Tito v Waddell (No 2) [1977] Ch 106

Facts

• The case concerned the Crown's lease of land on the Ocean Islands (a British settlement) to the British Phosphate Commissioners, in which the Crown had a 42% interest.
• Native Banaban landowners contended that the lease was, in effect, the Crown leasing land to itself, owing to its controlling interest in the lessee entity.
• The Banabans argued the Crown owed them fiduciary obligations and had breached self-dealing and fair-dealing rules by granting the lease without adequately protecting their interests.
• The Banabans claimed they did not understand the true value of the land or receive independent legal advice regarding the lease.
• The key legal issue was whether the relationship between the Crown and the Banabans gave rise to enforceable fiduciary duties, obliging the Crown to secure the true commercial value of the leased land and its resources.

Issues

1. Whether the Crown owed enforceable trust or fiduciary obligations to the Banaban landowners in its dealings over the Ocean Islands land.
2. Whether the rules of self-dealing and fair-dealing, as applied to private trustees, also constrained the Crown in this governmental context.
3. Whether governmental obligations of the Crown were justiciable and capable of enforcement by the courts.
4. Whether the Banabans were entitled to equitable remedies for an alleged breach of fiduciary obligations by the Crown.

Decision

• The court held that the Crown did not owe enforceable trust or fiduciary duties to the Banaban landowners in this governmental context.
• Megarry VC found that the obligations in question were governmental, not giving rise to legal or equitable fiduciary relationships enforceable by the courts.
• The rules of self-dealing and fair-dealing did not bind the Crown regarding governmental obligations.
• The court distinguished obligations enforceable in law or equity from those that are merely governmental and not justiciable.

Legal Principles

• The self-dealing rule: a sale of trust property by a trustee to themselves is generally voidable at the instance of a beneficiary, regardless of fairness, due to the conflict of interest.
• The fair-dealing rule: a trustee may purchase the beneficial interest of a beneficiary only if full disclosure is made, the transaction is shown to be fair, and the trustee did not exploit their position; the onus is on the trustee to prove fairness.
• Fiduciary obligations arise only from relationships with legally enforceable consequences and are not imposed on governmental duties lacking justiciability.
• Not every moral or governmental obligation constitutes a legal fiduciary duty enforceable in court.
• The court distinguished its position from that in Wright v Morgan [1926] AC 788, where fiduciary duties applied due to the presence of a private trust relationship and not a governmental context.

Conclusion

Tito v Waddell (No 2) established that fiduciary duties, including self-dealing and fair-dealing rules, are not universally applicable to governmental obligations. The Crown’s duties to the Banaban landowners were found to be governmental and not enforceable as fiduciary obligations in equity or law, limiting the courts’ ability to provide equitable remedies absent a justiciable relationship.