Core principles of trust law - The fiduciary relationship

Learning Outcomes

After studying this article, you will be able to define the fiduciary relationship as it applies in trusts, outline the key fiduciary duties of trustees, identify examples of breach, and determine appropriate remedies for beneficiaries in SQE2-style problem scenarios.

SQE2 Syllabus

For SQE2, you are required to understand the fiduciary character of trusts law and apply its doctrines to practical client situations. As you revise this topic, focus on:

• The legal meaning and significance of the fiduciary relationship in trust law.
• The principal fiduciary obligations of trustees, including the duty of loyalty, prohibition of unauthorized profit, and avoidance of conflicts.
• How breaches of fiduciary duty are identified and assessed.
• The main remedies available to beneficiaries following trustee breach, including account of profits and setting aside transactions.
• Realistic applications: recognizing breach, profit, and conflict in client-focused fact patterns.

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. What is the fundamental purpose of classifying trustees as fiduciaries in English trust law?
2. Name two classic examples where a trustee would breach their fiduciary duty to beneficiaries.
3. What remedy is usually awarded if a trustee earns personal profit from their role as trustee without authority?
4. True or false: A trustee can ever buy trust property personally if all the beneficiaries agree in advance.

Introduction

Trustees are subject to strict obligations towards trust beneficiaries. These are called fiduciary duties and are central to English trust law. Fiduciary duties require trustees to put the beneficiaries' interests ahead of their own, to act with honesty, and never to profit improperly from their role or allow their personal interests to compete with the trust.

Key Term: fiduciary
A person having legal or ethical duty to act solely for the benefit of another and not for their own gain.

Trustees owe duties beyond those of ordinary good faith. Every trustee is always a fiduciary, and the law imposes a high standard as a matter of public policy to protect beneficiaries and maintain trust in the institution of trusteeship.

The Fiduciary Nature of a Trustee

The defining characteristic of a fiduciary is the duty of loyalty. This compels the trustee to manage the trust in the sole interest of beneficiaries, not for their own advantage or to further personal interests.

Key Term: duty of loyalty
The fundamental requirement that a fiduciary must act entirely for the benefit of their beneficiaries.

Key Term: conflict of interest
Any situation where the fiduciary's personal interests could potentially be inconsistent with their duties to the beneficiaries.

Key Term: unauthorized profit
Personal profit gained by a fiduciary in connection with their position and without proper beneficiary consent.

A fiduciary must never put themselves in a situation where their own interests might conflict with their trust duties, nor make any personal profits without full consent from the beneficiaries.

Core Fiduciary Duties of Trustees

• No Unauthorized Profit: Trustees must not obtain, directly or indirectly, any profit from their position apart from expressly authorized fees.
• Avoidance of Conflicts: Trustees must avoid circumstances where there is even a possibility that their own interests may compete with the interests of the trust.
• Duty of Full Disclosure: Trustees are required to account transparently for their conduct and disclose any potential or actual conflicts or gains.

Worked Example 1.1

A trustee manages a trust that owns works of art. One of the paintings is to be sold at auction. The trustee owns an art gallery and buys the painting through the gallery, paying the auction price but making a commission from the sale. Has the trustee breached any fiduciary duty?

Answer:
Yes, the trustee has breached the duty not to profit and the duty to avoid conflict of interest. By buying trust property through their own business, even at a fair price, the trustee has placed themselves in a position of conflict and profited without full beneficiary consent.

Worked Example 1.2

A trust has several beneficiaries. One trustee is the parent of a beneficiary. Trustees decide to invest trust funds in a start-up company owned by that beneficiary. The interested trustee participates in the decision and votes in favour. Is this a breach?

Answer:
Yes. The trustee is in a conflict situation, as a personal or family interest is involved. Participating in that decision breaches the fiduciary requirement to avoid conflicts—even where there may be no actual loss to the trust.

Breach and Consequences

All breaches of fiduciary obligations have serious legal effects:

• The trustee is strictly liable to account for any improper profit.
• Beneficiaries may set aside transactions influenced by breach or conflict.
• Courts may remove the trustee.

Trustee honesty, reasonableness, or good intentions do not excuse breach. Even if the trust is not harmed or gets a good deal, the strict rule applies.

Worked Example 1.3

A trustee secretly earns a commission by placing trust money with a particular bank. The interest rate obtained is better than available elsewhere. Is this allowed?

Answer:
No. Regardless of the benefit to the trust, the trustee may not profit secretly from trust dealings. The commission must be paid to the trust, and the trustee is liable to account even if the bank offered better terms.

Remedies for Breach of Fiduciary Duty

If a trustee breaches:

• The beneficiary can claim an account of profits (requiring the trustee to pay all unauthorised gains to the trust).
• Any conflicted transaction may be set aside by the court.
• Repayment and compensation may be ordered for losses caused.
• The court may order removal and replacement of the trustee.

Exam Warning

Never justify a trustee's undisclosed profit or conflicted dealing on the basis of fairness or good faith. In SQE2, any profit or conflict without express beneficiary consent is strictly a breach.

Revision Tip

Read all trust fact scenarios slowly in problem questions. Scrutinise trustee conduct for possible profit or conflicts—many breaches happen without overt dishonesty.

Summary

Key Point Checklist

This article has covered the following key knowledge points:

• Trustees are fiduciaries, always bound by the strict duties of loyalty, no profit, and avoidance of conflicts.
• Any unauthorized or secret benefit from their position is a breach, regardless of trustee intentions.
• Beneficiaries can demand the return of unauthorised profits and have tainted transactions reversed.
• Informed consent of all beneficiaries may excuse a profit or conflicted transaction, but this must be freely and fully given.
• Strict liability applies: proof of dishonesty or loss is not required for a breach finding.

Key Terms and Concepts

• fiduciary
• duty of loyalty
• conflict of interest
• unauthorized profit