Fiduciary Duties. Welcome to this podcast on Fiduciary Duties written by Amanda Seager and read by Lois Alexander.

Transcription

1 Fiduciary Duties Welcome to this podcast on Fiduciary Duties written by Amanda Seager and read by Lois Alexander. Fiduciary duties arise in particular types of relationship. One example is the relationship between a trustee and a beneficiary in a trust. The trustee owes fiduciary duties to the beneficiary simply because that relationship exists. In this podcast we re going to see exactly what these fiduciary duties involve. We ll also look at other relationships where this fiduciary duty arises and explore the consequences of trustees or other fiduciaries being in breach of their fiduciary duty. By the end of this podcast you should be able to: and explain what s meant by the term fiduciary duty. understand some of the most common relationships in which a fiduciary duty can arise. advise whether a proposed course of action is a breach of fiduciary duty or not Understand the consequences of a breach of fiduciary duty. Let s start by looking at the role of a trustee. Consider the example of Luke, putting 200,000 into a trust for his three children. He s asked his friend Kieran to be a trustee. Kieran and Luke have been friends for years, so Kieran wants to help his friend if he can. But he doesn t really know anything about trusts. He assumes that the role of the trustee will just involve him holding on to the money in an account in his name, until the children are old enough to have the money themselves. On this basis he can see no problem with being a trustee and agrees to take on the role. Is Kieran s assumption correct? What advice might we give him about the role of the trustee? Well, Kieran s right, that as a trustee, he ll be looking after the money in the trust, but he can t just put it in his own account and forget about it. As a trustee he ll have to fulfil GDL_pod_0809_21_0 1 of 5 The College of Law

2 certain specific duties in the investing and managing of the money. So we would have to advise him about this. Looking at his obligations more generally, he needs to understand and remember at all times - that he s looking after something, the benefit of which belongs to someone else Luke s children, - and as such, he has an overarching duty to those children, the beneficiaries of the trust. This general duty which a trustee owes to beneficiaries, is known as a fiduciary duty. It basically means that the trustee must always do what s best for the beneficiaries, and act with the utmost good faith and loyalty towards them. This underlying concept takes practical shape in certain specific obligations. For example, a trustee mustn t profit from their position. So if, Kieran decided to buy for himself, some shares that had originally been offered to the trust, he would be allowing himself to profit from a deal that was originally offered to the trust, rather than him, and this would be a breach of his fiduciary duty. Another example of a specific obligation is that, trustees mustn t allow their own interests to conflict with those of the beneficiaries. Kieran buying shares for himself which were initially offered to the trust is an example of this. By taking the opportunity to buy the shares for himself, Kieran s putting his own interests before those of the beneficiaries. The beneficiaries, rather than Kieran, would get the benefit of the shares, if they were bought for the trust. Another illustration of a conflict of interest between the trustee and the beneficiary, would be if Kieran was desperate to buy a painting he d seen, but, short of funds, decided to borrow the purchase price from the trust, confident that he d soon be able to repay it. It would certainly be of benefit to Kieran to do this. It might not harm the beneficiaries, if he quickly repays the funds. But then again it might harm them, if he s unable to repay what he borrowed. This potential conflict of interests makes his proposed course of action unacceptable. So, we need to ensure that Kieran understands the nature of this fiduciary duty, and the importance of always keeping it in mind, when acting for the trust. Fiduciary duties don t just arise in the relationship of trustee and beneficiary, they occur in a number of other circumstances. The duty arises wherever you have one person acting in relation to the property of another, or looking after property for another. Aside from the trustee/beneficiary relationship, some of the commonest relationships where a fiduciary duty arises are between personal representatives and beneficiaries, between solicitors and their clients and between directors and their company. GDL_pod_0809_21_0 2 of 5 The College of Law

3 Personal representatives look after a deceased person s property until they re in a position to distribute it amongst the beneficiaries. During this period of time they re looking after the property for the beneficiaries, and as such, owe them a fiduciary duty. So far as solicitors and their clients are concerned, there s a whole set of specific rules dictating what solicitors can and can t do, but underlying these is the solicitors fiduciary duty to their clients, such that solicitors must always act with the utmost good faith towards their clients, with their clients interests being paramount. A company can hold property and enter contracts in its own name, but it needs people to carry out its actions on its behalf. This is what the directors do they deal with the day to day running of the company. In carrying out their actions directors must always act in the best interests of the company and mustn t let their own interests conflict with the interests of the company. So, for example, if a director of a company negotiates a lucrative contract for the company, but then decides to take the contract in his own name, instead of for the company, he ll be in breach of his fiduciary duty to the company. He s allowed himself to profit from his position, by taking a lucrative opportunity which rightfully belonged to the company, and so wasn t acting in the company s best interests. Remember then, wherever a fiduciary duty arises, the fiduciary must always: act with good faith, avoid their own interests conflicting with the interests of the person to whom they owe the duty and ensure they don t profit from their position. If any of these aspects is found wanting, the fiduciary has breached their fiduciary duty. There are lots of cases that illustrate fiduciary duties. A very well-known case is Industrial Development Consultants and Cooley. Mr Cooley was the managing director of a company. He tried to secure a contract for the company with a Gas Board. The Gas Board made it clear that it wasn t interested in entering into a contract with the company, but offered the contract to Mr Cooley personally. He was keen to take up this opportunity, so he left the company and took the contract for himself. Mr Cooley certainly owed a fiduciary duty to the company as he was a director of it. You might argue in this case that there was no conflict of interest, as this wasn t a situation where Mr Cooley took something that the company could ve had. It was clear in the facts that the contract would never have been offered to the company. So arguably the company didn t lose out. But a fiduciary mustn t be allowed to profit from his position as a fiduciary. In this case, the information about the contract came to Mr Cooley in his capacity of director of the company. He shouldn t have used this information for his own gain. GDL_pod_0809_21_0 3 of 5 The College of Law

