Fiduciary Relationships and Obligations — SQE1 FLK2 Trusts Law

A trustee holds a lease on trust for a child. The lease is running out. He asks the landlord to renew it for the trust, and the landlord refuses, because the beneficiary is an infant. So the landlord offers to renew it for the trustee personally instead. He takes it. He acted honestly. The beneficiary could never have had that renewal. Nobody lost anything.

Does he keep it? No. He holds the new lease on constructive trust for the child. That was decided in 1726 and it is still the law. This is Fiduciary Relationships and Obligations, and it runs on rules that are deliberately, uncomfortably strict. Keep that trustee and his lease in mind. He comes back.

Here is the route. First, when does a fiduciary relationship arise at all. Then the three core duties: no unauthorised profit, no purchase of trust property, and no conflict between interest and duty. Then the remedies, which is where most of the marks are. Then how fiduciary duties differ from a trustee's duty of care. And last, fiduciaries outside trusts.

Start with the definition, because it decides whether any of this applies. The leading modern statement is Millett's, in Bristol and West v Mothew, from 1998. A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter. In circumstances which give rise to a relationship of trust and confidence.

Three elements in that sentence. An undertaking to act for another. A particular matter. And circumstances giving rise to trust and confidence. Notice how broad it is. It captures the essence rather than listing categories, and the court decides from the facts. The label the parties put on the relationship does not settle it.

Some relationships are fiduciary as a matter of law. Trustee and beneficiary, which is the paradigm. Solicitor and client. Director and company. Agent and principal. Partner and partnership. What they share is that the fiduciary exercises discretion or control over someone else's affairs, and that creates the imbalance of power and information the doctrine exists to police.

But do not assume every professional relationship is fiduciary. That is a standing exam pitfall. A doctor and patient, or an accountant and client, is not automatically fiduciary. It depends on whether that professional has assumed responsibility to act on the other's behalf in a way that generates trust and confidence. And Millett made a second point that matters even more. Not every breach of duty by a fiduciary is a breach of fiduciary duty.

Hold that, because we come back to it. Now the first core duty. A fiduciary must not make any unauthorised profit from the fiduciary position. This is one of the strictest rules in equity, and the list of things that are no defence is what makes it strict.

It applies whether or not the fiduciary acted in good faith. Whether or not the profit was small. Whether or not the principal could have obtained the profit themselves. And whether or not the principal also benefited. Which takes us straight back to our trustee and his lease.

Keech v Sandford, from 1726. He acted honestly. The beneficiaries could not have obtained the renewal. He deprived them of no actual benefit. And he still held the lease on constructive trust. As the notes put it, the strictness of the rule is the price paid for the privilege of being a fiduciary.

Then Boardman v Phipps, from 1967. A solicitor acted for a trust that held shares in a private company. Using knowledge gained in that capacity, he bought more shares, some for himself and some for the trust. The trust benefited significantly. The House of Lords still made him account for every penny of his personal profit. Lord Hodson said it was irrelevant that the trust had gained too.

So what is a defence? One thing only. Fully informed consent. The principal must know all the material facts and freely agree, and the burden of proving that sits on the fiduciary. Not a general awareness. Not a disclosure buried somewhere. All material facts, and a free agreement.

Second core duty, and it is a close relative. A fiduciary must not purchase trust property. That applies to a trustee buying from the trust, a solicitor buying from a client, a director buying from the company. And here is the part candidates resist. It applies even at full market value, and even where the transaction is entirely fair to the principal.

Why? Because the rule is not about whether the deal was unfair. It is about the fiduciary being in a position where personal interest and duty might pull in different directions. The act of buying creates that position. So in a problem question, a fiduciary who has bought from the trust makes the transaction voidable at the principal's option, unless there was fully informed consent.

Third core duty, and it generalises the other two. No conflict. A fiduciary must not put themselves in a position where personal interest conflicts, or may possibly conflict, with duty to the principal. Read that phrase again. May possibly conflict. The rule bites on the possibility, not on actual conflict and not on actual dishonesty.

The leading case is Aberdeen Railway Co v Blaikie Bros, from 1854. A director of the railway company was also a partner in an engineering firm, and the railway contracted with that firm for ironwork. The House of Lords held the contract voidable, even though the price was fair, the director had not acted dishonestly, and the company had lost nothing. No one bound to act for another may be in a position where interest and duty are at variance.

This is what lawyers call a prophylactic rule. It exists to stop the situation arising, not to punish a proven wrong. So an argument that the fiduciary behaved impeccably and the principal did fine misses the point entirely. If a reasonable person would conclude that a conflict could arise, the rule is engaged.

Remedies now, and start by splitting them in two. Personal remedies run against the fiduciary. Proprietary remedies run against property. That division decides who wins when the fiduciary is bankrupt, so it is worth more marks than anything else here.

The primary personal remedy for an unauthorised profit is an account of profits. The fiduciary disgorges everything gained from the breach, whether or not the principal lost anything. Its purpose is to strip the gain, not to compensate the loss. That is what Boardman had to do, though the court did allow him something for his skill and effort.

The other personal remedy is equitable compensation, and it looks the other way, at the principal's loss. The measure is what is needed to put the principal in the position they would have been in had the breach not happened. In Target Holdings v Redferns, from 1996, the House of Lords held that compensation is measured by the loss actually flowing from the breach. Not by assuming perfect performance.

Then the proprietary remedy: a constructive trust over property acquired through the breach. The fiduciary is treated as holding that property for the principal. And the Supreme Court settled a long-running controversy in 2014, holding that a bribe or secret commission taken by a fiduciary is held on constructive trust for the principal.

