Trustee and Fiduciary Duties
The Nature of Fiduciary Duties
What is a Fiduciary?
A ‘fiduciary’ in relation to the trust. They occupy a position of high trust and so are burdened with particular duties. They must act without self-interest and with complete loyalty to the person to whom they owe they owe their duties (their ‘principal’).
As Millett LJ in Bristol and West Building Society v Mothew [1998] Ch 1 put it, a:
‘fiduciary is someone who has undertaken to act for or on behalf of another…in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty.’
A trustee is the archetypal fiduciary, but others can occupy fiduciary positions. Examples include solicitors to their clients and company directors to their companies.
The Core Fiduciary Duties
The core duties a fiduciary owes are duties to:
Operate in good faith
Avoid conflict of interests
Not make unauthorised profits
The Strictness of Fiduciary Duties
Liability for breach of fiduciary duty is strict. It is irrelevant that no harm was done. Similarly, the fiduciary’s motives or intent do not matter. This is a matter of public policy: Parker v McKenna (1874) LR 9 Ch App 609.
For example, it does not matter that the fiduciary in a position of conflict of interest chooses to prioritise their principal’s interests over their own interests. It is enough that they are potentially in conflict: Wright v Morgan [1926] AC 788.
The Fiduciary Duties
To Operate in Good Faith
A fiduciary must exercise their role in good faith. This is a woolly term, but broadly it means that the fiduciary must act honestly and for proper purposes.
The duty of good faith runs through all of the other core duties. For example, if a fiduciary finds themselves in a position of conflict of interests, good faith requires them to remedy this. If a fiduciary receives unauthorised profits, good faith requires them to disgorge those profits to the trust fund.
To Avoid Conflicts of Interest
Under this duty, a fiduciary must: Bristol and West Building Society v Mothew [1998] Ch 1
- Avoid putting themselves in a position where there could potentially be a conflict of interests;
- Not refrain from performing their duties or using their powers because of a conflict of interest;
- Decline to perform any transaction involving a conflict of interests;
- Remove themselves from positions where they are potentially in conflict or where they are bound to perform a transaction involving a conflict. This might involve resigning from the trust, in extreme cases.
There are two situations where a fiduciary is in a potential position of conflict. The first is where the principal’s interests and the fiduciary’s personal interests conflict. The second is where the fiduciary owes fiduciary duties to multiple people and their interests conflict. In the latter case, the fiduciary can remove themselves from conflict if both consent to the fiduciary continuing to act for both: Clark Boyce v Mouat [1994] 1 AC 428.
The rule against transacting in situations of conflict of interest has two sub-rules:
Fiduciaries cannot sell or dispose of the principal’s property to themselves. This includes using the principal’s money to purchase the fiduciary’s property. Any such transaction is voidable by any beneficiary. It is irrelevant whether the purchase was fair.
Until the beneficiary elects to affirm or void the transaction (or loses the right to), a trust binds both the property and the proceeds of sale. If the beneficiary chooses to affirm the transaction or loses this right, the proceeds of sale alone are held on trust: Re Postlethwaite (1889) 60 LT Rep 514. If they void the transaction, the property alone is held on the trust.
If a trustee purchases the beneficiary’s interest under a trust, the transaction is voidable at the beneficiary’s direction.
If the beneficiary seeks to void the transaction, it will be rescinded unless the fiduciary proves that: the purchase was fair and honest; the beneficiary was fully informed; and the fiduciary did not take advantage of their position.
This normally requires ensuring that the beneficiary first received independent legal advice: Rhodes v Bate (1865-6) LR 1 Ch App 252.
The courts are alert to attempts to get around the self-dealing and fair-dealing rules by using agents and proxies. A fiduciary cannot get around the rule by getting a third-party to buy the property on the understanding (binding or otherwise) that the third-party will sell it to the fiduciary: Re Postlethwaite (1888) 60 LT 514.
A person does not breach the dealing rules if they buy the principal’s property and then subsequently become a fiduciary: Re Mulholland Will Trust [1949] 1 All ER 460. By contrast, a retired trustee will breach the dealing rules if the buy the principal’s property unless:
- ‘[T]here is nothing to show that at the time of retirement there was any idea of a sale’ – Re Boles [1902] 1 Ch 244; and
- The trustee can show that they that they are not using any information they acquired as trustee.
To Avoid Unauthorised Profit
Fiduciaries are entitled to be reimbursed financial expenses properly incurred when acting for their principal. They gain a lien or equitable charge over the fiduciary’s property to the extent necessary to enable this: X v A [2000] 1 All ER 490.
What fiduciaries cannot do, however, is profit from their work without authorisation. If they do so, they hold that profit on constructive trust for the principal and are liable to account for it: Bray v Ford [1896] AC 44. It does not matter that:
- The fiduciary acted in good faith or honestly: Regal Hastings v Gulliver [1967] 2 AC 134;
- The principal also profited: Boardman v Phipps [1967] 2 AC 46;
- The principal was not harmed: Parker v McKenna (1874) LR 10 Ch App 124; or
- The fiduciary suffered harm or hardship to produce the profit: Boardman v Phipps [1967] 2 AC 46.
There are some exceptions to the no-profits rule, however.
Where the rules of quantum meruit apply, the fiduciary can be remunerated for their work. This cannot be by way of secret commission or bribe, however: FHR European Ventures v Cedar Capital Partners LLC [2014] UKSC 45.
