Learning Outcomes
This article examines the circumstances under which a trustee can be held liable for a breach of trust through a proprietary claim, even when the original trust property itself has not been misappropriated or diminished. It focuses on breaches of fiduciary duty where the trustee derives an unauthorised personal benefit. After studying this article, you should understand the nature of fiduciary duties, how they can be breached without affecting the trust property, the key case law such as Boardman v Phipps, and the proprietary remedies available to beneficiaries, primarily the account of profits and the imposition of a constructive trust over the benefit received by the trustee.
SQE1 Syllabus
For SQE1, you are required to understand the core principles of trustees' liability for breach of trust, including breaches of fiduciary duty. This includes situations where proprietary claims arise against a trustee even if the trust property has not been directly altered or lost. Your revision should cover:
- The nature and scope of fiduciary duties owed by trustees.
- Situations constituting a breach of fiduciary duty, such as unauthorised profits and conflicts of interest.
- The principles governing proprietary claims against trustees for benefits obtained through breach.
- The remedies of account of profits and constructive trusts in this context.
- The distinction between personal and proprietary claims against trustees.
- Key case law illustrating these principles, notably Boardman v Phipps.
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 best describes a trustee's fiduciary duty?
- A duty to maximise the financial return of the trust fund at all costs.
- A duty to act solely in the best interests of the beneficiaries, avoiding personal profit and conflicts of interest.
- A duty to follow the beneficiaries' instructions regarding trust administration.
- A duty to ensure the trust property never decreases in value.
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A trustee uses confidential information obtained while managing the trust to make a profitable personal investment. The trust's own assets remain unaffected. Has the trustee breached their duty?
- No, because the trust property was not harmed.
- No, if the trustee honestly believed the investment would also benefit the trust indirectly.
- Yes, because they made an unauthorised profit from their fiduciary position.
- Yes, but only if the trust could have made that specific investment itself.
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What is the primary remedy sought when a trustee makes an unauthorised profit from their position, even if the trust fund itself suffered no loss?
- Damages for negligence.
- Rescission of the trust.
- An account of profits.
- Specific performance.
Introduction
Trustees owe strict duties to the beneficiaries of the trust. These duties, known as fiduciary duties, require trustees to act with utmost loyalty and in the best interests of the beneficiaries. A breach of these duties can lead to liability, even in situations where the trustee has not directly misappropriated or caused loss to the trust property itself. This article focuses on proprietary claims that arise when a trustee breaches their fiduciary duty by making an unauthorised personal profit or gaining an advantage due to their position, despite the trust assets remaining unchanged. Understanding these principles is essential for advising beneficiaries on how to recover gains improperly made by trustees.
Fiduciary Duties of Trustees
The relationship between a trustee and a beneficiary is fiduciary in nature. This imposes fundamental obligations on the trustee beyond the basic duty to comply with the terms of the trust instrument.
Key Term: Fiduciary Duty
An obligation to act solely in the best interests of another party (the principal or beneficiary), characterised by loyalty, good faith, and the avoidance of conflicts of interest or unauthorised personal profit.
Core fiduciary duties include:
- Duty of Loyalty: Trustees must act solely in the interests of the beneficiaries.
- No-Conflict Rule: Trustees must not place themselves in a position where their personal interests conflict, or may possibly conflict, with their duties to the trust or the beneficiaries.
- No-Profit Rule: Trustees must not make any unauthorised profit from their position as trustee, either directly or indirectly.
Breach Without Loss to Trust Property
A breach of fiduciary duty can occur even if the trust fund suffers no loss, or even benefits from the trustee's actions. The focus is on the trustee's conduct and whether they have improperly benefited from their role.
Common examples include:
- A trustee using information obtained through their trusteeship for personal gain.
- A trustee taking advantage of an opportunity that arose because of their trusteeship.
- A trustee receiving a secret commission or bribe in relation to trust business.
The Principle in Boardman v Phipps
The House of Lords decision in Boardman v Phipps [1967] 2 AC 46 is a landmark case illustrating the strict application of fiduciary duties, particularly the no-conflict and no-profit rules, even where the trust property was not misused and the trust benefited from the fiduciaries' actions.
Facts
The trust held a minority shareholding in a poorly performing company. Boardman (the trust's solicitor) and Tom Phipps (a beneficiary) decided to attempt to gain control of the company to reorganise it. Using information obtained while acting for the trust, and purporting to represent the trust (though lacking full authority from all trustees), they attended company meetings. They subsequently purchased further shares personally, eventually gaining control and making the company profitable. Both the trust and Boardman and Tom Phipps personally profited significantly from the reorganisation. Another beneficiary sued, claiming the personal profits made by Boardman and Tom Phipps should be held on trust for the beneficiaries.
Decision
The House of Lords held, by a majority, that Boardman and Tom Phipps were liable to account for their personal profits to the trust. They had breached their fiduciary duties because:
- Information as Trust Property: They had used information gained from their position acting for the trust (which was regarded as trust property) to make a personal profit.
- Conflict of Interest: There was a possibility of a conflict between their personal interests (in purchasing shares) and their duty to advise the trustees (e.g., on whether the trust should apply to court for permission to buy more shares itself).
