strictly for the benefit of the beneficiaries, who hold the equitable interest. This unique position imposes stringent duties on trustees, designed to prevent abuse and ensure undivided loyalty. Central to these are the obligations to avoid conflicts of interest and unauthorised personal profit. This article examines these core duties and the specific rules regulating trustees' dealings with trust property.

These duties are policed by strict equitable principles. The overarching rule from Bray v Ford is that a fiduciary must not place themselves where duty and interest may conflict. Equity adopts a prophylactic approach: even the possibility of conflict or temptation to prefer personal gain triggers the duty. The law therefore prioritises the trust’s protection over assessing whether an individual transaction was objectively fair or beneficial. Authorisation is possible in limited, clearly established ways, and breach attracts robust remedies including disgorgement of profit.

The Core Fiduciary Duties

The fundamental principle is that a fiduciary must not allow their personal interests to conflict with their duties to the principal. From this stem two core obligations for trustees: the no-conflict rule and the no-profit rule.

The No-Conflict Rule

Trustees must avoid situations where their personal interests do or potentially could conflict with their duty to act in the best interests of the beneficiaries. This rule is applied strictly by the courts. It means a trustee must not place themselves in a position where their loyalty might be divided.

Key Term: Fiduciary Duty
An obligation of utmost loyalty and good faith owed by a person in a position of trust (a fiduciary, such as a trustee) to another (the principal, such as a beneficiary). It requires the fiduciary to act solely in the principal's best interests.

Key Term: No-Conflict Rule
The duty requiring a fiduciary (eg, a trustee) to avoid any situation where their personal interests might potentially clash with the interests of those to whom they owe the duty (eg, beneficiaries).

The rule's application is broad and aims to prevent even the possibility of bias. The trustee's state of mind or whether the trust actually suffered a loss is generally irrelevant; the mere existence of a potential conflict can trigger a breach. This is why abstention or resignation immediately before a conflicted transaction will not necessarily cure the conflict: equity looks at substance over form. If a trustee sets up a transaction in which they will later participate personally, or retires to facilitate a sale to themselves, the transaction remains tainted by conflict and is likely voidable.

Authorisation to engage in a transaction that would otherwise be conflicted must be clear. Valid sources of authorisation include:

• Express permission in the trust instrument (for example, a clause allowing a named fiduciary to take certain benefits or transact with the trust in defined circumstances).
• Fully informed consent by all beneficiaries who are sui juris (of full age and capacity), given before the transaction.
• Prior approval by the court where it is expedient and fair to the trust.

Where authorisation is sought from beneficiaries, disclosure must be complete and candid, covering all material facts and risks. Where authorisation is sought from the court, judges consider whether permitting the transaction would advance the trust’s administration and whether safeguards are needed.

The No-Profit Rule

Stemming from the no-conflict rule, trustees are prohibited from making any unauthorised profit from their position or by using trust property, information, or opportunities derived from their role. The rationale is to prevent trustees from being swayed by personal gain rather than their duty to the beneficiaries.

Key Term: No-Profit Rule
The duty preventing a fiduciary (eg, a trustee) from obtaining any unauthorised benefit or profit by reason of their fiduciary position.

Any profit made in breach of this rule must be accounted for to the trust, meaning the trustee holds the profit on constructive trust for the beneficiaries. This applies even if the trustee acted honestly or the trust itself benefited from the trustee's actions. A classic illustration is Keech v Sandford (1726), where a trustee took a lease renewal for himself after the landlord refused to renew it for the infant beneficiary; the court held the trustee held the lease on trust.

The rule also captures “incidental” profits. If a trustee secures commissions or fees by placing trust business with a firm, or is appointed as a director because of the trust’s shareholding, remuneration linked to that fiduciary position must ordinarily be surrendered to the trust unless expressly authorised (eg, by the trust instrument, independent shareholder votes not relying on the trust’s shares, beneficiary consent, or court allowance). Boardman v Phipps confirms that even honest, skilful fiduciaries who profit while also benefiting the trust must account for their gains, though the court can subsequently grant a fair allowance for skill and effort in appropriate cases.

Rules for Dealing with Trust Property

The fiduciary duties place specific constraints on how trustees can deal with trust property, particularly in transactions involving themselves.

The Self-Dealing Rule

This rule strictly prohibits a trustee from buying trust property from the trust or selling their own property to the trust. Such transactions are intrinsically conflicted – the trustee acts as both buyer and seller.

