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Law Quarterly Review 2005
The nature and function of fiduciary loyalty Matthew Conaglen Subject: Equity Keywords: Fiduciary duty
*L.Q.R. 452 I. INTRO!"TION THE word word “fiduci “fiduciary ary”” recurs recurs in legal legal discus discussion sion withou withoutt much understan understandin ding g of its meaning !n "articular# the fiduciary relationshi" has $een descri$ed as “a conce"t in search search of a "rinci "rinci"le "le””#% due in large large "art "art to &udicial &udicial refusal refusal to define define the fiduci fiduciary ary conce"t2 conce"t2 The &udges ha'e# howe'er# indicated that the “distinguishing o$ligation of a fiduciary is the o$ligation of loyalty” ( The question addressed in this article is# what does that mean) The article see*s to identify the function that fiduciary duties ser'e+ that which mar*s them out from other categories of legal duty such that they attract a diff differ erent ent name name ,ath ,ather er than than offe offeri ring ng a "rin "rinci ci"l "le e $y whic which h to iden identi tify fy fidu fiduci ciar ary y relationshi relationshi"s# "s# this article article endea'ours to "resent an understandi understanding ng of the nature nature and function of fiduciary duties when they e-ist !n other words# the article see*s to identify within equity.s case law a more "recise 'iew as to the nature and function of the conce"t of fiduciary loyalty loyalty This This is im"ort im"ortant ant in a num$er num$er of res"ects res"ects## $oth $oth theoret theoretica icall and "racti "ractical cal /e'era /e'erall commen com mentat tators# ors# "artic "articula ularly rly law law and economi economics cs scholar scholars# s# ha'e ha'e argued argued that that fiduci fiduciary ary duties are# in essence# merely e-am"les of im"lied or default contractual o$ligations 1thers 1thers ha'e ha'e suggest suggested ed that that they they are "ro"erl "ro"erly y catego categoris rised ed as torts torts5 5 This This ty"e ty"e of categor categorisa isatio tion n seems seems relati relati'e 'ely ly unim"o unim"ortan rtantt in "urely "urely "racti "ractical cal terms terms "ro'id "ro'ided ed the duties duties## and the remedi remedies es a'ail a'aila$l a$le e for for their their $reach# $reach# are clear clear## their their descri" descri"tio tion n is unim"ortant unim"ortant in settling dis"utes Howe'er# Howe'er# at a theoretical theoretical le'el# le'el# the "ro"er *L.Q.R. 453 classification of doctrines is im"ortant in understanding their interrelationshi" and# consequently# legal doctrine in general The difference $etween ty"es of legal doctrine is much more than a matter of semantics# and fiduciary doctrine is no e-ce"tion 3 4t a time time when when the histori historical cal origins origins of doctrin doctrines es are $ecomi $ecoming ng less less im"ort im"ortant ant than than the su$stance of o$ligations# o$ligations# it $ecomes e'en more im"ortant to identify and analyse the theore theoretic tical al simil similari aritie ties s and differ differenc ences es $etween $etween the su$sta su$stance nce of 'ariou 'arious s doctri doctrines nes Furthe Furthermo rmore# re# gi'en gi'en the itera iterati' ti'e e nature nature of com common mon law law de'elo de'elo"me "ment# nt# a theoret theoretica icall understanding of fiduciary doctrine is also rele'ant at the more "ractical le'el# as it hel"s indicate how we should a""roach the resolution of dis"utes a$out currently unsettled as"ects of fiduciary doctrine6 doctrine 6 Finally# although it is not the focus of this article# a dee"er unde underst rstan andi ding ng of what "ur"o "ur"ose se fidu fiduci ciar ary y duti duties es ser' ser'e e shou should ld assi assist st in the the futu future re determination of when their recognition is a""ro"riate7 a""ro"riate 7 This article contends that fiduciary duties ser'e a function which differs from that ser'ed $y othe otherr lega legall duti duties es The The conce" conce"tt of fidu fiduci ciar ary y “loy “loyal alty ty”” is an enca enca"su "sula lati tion on of a su$sidiary and "ro"hylactic form of "rotection for non8fiduciary duties which enhances the chance chance that that those those non8fi non8fiduci duciary ary duties duties will will $e "ro"erl "ro"erly y "erfor "erformed med The "rimar "rimary y means $y which this notion of loyalty is gi'en effect is a range of fiduciary duties which see* to insulate fiduciaries from influences that are li*ely to distract from such "ro"er