Where the principal shows that the contract giving rise to the fiduciary relationship is voidable, the fiduciary may be able to claim reasonable remuneration for work done under the now-void contract: O’Sullivan v MAM Ltd [1985] QB 428.
A fiduciary can make any profit authorised by either the principal or the court. A trustee can also profit if authorised by the trust instrument. The principal’s authorisation must be fully informed: Boardman v Phipps [1967] 2 AC 46.
The Trustee Act 2000, s.29 entitles non-charitable trust corporations to reasonable remuneration provided the trust instrument is silent on the matter. The same applies to professional trustees as long as: a) they are not a sole trustee; and b) every other trustee agrees in writing.
The fiduciary need not account for any profit that did not arise from their fiduciary role: Boardman v Phipps [1967] 2 AC 46. The principal must show that the profit is sufficiently causally connected to the fiduciary duty: Parr v Keystone Healthcare Ltd [2019] EWCA Civ 1246.
Trustee-specific Duties
As well as fiduciary duties, trustees owe their beneficiaries other equitable duties.
Duty of Care
Trustees owe beneficiaries an equitable duty to exercise reasonable care and skill: Trustee Act 2000, s.1. The trust instrument can modify this duty. The general standard of care is that the trustee must ‘conduct the business of the trust in the same manner that an ordinary prudent man of business’ would conduct their own affairs: Re Speight (1883) LR 22 Ch D 727.
This is modified slightly in the investment context. The trustee must ‘take such care as an ordinary prudent man of business would take if he were minded to make an investment for the benefit of other people for whom he felt morally obliged to provide’: Re Whiteley (1886) LR 33 Ch D 347. This means that trustees cannot take the same level of risks that they might be prepared to take in their own affairs.
Duty of Proper Discretion
The duty of proper discretion has two components:
Any discretionary power must be exercised in good faith and within its scope: Pitt v Holt [2011] EWCA Civ 197. The trustee must take into account all relevant factors when making their decision, and not any irrelevant ones: Sieff v Fox [2005] EWHC 1312.
If the trustees have positive discretions, they must properly consider whether and how to exercise them. They cannot simply let the trust manage itself or allow others to manage the trust: Turner v Turner [1984] Ch 100.
The trust instrument cannot oust the court’s jurisdiction to determine whether a trustee properly exercised a power. If the trust instrument purports to give the trustee absolute discretion, the decision is still reviewable if the trustee acted in bad faith: Gisborne v Gisborne (1877) LR 2 App Cas 300.
Even if a trustee’s reasoning is unsound, the courts are generally reluctant to set aside their decision if it was one which a reasonable trustee exercising sound reasoning could have made: Re Hastings-Bass [1975] Ch 25.
Trustees are not under any duty to give reasons for their decisions: Re Beloved Wilke’s Charity (1851) 3 Mac & G 440. If they fail to give reasons, however, the court may be more likely to strike down their decision as one which no reasonable trustee could have soundly made.
Duty to Act Fairly
If there are multiple beneficiaries or classes of beneficiaries, trustees must act fairly between them when making decisions.
This duty does not require trustees to treat all beneficiaries equally, however: Nestle v National Westminster Bank plc (1996) 10 TLI 112. Instead, when deciding whether to beneficiaries them equally or unequally, trustees must consider all relevant factors and ignore irrelevant, irrational or improper factors: Edge v Pensions Ombudsman [1998] Ch 512.
This is particularly relevant where a trust with investment powers gives a vested interest to one beneficiary and contingent or remainderman interest to another. The trustee may make decisions which benefit the vested beneficiary at the expense of the remainderman, or vice versa. They must make any such decision fairly.
Duty of Personal Service
The basic rule is that trustees are not permitted to delegate fiduciary decision-making powers to others (Re Speight (1883) LR 22 Ch D 727) without authority from the trust instrument, statute or the court: Pilkington v IRC [1964] AC 612. Statute has granted several authorities to delegate, however:
Trustees may delegate purely administrative functions: Trustee Act 1925, s.23(1). They will not be liable for anything those agents do in good faith.
The Trustee Act 2000 allows trustees to collectively delegate any function other than the distribution of assets, the use of income or capital to meet the trust’s financial commitments, and the appointment of trustees, agents, custodians and nominees: s.11. Trustees are not liable for their agent’s acts: s.23.
Under s.25 of the Trustee Act 1925, a trustee can unilaterally delegate any power or function by power of attorney for no more than 12 months. They must give notice to any other trustees. They are liable for their agent’s acts/omissions, however: Trustee Delegation Act 1999, s.5(7).
The decision to delegate to another is subject to the fiduciary duties and the general duty of care. This means that a trustee can be liable even if they are not directly liable for their agent’s defaults.
The agent must be suitable and properly monitored: Speight v Gaunt (1883) LR 22 Ch D 727. The Trustee Act 2000 sets out various specific duties to monitor agents, including:
- A duty ‘to keep under review the arrangements under which the agent, nominee or custodian acts and how those arrangements are being put into effect’: s.22(1)(a).
- ‘[I]f circumstances make it appropriate to do so… [they must] consider whether there is a need to exercise any power of intervention that they have’: s.22(1)(b).
- A duty, ‘if they consider that there is a need to exercise such a power…[to] do so’: s.22(1)(c).
- If the agent is authorised to manage assets, there is a duty to consider whether to revise or replace any policy statement on asset management and assess whether the agent is complying with the statement: s.22(2).