Key Term: Self-Dealing
A transaction where a trustee purchases trust property for themselves or sells their own property to the trust. Such transactions are voidable by the beneficiaries, irrespective of fairness.

The rule is applied rigorously. It does not matter if the trustee paid a fair price, or even above market value, or acted with complete transparency (e.g., buying at a public auction). The transaction is voidable ex debito justitiae (as a matter of right) at the option of any beneficiary. The beneficiaries can choose to set aside the transaction (requiring the trustee to return the property and receive back the purchase price) or affirm it if they wish. A trustee cannot circumvent the rule by resigning shortly before the transaction or by using a nominee.

The court’s focus is structural conflict rather than price. Trustees must not place themselves on both sides of a sale. That said, the equitable discretion of the court can be used prospectively to authorise a transaction in exceptional circumstances (and very rarely retrospectively). Holder v Holder is often cited to illustrate the court’s capacity to approve an otherwise prohibited purchase where the executor had effectively ceased acting, the sale was public and fully disclosed, and the risk of conflict had been neutralised. This is a narrow exception and not a general licence to circumvent the rule.

Exceptions are very limited and require clear authorisation:

• Express authorisation in the trust instrument.
• Consent from all beneficiaries, provided they are sui juris (of full age and sound mind) and fully informed.
• Prior approval from the court.
• Compliance with a binding option or contract entered into before appointment as trustee (eg, the trustee was already party to a pre-existing contract to purchase property before their trusteeship commenced).

Trustees should record full disclosure and consent carefully wherever relying on beneficiary consent. If there are infant or incapacitated beneficiaries, consent cannot be given, so court authorisation must be sought in advance.

The Fair-Dealing Rule

This rule applies where a trustee purchases the beneficial interest of a beneficiary under the trust, rather than the trust property itself. Unlike self-dealing, such transactions are not automatically voidable but are subject to close scrutiny by the court.

Key Term: Fair-Dealing
A transaction where a trustee purchases the equitable (beneficial) interest of a beneficiary under the trust. It is permitted only if the trustee can demonstrate utmost fairness and full disclosure.

For a fair-dealing transaction to be upheld, the trustee bears the heavy burden of proving:

1. They did not abuse their position as trustee.
2. They paid a fair price for the beneficial interest.
3. They made full disclosure of all material facts relevant to the transaction to the beneficiary.
4. The beneficiary exercised an independent judgment, free from any undue influence by the trustee.

Independent legal advice is strong evidence of independent judgment and fully informed consent, but it is not a strict legal requirement. Courts look to substance: transparency, fair value, freedom from pressure, and real understanding. If the trustee cannot satisfy these requirements, the transaction is voidable by the beneficiary.

In practice, trustees engaging in fair-dealing should:

• Obtain a professional valuation of the interest, tailored to the trust’s terms and the beneficiary’s entitlement (eg, life interest versus remainder).
• Provide the beneficiary with up-to-date trust accounts, investment statements, and relevant information about prospects affecting value.
• Allow sufficient time for the beneficiary to consider the proposal and seek independent advice if they choose.
• Avoid initiating or conducting the negotiation in a way that leverages their control or decision-making role in the trust.

Worked Example 1.1

Scenario: T is the sole trustee of a family trust holding shares in a private company, XYZ Ltd. The beneficiaries are adults A and B. T is also a shareholder in XYZ Ltd in her personal capacity. T decides the trust should sell its holding. T purchases the trust's shares herself at a price determined by an independent valuation, believing it is a fair price. A and B are informed after the sale.

Question: Is this transaction valid?

Answer:
No, the transaction is likely voidable by A and B. This is an example of self-dealing, as T has purchased trust property. The fairness of the price or the independent valuation is irrelevant under the strict self-dealing rule. T acted as both seller (for the trust) and buyer (personally), creating a conflict of interest. Unless the trust instrument or A and B (fully informed) consented beforehand, or the court approved it, the beneficiaries can have the sale set aside.

Worked Example 1.2

Scenario: Same facts as above, but instead, beneficiary A decides they want to sell their beneficial interest in the trust (their right to future capital/income) to raise immediate cash. Trustee T offers to buy A's beneficial interest. T provides A with the latest trust accounts and an independent valuation of A's interest, paying the valued price. A agrees and the sale proceeds.

Question: Is this transaction valid?

Answer:
This transaction might be valid under the fair-dealing rule, but it depends on whether T can satisfy the strict requirements. T purchased A's beneficial interest, not trust property. T must prove they paid a fair price, made full disclosure (providing accounts and valuation helps), did not abuse their position, and A acted independently. If T meets this high standard, the sale stands. If not, A could seek to have it set aside.