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"erform "erformanc ance e !t is often often o$ser' o$ser'ed ed that that fiduci fiduciary ary doctrine doctrine is applied in a "ro"hylactic manner# although frequently without much clarification of what that means This article see*s see*s to show show that that fiduci fiduciary ary doctri doctrine. ne.s s "ro"hy "ro"hylac lactic tic as"ect as"ect is more more than than merely merely the strictness of its a""lication+ the argument "resented here is that fiduciary doctrine is "ro"hylactic in its very nature, as it is designed to a'ert $reaches of non8fiduciary duties $y see*ing see*ing to neutra neutralis lise e influe influences nces li*ely li*ely to sway sway the fiduci fiduciary ary away away from from "ro"erl "ro"erly y "erforming those non8fiduciary duties This understanding of fiduciary loyalty "ro'ides a theo theore reti tica call unde under" r"in inni ning ng for a num$ num$er er of tene tenets ts of fidu fiduci ciar ary y doct doctri rine ne that that are are ac*nowledged in the case law $ut are otherwise une-"lained Fiduciary doctrine is frequently conce"tualised as e-horting more moral $eha'iour from fidu fiduci ciar arie ies s 9ro" 9ro"erl erly y unde underst rstood ood## the the doct doctri rine ne is far far mo more re *L.Q *L.Q.R. .R. 454 cynical# functi functiona onall and instru instrumen mental talist ist in outloo outloo*# *# focusi focusing ng on lessen lessening ing the danger danger that that a fiduciary.s underta*ing will not $e "ro"erly "erformed
II. R#$#R#N"# %OINTS :efore e-"laining more fully what is meant $y the "ro"osition that fiduciary doctrine "ro'ides su$sidiary and "ro"hylactic "rotection for non8fiduciary duties# it is im"ortant to $e clear a$out the material from which this thesis is de'elo"ed Much writing on fiduciary doctrine is $eset $y a lac* of clarity as to the reference "oints from which the arguments are de'elo"ed !n many instances# commentators are tal*ing "ast one another as their analyses arise out of different "remises which are neither articulated nor defended The The anal analys ysis is offe offered red in this this arti articl cle e focu focuses ses on situ situat atio ions ns where where fidu fiduci ciar ary y dutie duties s indu$ita$ly are owed This is "ossi$le $ecause the case law clearly recognises se'eral relationshi"s where one "arty# the “fiduciary”# ordinarily %0 %0 owes owes fiduciary duties to the other "arty in the relationshi"# the “"rinci"al” The "aradigm e-am"le is the relationshi" $etween trustee and $eneficiary# $ut there are many other clear e-am"les of esta$lished fiduciary relationshi"s%% relationshi"s %% 4do"ting 4do"ting this course circum'ents any need to de'elo" a theory as to when fiduciary duties are owed !t is also sensi$le# when de'elo"ing a theory as to the nature nature and function function of fiducia fiduciary ry loyalt loyalty# y# to do so $y refere reference nce to cases cases where where fiduciary lia$ility is clear# rather than $y reference to those where its 'ery e-istence is more contentious /econdly# concentrating on settled categories of fiduciary relationshi" allows attention to $e focused u"on the duties within that relationshi" that are "eculiar to fiduciary doctrine !t is only $y doing this that one can de'elo" a theory as to the nature and function of fiduciary doctrine The "ro$lem that arises at this stage of the analysis is that there is no clear 'iew as to which doctrines are fiduciary and which are not 1n one 'iew# which hold holds s cons consid ider era$ a$le le sway sway in ;ort ;orth h 4m 4mer eric ica# a# all all duti duties es owed owed $y a fidu fiduci ciar ary y are are a""ro"riately treated as fiduciary duties Thus# for e-am"le# a director.s duty of care is often discussed as "art of directors. fiduciary duties in the
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in essence# really see*ing to answer the “notoriously intracta$le” %5 question# when does a fiduciary relationshi" arise)%3 4s yet# there is no settled answer to that question % Consequently# that a""roach does not much hel" when attem"ting to ascertain the nature and function of fiduciary doctrine !nstead# in recent years# courts ha'e $egun to insist that a distinction $e drawn $etween =i> the duties that fiduciaries owe $ut which are not owed $y non8fiduciaries and =ii> duties that can $e owed $y fiduciaries and non8fiduciaries ali*e !t is only the former class of duties which differentiate fiduciaries from others and which ought to $e referred to as fiduciary duties !n England# this a""roach was forcefully ad'ocated $y the Court of 4""eal in Bristol and West Building Society v Mothew, %6 and it is recognised guidance elsewhere in the Commonwealth%7 !n Mothew Millett ?@ o$ser'ed that fiduciary ,
doctrine “has $een $ede'illed $y unthin*ing resort to 'er$al formulae” 20 and that this can only $e a'oided in the following way2% “The e-"ression Afiduciary dutyB is "ro"erly confined to those duties which are "eculiar to fiduciaries and the $reach of which attracts legal *L.Q.R. 456 consequences differing from those consequent u"on the $reach of other duties