4 And so Mr Cooley was in breach of his fiduciary duty. Another leading case on fiduciary duty is the case of Boardman and Phipps involved Mr Boardman, acting as a solicitor to the trustees of a trust. The trust held shares in a company. Acting as solicitor for the trustees, Mr Boardman had attended company meetings where he obtained information about the company which wasn t publicly available. He considered that the company was underperforming and that it would be advantageous for the trust to buy more shares in the company, in order to give it a greater say in the running of the company. But the trustees didn t want to do this, and in fact didn t have the power to do this. Mr Boardman decided to invest in shares in the company himself, using his own money. These shares gave him some influence in the running of the company, and the company s fortunes improved. The shares increased in value, giving both Mr Boardman and the trust, which already owned shares in the company, a profit on their shares. So was Mr Boardman in breach of his fiduciary duty to the trustees? You can see arguments here to support him not being in breach of his fiduciary duty. The trustees of the trust had already said that they weren t going to buy the shares, so you can t say that he took something which should ve gone to the trust. There s no obvious conflict between the trust s and his interests. If the company does well, both the trust and Mr Boardman benefit. You can hardly say that the trust s interests were prejudiced, as the trust made a profit on its shares, as a result of Mr Boardman s actions. But the majority in this case held that there was a theoretical possibility of conflict between Mr Boardman s duty to the trust and his personal interest. He might find it difficult to impartially advise the trust because of his own personal interest. In addition, he bought the shares as a result of knowledge which he acquired in his position as solicitor to the trust, and so he d made a profit out of his position. So in conclusion Mr Boardman was in breach of his fiduciary duty. It was irrelevant that he acted in good faith with entirely proper motives throughout and that the trust had not lost out, but in fact had made a profit. The rule had to be strictly applied. So, what happens when a fiduciary is in breach of their fiduciary duty. What action can be taken against them? The appropriate remedy will depend on the facts. If a fiduciary profits from their position, as Mr Boardman did, in the case of Boardman and Phipps, the appropriate remedy is to require the fiduciary to account for the profit GDL_pod_0809_21_0 4 of 5 The College of Law

5 they ve made to the person or persons to whom they owe the fiduciary duty. And so Mr Boardman had to hand over the profit he made to the trust for whom he was acting. This may seem harsh, in a case like Boardman and Phipps, where the party for whom Mr Boardman was acting wasn t going to take the opportunity for themselves, and so really hadn t lost out. But the rationale for the court s strict application of the rule is that it sends a clear message to people in a fiduciary position. They know that any profit made from their position, whatever the circumstances, will have to be relinquished and so they won t be tempted to do it in the first place. There is a way around this strict rule, and that is to get the beneficiaries of the trust to agree in advance to a proposed course of action. If the beneficiaries are all adults, and they all agree to a particular action by a trustee, they can t later decide to pursue the trustee for any profit the trustee makes from that action. If, as a result of a trustee s breach of fiduciary duty, the trust suffers a loss, then the appropriate remedy in this case is to require the trustee in breach to make good the loss to the trust, so that ultimately, the trust shouldn t be out of pocket. So the direct remedies for beneficiaries, where a trustee s in breach of their fiduciary duty, is to pursue the trustee to account for any profit they ve made, and /or to require the trustee to make good any loss to the trust. If, as a result of the trustee s actions, the beneficiaries are unhappy with the trustee continuing in their role, an additional action that the beneficiaries may be able to take is to remove the trustee from office. This course of action would be available to the beneficiaries if they were all adult and in agreement. That brings us to the end of this podcast on fiduciary duties. We ve looked at what s meant by a fiduciary duty, at some of the relationships where such a duty arises and what happens when there s a breach of this duty. We ve seen that this duty underlies everything that the fiduciary does, and is strictly upheld, irrespective of motive and outcome. You should now be able to: explain what s meant by the term fiduciary duty. understand some of the most common relationships in which a fiduciary duty can arise. advise whether a proposed course of action is a breach of fiduciary duty or not. and Understand the consequences of a breach of fiduciary duty. GDL_pod_0809_21_0 5 of 5 The College of Law