Worked Example 1.3

Scenario: Trustees sell trust land at a public auction after full marketing. One trustee, J, bids and pays above the highest pre-auction valuation. The sale completes to J. The other trustees consider the process fair.

Question: Can the beneficiaries later rescind the sale?

Answer:
Yes, the sale is voidable under the self-dealing rule. A public auction, high price, and transparency do not displace the structural conflict where the trustee is both vendor and purchaser. The beneficiaries may set the sale aside, requiring reconveyance to the trust against repayment of the purchase price, unless valid prior authorisation or fully informed consent was obtained, or the court had approved the purchase in advance in an exceptional case.

Worked Example 1.4

Scenario: Trustee T arranges for her sister D to buy a valuable trust chattel, intending D to hold it for T. D pays a fair price. The beneficiaries discover T’s involvement months later.

Question: Does using a nominee avoid the self-dealing rule?

Answer:
No. Using a nominee does not avoid the rule. Equity regards substance over form: T has effectively caused a sale to herself through D. The beneficiaries may rescind the transaction unless it was pre-authorised or unanimously approved by fully informed sui juris beneficiaries, or the court authorised it.

Worked Example 1.5

Scenario: Trustee Q offers to buy beneficiary R’s remainder interest in a fund held for S for life, remainder to R. Q provides independent valuations of the remainder interest, yields, and life expectancy tables, and discloses that the trustees plan an imminent diversification of investments. R agrees without receiving independent legal advice.

Question: Is independent legal advice essential for validity under fair-dealing?

Answer:
No. Independent advice is not essential, but it is strong evidence of fairness. Q must prove fair price, full disclosure, and the absence of undue influence or exploitation of position. If R’s decision was genuinely independent, based on full information and a fair valuation, the transaction may stand. If not, R can have it set aside.

Competition with the Trust

A trustee must not carry on a business that competes with a business carried on by the trust. Doing so places the trustee's personal interest in advancing their own business in direct conflict with their duty to advance the trust's business. Any profits made by the trustee from the competing business may be liable to be accounted for to the trust. Courts can also grant injunctions to restrain a threatened competing venture. Re Thomson demonstrates that trustees appointed to continue an existing business for the trust cannot set up a rival enterprise; profits from the competition must be surrendered.

Worked Example 1.6

Scenario: A trust operates a small yacht brokerage. The trustee, appointed to continue that business for the benefit of a minor, opens a personal brokerage in the same marina.

Question: What are the consequences?

Answer:
The trustee is in breach of fiduciary duty by competing with the trust. The court may grant an injunction to restrain the competing business and order an account of profits made from the breach. Continuing would entrench a conflict between the trustee’s personal interest and duty to advance the trust’s business.

Remuneration of Trustees

Reflecting the no-profit rule, trustees are generally expected to act gratuitously. They are not entitled to payment for their time and effort unless payment is specifically authorised. Authorisation can come from:

• The trust instrument: Many modern trust deeds include express 'charging clauses' allowing professional trustees (like solicitors or accountants) and sometimes lay trustees to charge reasonable fees. Charging clauses should be construed strictly; they authorise remuneration only within their terms.
• Statute: The Trustee Act 2000 permits professional trustees and trust corporations to charge reasonable remuneration under certain conditions (e.g., co-trustees’ written consent for professionals and whether the trustee acts in a professional capacity). A trust corporation may charge even if it acts as sole trustee. Statutory remuneration is not available where the trust instrument already provides for charges.
• The beneficiaries: All beneficiaries, being sui juris and fully informed, can collectively agree to the trustees being paid. The agreement should be documented, ensure full disclosure, and be fair.
• The court: The court has implied jurisdiction to authorise payment, usually where the duties are particularly onerous or complex, or the trust needs the skills of a particular trustee.

Trustees are, however, always entitled to be reimbursed out of the trust fund for expenses properly incurred in the administration of the trust. Distinguish reimbursement of expenses (always permitted) from remuneration for services (requires authorisation).

Incidental profits must also be addressed. If a trustee secures commission from placing trust business with a firm, or a director’s salary attributable to votes controlled via the trust’s shareholding, they must ordinarily account to the trust unless one of the recognised authorisations applies (express clause, independent appointment without reliance on trust votes, beneficiary consent, or court allowance).