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"eculiarly fiduciary doctrine This duty frequently comes hand8in8hand with a duty to act in good faith Thus# when e-ercising his "ower of sale# a mortgagee cannot e-ercise it for im"ro"er "ur"oses( /imilarly# in most of the cases referred to a$o'e where it was held that contractual "owers had to $e e-ercised in good faith# it was also held that the "owers could not $e e-ercised for an im"ro"er "ur"ose (5 This suggests that the duty to act for "ro"er "ur"oses ought also to $e e-cluded from a consideration of "eculiarly fiduciary duties !n the com"any law conte-t# a director.s duty to act for "ro"er "ur"oses is often descri$ed as a fiduciary duty# or at least one which arises out of the director.s fiduciary "osition(3 Howe'er# it is suggested that this duty is *L.Q.R. 458 sim"ly a manifestation of the $roader conce"t of fraud on a "ower# ( and is $est treated as not "eculiarly fiduciary in nature The descri"tions of it as fiduciary in the case law reflect the e-"orting function of the fiduciary conce"t referred to earlier directors held "ositions sufficiently similar to trustees that the courts would similarly not allow them to use their "owers for im"ro"er "ur"oses(6 !n com"any law# this came to $e *nown as the “"ro"er "ur"oses” doctrine# $ut it is suggested that its root is the conce"t of fraud on a "ower The connection $etween the "ro"er "ur"oses doctrine and fraud on a "ower was made e-"licit $y ?ord Cranworth in Spackman v vans, where he referred to directors who had "ur"orted to e-ercise a "ower to forfeit shares as ha'ing a""lied the "ower “to a "ur"ose foreign to that to which alone they would $e &ustified in acting on it That which the directors did was# therefore# what is called a fraud on the "ower” (7 The rele'ance here is that fraud on a "ower is a general doctrine concerned with limitations im"liedly im"osed with the grant of a limited "ower# rather than a "eculiarly fiduciary doctrine Fraud on a "ower “merely means that the "ower has $een e-ercised for a "ur"ose# or with an intention# $eyond the sco"e of or not &ustified $y the instrument creating the "ower” 0 Thus# it is “trite law that a "ower can $e e-ercised only for the "ur"ose for which it is conferred# and not for any e-traneous or ulterior "ur"ose” % The doctrine of fraud on a "ower does a""ly to fiduciaries# $ut it a""lies more $roadly than that# also controlling "owers held $y "ersons who are not fiduciaries The cases in'ol'ing the "ro"er "ur"oses limit on the e-ercise of mortgagees. "owers of sale and those im"lied in other contractual settings ha'e already $een mentioned 2 /imilarly# des"ite the fact that shareholders do not normally occu"y any fiduciary relationshi" vis!"!vis one another#( they are restricted in the e-ercise of some of their "owers# *L.Q.R. 459 such as "owers to alter the articles of association# in the sense that those "owers cannot $e used for an ulterior or im"ro"er "ur"ose “li*e other "owers# Dthey must $e e-ercised $ona fide# and ha'ing regard to the "ur"oses for which they are created# and to the rights of "ersons affected $y them” The fraud on a "ower doctrine has also $een a""lied to the e-ercise of "owers of a""ointment held $y $eneficiaries of trusts 5 !t is not fiduciary in the sense that matters here# as Farwell o$ser'ed 3 “the essential notion is dis"osition $eyond the sco"e of the "ower# not $reach of trust $y the donee# though it is not unusual to s"ea* of the donee of a limited "ower as $eing in a fiduciary "osition His "osition is refera$le to the terms# e-"ress and im"lied# of the instrument creating the "ower and the im"lied o$ligation not to a""oint for an ulterior "ur"ose# and is not in truth founded# li*e the "osition of a trustee# u"on a state of conscience im"uted to him $y Courts of Equity” E-cluding from analysis the duty of good faith and the "ro"er "ur"oses doctrine# as neither is "eculiarly fiduciary in nature# does not lea'e the cu"$oard $are Certain
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doctrines are widely ac*nowledged as "eculiarly a""lica$le to those in fiduciary "ositions /ee*ing rules which a""ly uni'ersally# and "eculiarly# to fiduciaries# one is li*ely “to halt at the $edroc* of the two negati'e "rinci"les” which "rohi$it fiduciaries =a> from acting with a conflict $etween duty and interest+ and =$> from ma*ing a "rofit out of the fiduciary "osition The conflict "rinci"le# which has $een “esta$lished as the irreduci$le core of the fiduciary o$ligation”#6 has *L.Q.R. 460 further engendered a se"arate conflict doctrine that "rohi$its fiduciaries from acting where duties owed to one "rinci"al conflict with duties owed to another "rinci"al !t is suggested that it is these doctrines which form the core of fiduciary doctrine and which constitute its conce"tualisation of loyalty !t is these doctrines# therefore# which call for consideration if we are to understand more dee"ly the nature and function of fiduciary doctrine E'en if it is not acce"ted that the good faith and "ro"er "ur"oses doctrines are not "eculiarly fiduciary in nature# it can $e said with confidence that the conflict and "rofit "rinci"les undou$tedly are "eculiarly fiduciary+ the same cannot $e asserted with such confidence in res"ect of the good faith and "ro"er "ur"oses doctrines !t is sensi$le# when trying to understand the nature and function of a "articular *ind of doctrine# to $egin the analysis $y reference to rules and "rinci"les which clearly are e-am"les of that *ind of doctrine
III. S!&SII'R( %RO%)(L'"TI" %ROT#"TION The thesis "ro"osed in this article is that the conce"t of “loyalty”# as it e-ists in 4nglo8 4ustralian fiduciary doctrine# enca"sulates the su$sidiary and "ro"hylactic "rotection for non8fiduciary duties that is "ro'ided $y fiduciary duties That "rotection enhances the li*elihood that a fiduciary will "ro"erly "erform his non8fiduciary duties This "art of the article e-"ounds that thesis# while the ne-t "art considers some of the im"lications of understanding fiduciary doctrine in that way