- Lack of Fully Informed Consent: They had not obtained the fully informed consent of all the beneficiaries for their actions.
The court ordered that the profits be held on constructive trust for the beneficiaries, although it also awarded Boardman and Tom Phipps generous remuneration for their work and skill, acknowledging they had acted honestly (albeit in breach) and had benefited the trust.
Key Term: Conflict of Interest
A situation where a person's personal interests could compromise their judgment, decisions, or actions in their professional or official capacity, particularly concerning their duty to another party.Key Term: No-Profit Rule
The principle that a person in a fiduciary position must not make any unauthorised profit from that position.
Proprietary Remedies
Where a trustee makes an unauthorised profit in breach of fiduciary duty, the primary remedy available to the beneficiaries is proprietary, aimed at recovering the specific profit or benefit obtained by the trustee.
Account of Profits
This is an equitable remedy requiring the fiduciary to account for (and pay over) the unauthorised profits made as a result of the breach. The aim is not to compensate the beneficiary for loss, but to strip the fiduciary of the gains they were never entitled to make.
Key Term: Account of Profits
An equitable remedy compelling a defendant (often a fiduciary) to disclose and surrender profits made through a wrongful act, such as a breach of trust or fiduciary duty.
The calculation is based on the profit actually made by the trustee.
Constructive Trust
Equity may impose a constructive trust over the specific profits or assets acquired by the trustee through the breach of fiduciary duty.
Key Term: Constructive Trust
A trust imposed by law, regardless of the parties' intentions, where equity considers it unconscionable for the person holding legal title to property (the constructive trustee) to retain the full beneficial interest, often due to wrongful conduct like breach of fiduciary duty.
Where a constructive trust is imposed:
- The trustee holds the legal title to the profit or asset on trust for the beneficiaries.
- The beneficiaries acquire an equitable proprietary interest in that profit or asset.
- If the asset acquired with the profit increases in value, the beneficiaries are entitled to that increase.
- The beneficiaries gain priority over the trustee's general creditors if the trustee becomes bankrupt.
Worked Example 1.1
Anna is a trustee of the Bell Family Trust, which owns shares in TechCorp Ltd. Through attending board meetings as a representative of the trust, Anna learns confidential information about TechCorp's upcoming revolutionary product launch. Before this information is public, Anna uses her personal savings to buy shares in TechCorp. The share price triples after the product launch. The trust's own shareholding also increases in value. Can the beneficiaries claim Anna's personal profit?
Answer: Yes. Anna obtained the confidential information solely due to her position as trustee. Using this information for personal gain is a breach of her fiduciary duty (no-profit rule and potentially no-conflict rule). The beneficiaries can seek an account of profits, requiring Anna to surrender the profit she made. Alternatively, they could argue for a constructive trust over the shares Anna bought or the profit realised, giving them a proprietary interest in the gain. The fact the trust also benefited or suffered no loss is irrelevant to Anna's liability for her personal profit.
Worked Example 1.2
David is a trustee for a trust holding commercial properties. He is responsible for appointing managing agents. He appoints an agency run by his cousin, without disclosing the relationship. The agency performs adequately, and the fees charged are standard market rates. However, David secretly receives a £1,000 'introduction fee' from his cousin's agency.
Is David liable to the trust?
Answer: Yes. David is liable for breach of fiduciary duty. He placed himself in a position of conflict of interest by appointing a relative without disclosure. More significantly, he breached the no-profit rule by accepting a secret commission. The beneficiaries are entitled to demand that David account for the £1,000 profit he made. The fact that the agency performed well or charged fair rates does not excuse David's breach in profiting personally and having a conflict of interest.
Defences
A trustee facing a claim for making an unauthorised profit may have limited defences:
- Authorisation by Trust Instrument: The trust deed may expressly permit the trustee to retain certain profits or engage in potentially conflicting transactions.
- Informed Consent: The trustee obtained the fully informed consent of all adult beneficiaries of sound mind before acting. This requires full disclosure of all material facts.
- Court Approval: The trustee obtained prior approval from the court for the transaction.
Revision Tip
Remember the strictness of fiduciary duties. Arguments that the trustee acted honestly, that the trust suffered no loss, or even that the trust benefited from the trustee's actions, are generally not defences to a claim for unauthorised profits derived from the fiduciary position. The key is whether the trustee improperly benefited due to their role.
Key Point Checklist
This article has covered the following key knowledge points:
- Trustees owe strict fiduciary duties, including loyalty, no-conflict, and no-profit rules.
- A breach of fiduciary duty can occur even if the trust property is not misappropriated or diminished in value.
- Trustees must not use their position, information, or opportunities arising from the trust for personal gain without authorisation.
- The case of Boardman v Phipps illustrates the strict liability for unauthorised profits and conflicts of interest.
- Beneficiaries can bring proprietary claims against trustees for unauthorised profits.
- The primary remedies are an account of profits or the imposition of a constructive trust over the profits or assets acquired.
- Defences are limited and generally require prior authorisation or fully informed consent.
Key Terms and Concepts
- Fiduciary Duty
- Conflict of Interest
- No-Profit Rule
- Account of Profits
- Constructive Trust