Exam Warning

Be alert to scenarios where a trustee appears to be benefiting financially. Unless clearly authorised by one of the accepted sources (trust deed, statute, beneficiaries, court), payment or profit-making is likely a breach of fiduciary duty. Do not assume lay trustees can charge fees without express authorisation.

Consequences of Breach

Breaching fiduciary duties, such as the no-conflict or no-profit rules, or engaging in impermissible self-dealing, can lead to significant consequences for the trustee. Beneficiaries have recourse to various remedies:

1. Setting Aside Transactions: Voidable transactions (like self-dealing or unfair fair-dealing) can be rescinded by the beneficiaries. Rescission restores the parties to their pre-transaction position: the property returns to the trust and the trustee receives back the purchase price. Interest is discretionary and may depend on fairness in the circumstances.
2. Account of Profits: The trustee must surrender any unauthorised profits made as a result of the breach. The profit is held on constructive trust for the beneficiaries. This includes profits from exploiting opportunities, confidential information, commissions, or competition with the trust.
3. Equitable Compensation: If the breach caused loss to the trust fund, the trustee is personally liable to compensate the trust for that loss. Equity aims to restore the trust fund to the position it would have occupied absent the breach. Simple interest can be awarded; compound interest may be ordered where the breach involves fraud or misappropriation.
4. Injunction: Beneficiaries may seek an injunction to prevent a threatened breach of duty, such as commencing a competing business.
5. Proprietary Claims: Beneficiaries may be able to trace and recover trust property (or its proceeds) that has been misappropriated or misapplied (see separate topic on Tracing). A proprietary remedy gives priority over the trustee’s unsecured creditors if the trustee is insolvent.
6. Liability Among Trustees: Where more than one trustee is in breach, liability to the beneficiaries is joint and several. As between trustees, the court can apportion responsibility under the Civil Liability (Contribution) Act 1978 and may order indemnity where one trustee (eg, a fraudulent trustee or controlling professional) should bear the full burden. A retiring trustee remains liable for breaches committed while in office and may be liable if retirement was to facilitate a breach.

Relief and limitation:

• The court has a statutory discretion under s 61 Trustee Act 1925 to relieve a trustee, wholly or partly, where they acted honestly and reasonably and ought fairly to be excused. Courts are reluctant to excuse professional trustees and passive trustees who failed to supervise.
• The general limitation period for breach of trust actions is six years from accrual of the right to sue (s 21 Limitation Act 1980), subject to exceptions: no limitation for actions to recover trust property or its proceeds from a trustee, or for fraudulent breaches. Time starts for remainder beneficiaries when their interest falls into possession (eg, on the life tenant’s death). Equitable doctrines like laches can bar equitable relief where there is undue delay causing prejudice.

Revision Tip

Focus on identifying the type of breach in scenario questions. Is it a conflict of interest? Unauthorised profit? Self-dealing? Fair-dealing issue? Correctly identifying the breach leads to the correct rule and potential consequences.

Key Point Checklist

This article has covered the following key knowledge points:

• Fiduciaries, like trustees, owe strict duties of loyalty, including the no-conflict and no-profit rules.
• The no-conflict rule prevents trustees from placing themselves where personal interest and duty may collide.
• The no-profit rule prevents trustees from making unauthorised gains from their position, including incidental profits such as commissions or director’s fees.
• The self-dealing rule makes transactions where a trustee buys from or sells to the trust voidable by beneficiaries, regardless of fairness, auction sale, or price paid.
• The fair-dealing rule permits a trustee to buy a beneficiary's interest only under strict conditions of fairness and disclosure; independent advice is persuasive but not essential.
• Trustees generally cannot compete with the trust business; profits from competition must be accounted for and injunctions may restrain the competition.
• Remuneration for trustees is only allowed if properly authorised (e.g., by trust deed, statute, beneficiaries, or court); reimbursement of expenses is always permitted.
• Breaches of fiduciary duty can lead to personal liability (equitable compensation, account of profits), proprietary remedies (tracing, constructive trust), and rescission of voidable transactions.
• Courts may relieve honest and reasonable trustees under s 61 Trustee Act 1925; limitation rules and laches can affect claims, with key exceptions for fraud and proprietary recovery.
• Authority to depart from strict rules must be clear (express clause, fully informed consent of all sui juris beneficiaries, or court approval).

Key Terms and Concepts

• Fiduciary Duty
• No-Conflict Rule
• No-Profit Rule
• Self-Dealing
• Fair-Dealing