(a) Protective function of fiduciary doctrine The "ro"osition that the function of fiduciary duties is to "rotect the "ro"er "erformance of non8fiduciary duties is $est illustrated $y reference to the fundamental fiduciary "rinci"le that "rohi$its a fiduciary from acting where there is a “real sensi$le "ossi$ility of conflict” 7 $etween his duty and his "ersonal interest !n $%erdeen &ailway 'o v Blaikie Bros, ?ord Cranworth ?C stated the "rinci"le in clear terms 50 “it is a rule of uni'ersal a""lication# that no one ha'ing Dfiduciary duties to discharge# shall $e allowed to enter into engagements in which he has# or can ha'e# a "ersonal interest conflicting# or which may "ossi$ly conflict# with the interests of those whom he is $ound to "rotect”
Blaikie Bros illustrates this "rotecti'e function in o"eration :lai*ie# who was a director of a railway com"any# caused it to enter into a contract to $uy iron chairs for use on the railway The com"any acce"ted around two8 *L.Q.R. 46 thirds of the chairs# $ut then refused to acce"t deli'ery of any more on the $asis that :lai*ie was also a "rinci"al of the firm selling the chairs The com"any succeeded in the House of ?ords ?ord Cranworth e-"lained that :lai*ie.s "osition as a director meant he owed the com"any a duty “to ma*e the $est $argains he could” #5% whereas his "ersonal interest as a "rinci"al
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of the 'endor “would lead him in an entirely o""osite direction# would induce him to fithe "rice as high as "ossi$le This is the 'ery e'il against which the rule in question is directed”52 !n other words# a fiduciary is "rohi$ited from acting in a situation where there is a conflict $etween the $asic duty which he owes to his "rinci"al and his own "ersonal interest $ecause that "ersonal interest is li*ely to lead the fiduciary away from "ro"er "erformance of his duty5( This understanding of the function ser'ed $y fiduciary doctrine can $e traced throughout the case law !n Whichcote v )awrence, ?ord ?ough$orough ?C e-"lained that the concern when a trustee $uys trust "ro"erty for himself is that he “is not acting with that want of interest# that total a$sence of tem"tation” 5 $ecause “where a trustee has a "ros"ect of ad'antage to himself# it is a great tem"tation to him to $e negligent” 55 !n other words# the fiduciary conflict "rinci"le is concerned with a'oiding situations where there is a tem"tation not to "erform "ro"erly one.s other duties if the trustee does not ha'e a "ersonal interest in a transaction he does not ha'e the tem"tation to $reach his duty and sell the trust "ro"erty at a "rice which would $e negligent were it sold to a third "arty !n *amilton v Wright, ?ord :rougham "ointed out that53 “There cannot $e a greater mista*e than to su""ose that a trustee is only "re'ented from doing things which $ring an actual loss u"on the estate under his administration !t is quite enough that the thing which he does has a tendency to in&ure the trust+ a tendency to interfere with his duty” The fiduciary conflict "rinci"le is not concerned with determining whether the fiduciary actually has acted in $reach of his duty# $ut rather focuses its attention on circumstances where there is a risk that the duty might $e $reached !t is im"ortant to $e clear here a$out the two *inds of duty in'ol'ed the +iduciary duty "rohi$its conflict $etween duty and interest# $ut there is also a non!+iduciary duty# the "rotection of which is the "ur"ose of the fiduciary duty !n Blaikie Bros, for e-am"le# :lai*ie owed a non8fiduciary duty to the *L.Q.R. 462 com"any to negotiate contracts on $ehalf of the com"any on terms most $eneficial to the com"any That duty arose $ecause of his "osition as a director of the com"any# $ut it is not a fiduciary duty !f a director acts incom"etently in negotiating a contract# he acts in $reach of a duty owed to the com"any# $ut he does not there$y commit a $reach of fiduciary duty The fiduciary duty is se"arate# designed to "rotect "ro"er "erformance of the non8fiduciary duty from inconsistent influences+ it "rohi$its the fiduciary from acting in a situation where he has a "ersonal interest which is inconsistent with his non8fiduciary duty !f one does not se"arate the fiduciary conflict "rinci"le from the non8fiduciary duties which it "rotects# and instead treats all of the duties in'ol'ed as fiduciary# then the conflict "rinci"le amounts to the "ro"osition that a fiduciary owes a fiduciary duty to a'oid conflicts $etween his fiduciary duty and his "ersonal interest That formulation is confusing and unhel"ful#5 es"ecially when com"ared with the clearly understanda$le "ro"osition that a fiduciary owes a fiduciary duty to a'oid conflicts $etween his non8fiduciary duty and his "ersonal interest the fiduciary duty contained in the conflict "rinci"le and the non8 fiduciary duty which it "rotects “must $e different duties” 56 :ir*s descri$ed the fiduciary duty as “"arasitic”#57 to e-"lain that the two duties are not $oth fiduciary duties and to descri$e the relationshi" $etween the two *inds of duty hile he is correct to "oint out the need for $oth a fiduciary and a non8fiduciary duty to ma*e sense of the conflict "rinci"le# it is suggested that the relationshi" is $etter understood if the fiduciary duty is seen as protective of non8fiduciary duties 4s ?ord Cottenham ?C said in night v
