Learning Outcomes
This article outlines the core duties owed by fiduciaries, specifically trustees, focusing on the rules preventing conflicts of interest and unauthorised profits. It also details the specific rules governing transactions where trustees deal with trust property, such as the self-dealing and fair-dealing rules. For the SQE1 assessments, you need to comprehend these fundamental obligations to identify potential breaches and advise on the validity of trustee actions. Understanding these principles will enable you to apply the correct legal rules to SQE1-style single best answer questions concerning 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. Your revision should ensure you can identify and apply the principles governing:
- 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.
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 equitable maxim best underpins the strict rules preventing trustees from profiting from their position?
- Equity looks to the intent rather than the form.
- Equity will not suffer a wrong without a remedy.
- A fiduciary must not permit a conflict between their personal interest and their duty.
- Equity follows the law.
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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?
- Yes, because the trustee paid more than market value.
- Yes, because the purchase was made transparently at a public auction.
- No, the transaction is voidable at the beneficiaries' instance due to the self-dealing rule.
- No, unless the trustee obtained prior court approval.
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Under the 'fair-dealing' rule, which condition is NOT essential for a trustee to validly purchase a beneficiary's equitable interest?
- The trustee paid a fair price.
- The trustee made full disclosure of all material facts to the beneficiary.
- The beneficiary received independent legal advice.
- 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.
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.
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.
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.
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.
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:
- They did not abuse their position as trustee.
- They paid a fair price for the beneficial interest.
- They made full disclosure of all material facts relevant to the transaction to the beneficiary.
- The beneficiary exercised an independent judgment, free from any undue influence by the trustee.
If the trustee cannot satisfy these requirements, the transaction is voidable by the beneficiary.
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.
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.
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.
- Statute: The Trustee Act 2000 permits professional trustees and trust corporations to charge reasonable remuneration under certain conditions (e.g., consent of co-trustees for professionals).
- The beneficiaries: All beneficiaries, being sui juris and fully informed, can collectively agree to the trustees being paid.
- The court: The court has implied jurisdiction to authorise payment, usually where the duties are particularly onerous or complex.
Trustees are, however, always entitled to be reimbursed out of the trust fund for expenses properly incurred in the administration of the trust.
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:
- Setting Aside Transactions: Voidable transactions (like self-dealing or unfair fair-dealing) can be rescinded by the beneficiaries.
- 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.
- Equitable Compensation: If the breach caused loss to the trust fund, the trustee is personally liable to compensate the trust for that loss.
- Injunction: Beneficiaries may seek an injunction to prevent a threatened breach of duty.
- 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).
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.
- The self-dealing rule makes transactions where a trustee buys from or sells to the trust voidable by beneficiaries, regardless of fairness.
- The fair-dealing rule permits a trustee to buy a beneficiary's interest only under strict conditions of fairness and disclosure.
- Trustees generally cannot compete with the trust business.
- Remuneration for trustees is only allowed if properly authorised (e.g., by trust deed, statute, beneficiaries, court).
- Breaches of fiduciary duty can lead to personal liability (compensation, account of profits) and proprietary remedies (tracing, constructive trusts).
Key Terms and Concepts
- Fiduciary Duty
- No-Conflict Rule
- No-Profit Rule
- Self-Dealing
- Fair-Dealing