Which matters enormously, and here is why. A personal claim makes the principal an unsecured creditor, proving in the bankruptcy alongside everyone else. A proprietary claim gives the principal a beneficial interest in the specific asset. That takes priority over the general creditors, captures any increase in its value, and lets the principal trace into whatever the money was used to buy.

Rescission is the fourth. Where the fiduciary contracted in breach of duty, the principal may unwind the transaction and restore the parties to where they started. It is discretionary, and it can be barred: if restitution has become impossible, or if third parties have acquired rights in the meantime. One warning on remedies generally. The principal cannot double-recover, taking both an account of profits and equitable compensation for the same breach.

Now that distinction I asked you to hold. Fiduciary duties are not the same as a trustee's duty of care. Every trustee is a fiduciary, but a trustee also owes statutory duties under the Trustee Act 2000. The duty of care in section 1, duties about investment, review, advice and diversification, and powers of delegation.

Keep them apart. Failing to diversify investments is a breach of the statutory duty of care. It is not a breach of fiduciary duty, unless it involves disloyalty or conflict. Conversely a trustee who profits from the position breaches fiduciary duty whether or not the Trustee Act is engaged at all. The categories overlap. They are not the same.

Last, fiduciaries outside trusts, because the core duties travel unchanged. A solicitor owes undivided loyalty to the client. Not to act for conflicting clients. Not to use client information for personal gain. Not to take secret commissions, and not to acquire property adverse to the client.

Directors have theirs largely codified in sections 170 to 181 of the Companies Act 2006. Section 175 is the one to know. A director must avoid a situation in which he has, or can have, an interest that conflicts or possibly may conflict with the company's interests. And it says in terms that this applies to exploiting property, information or opportunity, irrespective of whether the company could have taken it.

That last clause is the statutory echo of Keech. Add section 176, no benefits from third parties, and section 177, declare an interest in a proposed transaction. Agents owe the same core duties: no unauthorised profit, no secret commissions, no competing. And partners account to the firm under sections 29 and 30 of the Partnership Act 1890, for benefits derived from the partnership and for profits of a competing business.

A word on how SQE1 tests this. You will not be asked to recall a case name or a section number. You get a scenario, five answers, and one instruction: pick the best. So learn the three core duties as a checklist, and learn which remedy answers which kind of wrong.

If you keep only three pegs. Bristol and West v Mothew, for what a fiduciary is and for the warning that carelessness is not disloyalty. Keech v Sandford, where honesty and a beneficiary who could not have taken the opportunity made no difference at all. And Boardman v Phipps, where the trust profited too and the fiduciary still accounted for every penny.

Four traps. One: good faith is not a defence. Students argue constantly that an honest fiduciary who harmed nobody should keep the profit. Equity's answer is no, and the strictness is deliberate. The only defence is fully informed consent, and the fiduciary has to prove it.

Two: actual conflict is not required. The no-conflict rule is triggered by the possibility of conflict. An option that says there was no breach because nothing actually went wrong, or because the price was fair, is testing exactly this.

Three: not every duty a fiduciary owes is a fiduciary duty. Carelessness is not disloyalty. A trustee who invests badly without advice has breached a duty of care. A trustee who takes a secret payment has breached fiduciary duty. Different duties, different analysis.

Four: personal and proprietary are not interchangeable. If the fiduciary is solvent it may not matter much. If the fiduciary is bankrupt it decides everything, because only the proprietary claim takes the principal ahead of the general creditors and lets them follow the money.

Quick check. A trustee does two things the beneficiaries complain of. First, he chooses the trust's investments himself, without taking any advice, because he thinks he knows the market better than any adviser. The fund performs badly and the trust loses money. Second, he places the rest of the trust's money with a fund manager who pays him £5,000 for the introduction. He chose that manager because of the payment, keeps it, and says nothing.

On which act can a claim for breach of fiduciary duty be founded? Three candidates. One: the payment alone, because the duty to take care in investing is not a fiduciary duty. Two: both, because every duty a trustee owes is a fiduciary duty. Three: neither, because they must first show the trust suffered a loss. Pause here if you want a moment.

The answer is one. The core fiduciary obligations are obligations of loyalty. No unauthorised profit, no conflict, no misuse of information, good faith. Taking a secret payment for placing the trust's money is an unauthorised profit, so it is a breach of fiduciary duty. The duty to exercise reasonable care and skill is a different obligation, and for trustees a statutory one under section 1 of the Trustee Act 2000.

Why the others fail. Option two treats every trustee duty as fiduciary, and a trustee owes duties of several kinds. Only the loyalty-based ones qualify. Option three demands a loss, and a fiduciary claim needs none. He accounts for the £5,000 whether or not the trust lost anything.

Five things to take away. One: fiduciary duties arise where someone has undertaken to act for another in a particular matter, in circumstances of trust and confidence. Two: three core duties. No unauthorised profit, no purchase of trust property, no conflict of interest and duty. Good faith is no defence, benefit to the principal is no defence, and a fair price is no defence.

Three: the only defence is fully informed consent, and the fiduciary must prove it. Our 1726 trustee had none, which is why an honest man lost an honest bargain. Four: account of profits strips the gain, equitable compensation answers the loss, and a constructive trust survives insolvency.

Five: keep fiduciary duty apart from the duty of care. Carelessness is not disloyalty. And the core duties travel: solicitors, directors, agents and partners owe them just as trustees do. Next time, Trustees, Appointment, Powers and Duties.

Practise this topic with exam-style questions at sqe1prep.co.uk. This episode is for education and exam revision only, not legal advice, and we are not affiliated with or endorsed by the SRA or Kaplan.