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Mar.ori%anks, “its o$&ect is to secure the due e-ecution of the duty which the trustee ta*es u"on himself to "erform” 30 The function of fiduciary duties is# therefore# to stri*e at situations where there is a tem"tation for the fiduciary to act in $reach of non8fiduciary duty !n Boston /eep Sea 0ishing and ce 'o v $nsell, for e-am"le# a director acted in $reach of fiduciary duty when he $ought ice for use $y the com"any from another com"any in which he held shares and from which he recei'ed $onuses Cotton ?@ indicated the "rotecti'e function of the fiduciary doctrine $y e-"laining that the director "ut “himself in such a "osition that he has a tem"tation not faithfully to "erform his duty to his *L.Q.R. 463 em"loyer” 3% 4cting in a situation where there is tem"tation to $reach one.s non8 fiduciary duties suffices# as the Court of 4""eal e-"lained in /e Bussche v $lt 32 “the honesty of the agent concerned in the "articular transaction should not $e inquired into as a question u"on which its 'alidity de"ends# for $y this strictness the tem"tation to em$ar* in what must always $e a dou$tful transaction is r emo'ed” This "rotecti'e understanding of fiduciary duties is further su""orted when one considers the remedies for $reach of fiduciary duties Fiduciary doctrine "ro'ides a series of remedies from which the "rinci"al may choose as he sees fit The "re8eminent 3( remedies for $reach of fiduciary duty are rescission of the resultant transaction or "rofit8 stri""ing here# for e-am"le# a trustee "urchases trust "ro"erty for himself# “the sale is 'oida$le $y any $eneficiary e de%ito .ustitiae, howe'er fair the transaction” 3 The $eneficiaries ha'e the same "ower to rescind where a trustee has sold his own "ro"erty to the trust35 4lternati'ely# the $eneficiaries may $e a$le to stri" any "rofit which the fiduciary has made on the transaction Thus# if an agent has ta*en a $ri$e# the "rinci"al can force the agent to disgorge the "rofit# through either an account 33 or a "ro"rietary constructi'e trust3 Com"ensation is also "otentially a'aila$le as a remedy# which will $e im"ortant where the $reach of fiduciary duty has caused the "rinci"al loss rather than created a gain for the fiduciary36 The im"ortant "oint in the "resent conte-t is that the "re8eminent remedies of rescission and "rofit8stri""ing $oth e-ist to remo'e from the fiduciary any $enefit which he recei'es from a transaction entered into while he had a conflict $etween duty and interest ,escission clearly su""orts the "ro"hylactic function ser'ed $y fiduciary duties the transaction should not ha'e ta*en "lace and so the "rinci"al may ha'e it undone The "ur"ose of it and of the other "rofit8stri""ing remedies is to remo'e any attraction which such a transaction might hold for the fiduciary# in order to deter the fiduciary from entering into the transaction ,emo'ing the fruits of tem"tation is designed to neutralise the tem"tation itself $y rendering it "ointless37 *L.Q.R. 464 ?ionel /mith has argued recently that this 'iew of fiduciary doctrine is inadequate and “im"lausi$le”0 He "oints out that “a rule that only ta*es away the defendant.s gain is not much of a deterrent” #% and argues that a rule which is concerned with deterrence is inconsistent with the internal rationality of "ri'ate law 4s to the first "oint# it is true that "erfect disgorgement does not "ro'ide the same degree of deterrence as could $e achie'ed $y a "enalty2 Howe'er# 4nglo84ustralian equita$le doctrine has historically set its face against "uniti'e action#( $ecause its fundamental concern was to hold trustees to account for what they had recei'ed and for what they ought to ha'e recei'ed if they had acted "ro"erly The "olicy underlying the fiduciary conflict "rinci"le is to discourage fiduciaries from acting in situations that carry a heightened ris* of $reach of non8fiduciary duties Fiduciary doctrine.s "rofit8stri""ing
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remedies gi'e effect to that deterrent# "erha"s im"erfectly $ut as fully as "ossi$le while remaining within the constraints of traditional equita$le doctrine 4s ?ord :rougham ?C said in /ocker v Somes, the situation is “discouraged $y interce"ting its gains# and thus frustrating the intentions that caused it”5 4s to /mith.s second "oint# that see*ing to influence the conduct of others in the future is inconsistent with the internal or “immanent” 3 rationality of "ri'ate law# as it is not concerned with issues of correcti'e &ustice $etween two "arties# the short answer is that this does not ma*e it any less a "art of "ri'ate law E-em"lary damages# which ser'e a similarly deterrent function in "art# can $e criticised on this $as is# 6 and yet they e-ist nonetheless7 !ndeed# as the House of ?ords ha'e recognised# a single award of damages can ser'e multi"le "ur"oses#60 as does the law of tort *L.Q.R. 465 generally#6% and yet $oth are fundamental as"ects of "ri'ate law The common law# including equity in this res"ect# “is a "ragmatic# wor*ing# authority8$ased system !t is not a school of "hiloso"hy” 62 Fiduciary doctrine.s concern to "rotect the "ro"er "erformance of non8fiduciary duties is also gi'en 'ent in the fiduciary "rinci"le that "rohi$its a fiduciary from acting# or continuing to act# where there is a conflict $etween duties owed to multi"le "rinci"als Millett ?@ e-"lained in Mothew that a “fiduciary who acts for two "rinci"als with "otentially conflicting interests without the informed consent of $oth is in $reach of the o$ligation of undi'ided loyalty+ he "uts himself in a "osition where his duty to one "rinci"al may conflict with his duty to the other :reach of the rule automatically constitutes a $reach of fiduciary duty” 6( This "rinci"le de'elo"ed out of the "rinci"le regarding conflicts $etween duty and interest ?ord Eldon ?C# who contri$uted significantly to the sha"ing of fiduciary doctrine into the form in which we now *now it# e-"lained in p Bennett that the concern which multi"le conflicting duties raise is fiduciary doctrine.s fundamental concern with tem"tation to $reach those non8fiduciary duties6 “if the "rinci"le $e# that the /olicitor cannot $uy for his own $enefit# ! agree# where he $uys for another# the tem"tation to act wrong is less yet# if he could not use the information he has for his own $enefit# it is too delicate to hold# that the tem"tation to misuse that information for another "erson is so much wea*er# that he should $e at li$erty to $id for another That distinction is too thin to form a safe rule of &ustice” The fiduciary “"rofit” "rinci"le =as o""osed to the two “conflict” "rinci"les &ust e-amined> is a little less clearly concerned with "rotection of non8fiduciary duties# $ut it is suggested that it too can $e understood as "ro'iding a "enum$ral "art of that "rotection The "rofit "rinci"le is hard to analyse as it is difficult to find much material from which to do so The reason for this is that most of the cases where a "rofit is made in $reach of fiduciary duty also in'ol'e the fiduciary acting in a situation of conflict $etween duty and interest /e Bussche v $lt "ro'ides an e-am"le of the difficulty 4n agent# who had $een contracted to sell his "rinci"al.s shi" in the 1rient# had some trou$le arranging a sale $ut e'entually arranged to sell the shi" to a @a"anese "rince for G%30#000 !nstead of arranging the transaction directly $etween the "rince and his "rinci"al# the agent inter"osed himself# $uying the shi" from his "rinci"al for G70#000 and then com"leting the sale to the "rince The consequent "rofit of G0#000 was *L.Q.R. 466 clearly made in $reach of fiduciary duty and the agent was required to account to the "rinci"al !n e-"laining the “law under which an agent is "re'ented from ma*ing a "rofit out of his em"loyment”# 65 the Court of 4""eal stated the "ro$lem with
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the situation in terms of the conflict $etween the agent.s "ersonal interest and the non8 fiduciary duty owed to his "rinci"al “one cannot $ut feel some dou$t whether Dthe "rince might not "ossi$ly# if the efendant.s own interest had $een out of the way# ha'e $een induced to gi'e a sum e-ceeding# at least to a small amount# the limit of G70#000 fi-ed $y the 9laintiff” 63 This difficulty has caused numerous o$ser'ations in dicta to the effect that the "rofit "rinci"le is merely a su$set of the conflict "rinci"le in Boardman v Phipps, for e-am"le# ?ord <"&ohn referred to “the fundamental rule of equity that a "erson in a fiduciary ca"acity must not ma*e a "rofit out of his trust which is "art of the wider rule that a trustee must not "lace himself in a "osition where his duty and his interest may conflict” 6 1n the other hand# the High Court of 4ustralia has suggested that the conflict and "rofit "rinci"les# “while o'erla""ing# are distinct”66 This a""ears now to $e the mainstream 'iew and is su""orted $y cases decided in the House of ?ords !n Brown v nland &evenue 'ommissioners, for e-am"le# ?ord ,eid and ?ord <"&ohn $oth referred to what a""ears to $e a se"arate "rofit rule# 67 although without analysing its relationshi" to the conflict rule 4nd the decisions in &egal 6*astings7 )td v 8ulliver 70 and Boardman v Phipps7% $oth seem to ha'e $een $ased more on the finding that the fiduciaries in those cases had made a "rofit $y reason of their fiduciary "osition rather than on there ha'ing $een a conflict $etween duty and interest72 The question which then arises is# what is the $asis of this fiduciary "rofit "rinci"le) hen se"arating the two "rinci"les# the High Court of 4ustralia o"ined that the conflict rule was designed “to "reclude the fiduciary from $eing swayed $y considerations of "ersonal interest”#7( $ut the "rofit rule was designed “to "reclude the fiduciary from actually misusing his "osition for "ersonal ad'antage” 7 !t is suggested that ?ord <"&ohn.s o$ser'ation in *L.Q.R. 467 Boardman v Phipps,75 that the "rofit rule is "art of the wider conflict rule# "ro'ides the *ey to this conundrum His o$ser'ation is incorrect insofar as it suggests that the "rofit rule is merely a su$set of the conflict rule# as not all "rofit cases necessarily in'ol'e an identifia$le conflict $etween duty and interest if he were correct# there would $e no need for a se"arate "rofit rule :ut ?ord <"&ohn.s o$ser'ation is im"ortant as it reflects the genesis of the "rofit rule The historical de'elo"ment of the "rofit rule suggests that it was $orn out of the conflict rule73 !t is suggested that the reason for the "rofit rule ha'ing de'elo"ed an e-istence of its own is that it was recognised that situations where a fiduciary has made an unauthorised "rofit out of his fiduciary "osition are situations where there will commonly or generally $e a conflict $etween duty and interest !n other words# in 'irtually all cases where a "rofit is made out of a fiduciary "osition# the fiduciary will ha'e acted in a way that in'ol'es a conflict $etween his non8fiduciary duty and his "ersonal interest That e-"lains the difficulty in se"arating the two rules from one another# while also e-"laining the reason for the e-istence of the "rofit rule it is sim"ly a "ragmatic res"onse to the li*elihood of a conflict $eing "resent in such settings 4s ?ord ;icholls of :ir*enhead said recently7 “Equity reinforces the duty of fidelity owed $y a trustee or fiduciary $y requiring him to account for any "rofits he deri'es from his office or "osition This ensures that trustees and fiduciaries are financially disinterested in carrying out their duties They may not "ut themsel'es in a "osition where their duty and interest conflict To this end they must not ma*e any unauthorised "rofit” !n other words# rather than $eing concerned with situations where there is an “actual
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misuse” 76 of the fiduciary "osition# the "rofit rule is $ased fundamentally on the same concern as the conflict rule it too focuses on situations which carry an increased risk of the fiduciary a$andoning his non8fiduciary duty in fa'our of his "ersonal interest Fiduciary doctrine has not de'elo"ed a so"histicated understanding of what it means to “misuse” a fiduciary "osition# as one would e-"ect it to ha'e done o'er se'eral hundred years of e'olution if that were its central concern !nstead# it has de'elo"ed so"histicated rules which are designed to enhance the chances of "ro"er "erformance of non8fiduciary duties $y requiring fiduciaries to eschew situations where there is a ris* that they will $e swayed away from such "erformance The "rofit "rinci"le a""ears to ha'e $een an outgrowth from the more fundamental conflict "rinci"le# rather than a se"arate *ind of *L.Q.R. 468 doctrine# which e-"lains the relati'ely small num$er of cases in'ol'ing a $reach of the "rofit rule without there also $eing identifia$le a sensi$le "ossi$ility of conflict $etween duty and interest
(!) Pro"#y$a%i& in fiduciary doctrine The "rotection that fiduciary doctrine "ro'ides with res"ect to non8fiduciary duties is "ro"hylactic in nature hile it is quite commonly o$ser'ed that fiduciary duties are "ro"hylactic#77 it is suggested that there is more to the "ro"hylactic as"ect of fiduciary doctrine than is ordinarily meant $y such o$ser'ations /uch o$ser'ations generally refer to equity ha'ing set the $oundaries of lia$ility for fiduciaries more widely than might strictly $e necessary to meet the normati'e &ustifications for that lia$ility %00 Thus# for e-am"le# in the famous case of eech v Sand+ord,%0% a trustee was in $reach of fiduciary duty when he $ought the lease of ,omford mar*et for himself after the "re'ious lease# which he had $een holding on trust for an infant# had e-"ired and the landlord had refused to renew the lease in fa'our of the infant The trustee was under a duty to attem"t to o$tain a renewal of the lease for the $enefit of the infant# $ut he acted in $reach of fiduciary duty des"ite the fact that in the circumstances he could not achie'e that end ?ord Iing ?C said# “if a trustee# on the refusal to renew# might ha'e a lease to himself# few trust8estates would $e renewed to cestui :ue use” %02 !t is the harsh or strict a""lication of the rule# in circumstances where it seems the fiduciary has done no a""arent “wrong”# which traditionally attracts the "ro"hylactic e"ithet %0( The rationale for this as"ect of fiduciary doctrine.s "ro"hyla-is is the difficulty of "ro'ing in any gi'en case whether or not the fiduciary actually has done e'erything he ought to ha'e done 4s ?ord Eldon ?C said in p )acey %0 “though you may see in a "articular case# that Dthe trustee has not made ad'antage# it is utterly im"ossi$le to e-amine u"on satisfactory e'idence in the "ower of the Court# $y which ! mean# in the "ower of *L.Q.R. 469 the "arties# in ninety8nine cases out of an hundred# whether he has made ad'antage# or not” This form of "ro"hyla-is in fiduciary doctrine is essentially a matter of methodology+ it concerns difficulties of "roof and the way fiduciary doctrine is a""lied %05 Howe'er# it is suggested that there is a further as"ect of "ro"hyla-is in fiduciary doctrine that is not quite reached $y the sorts of o$ser'ations which ha'e &ust $een mentioned The 'ery nature of fiduciary doctrine# as o""osed merely to its methodology# is itself "ro"hylactic in the sense that the 'ery o$&ect of its rules and "rinci"les is to try to remo'e or neutralise incenti'es that might tem"t or otherwise moti'ate a fiduciary not to "erform "ro"erly his non8fiduciary duties
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/ome commentators ha'e noted this as"ect of "ro"hyla-is# although without discussion of its relationshi" to the more commonly identified "ro"hylactic element in fiduciary doctrine :ir*s# for e-am"le# said that “one "ro"hylactic technique is to im"ose a duty not to $ring a$out a situation in which the mischief in question might ha""en The mischief which equity see*s to a'oid is the sacrifice of the $eneficiary.s interests which is li*ely to ha""en if the fiduciary "ursues such an o""ortunity” %03 :oth forms of "ro"hyla-is in'ol'e rules that are crafted more widely than is strictly necessary to ca"ture the situations that cause concern Howe'er# the traditionally recognised form of "ro"hyla-is is intended to try to ca"ture all of the situations that are considered “wrong”# recognising that# in order to do so# some “non8wrongs” will also $e caught Here# a cause of action res"onds to more situations than are &ustified $y the "olicy concerns that underlie it $ecause "rocedural and e'idential difficulties mean a more narrowly crafted cause of action might fail to meet those concerns !n contrast# the less recognised form of "ro"hyla-is# which is central to the analysis de'elo"ed in this article# sim"ly o"erates to ma*e a wrong less likely, $y attem"ting to a'oid situations where that wrong is more li*ely to occur Here# "ro"hyla-is forms the 'ery reason for the e-istence of the cause of action# rather than merely the reason for the o'erinclusi'e $readth of a cause of action Fiduciary doctrine see*s to a'oid $reaches of non8fiduciary duties# $ut it cannot guarantee that such $reaches will ne'er occur as non8fiduciary duties can $e $reached for many reasons entirely unrelated to the concerns that attract fiduciary lia$ility Hence# while fiduciary doctrine certainly ca"tures situations in which there has $een no $reach of non8fiduciary duty =and# indeed# where the fiduciary.s conduct has actually $enefited his *L.Q.R. 470 "rinci"al%0 ># it is not sim"ly an o'er8$road ca"turing of all of the “wrongs” that constitute $reach of non8fiduciary duty ,ather# its "ur"ose is to "ro'ide "ro"hylactic "rotection designed to ma*e such wrongs less li*ely to occur ?ord Herschell.s famous dictum in Bray v 0ord highlights the "ro"hylactic "ur"ose of fiduciary doctrine%06 “!t is an infle-i$le rule of a Court of Equity that a "erson in a fiduciary "osition is not allowed to "ut himself in a "osition where his interest and duty conflict !t does not a""ear to me that this rule is# as has $een said# founded u"on "rinci"les of morality ! regard it rather as $ased on the consideration that# human nature $eing what it is# there is danger# in such circumstances# of the "erson holding a fiduciary "osition $eing swayed $y interest rather than $y duty# and thus "re&udicing those whom he is $ound to "rotect” Fiduciary doctrine.s fundamentally "ro"hylactic nature is a""arent here+ it is clear that the normati'e &ustification for its e-istence is to a'oid situations which in'ol'e a ris* of $reach of non8fiduciary duties Thus# in eech v Sand+ord, the trustee.s fiduciary duty e-isted in order to ma*e it more li*ely that he would "erform his non8fiduciary duty to see* to o$tain a renewal of the lease for the $enefit of his $eneficiary !t is suggested# therefore# that fiduciary doctrine is "ro"hylactic %oth in its strict mode of a""lication and, im"ortantly# in its fundamental nature The two forms of "ro"hyla-is are related in the sense that fiduciary duties are a""lied strictly in order to assist with achie'ing the normati'e "ro"hylactic function that fiduciary doctrine ser'es 4s Heydon @4 recently o$ser'ed in *arris v /igital Pulse Pty )td %07 “Dfiduciary rules are "ro"hylactic in the sense that they tend to "re'ent the disease of
Page12
tem"tation in the fiduciary88they "reser'e or "rotect the fiduciary from that disease The "re'ention of or "rotection from the rele'ant disease is assisted $y the strictness of the standard im"osed and the a$sence of defences &ustifying de"arture from it” The second "art of this o$ser'ation reflects the form of "ro"hyla-is traditionally associated with fiduciary doctrine# while the first "art of the o$ser'ation reflects the "ro"hylactic essence of fiduciary doctrine Heydon @4 did not identify "recisely what is “the disease of tem"tation”# $ut it is *L.Q.R. 47 suggested that the “disease” "rotected against is the tem"tation to $reach non8fiduciary duties Fiduciary doctrine "rotects against that “disease” $y see*ing to neutralise the tem"tation and is in that sense "ro"hylactic it "rotects against $reach of non8fiduciary duties $y remo'ing incenti'es which increase the ris* of such $reaches occurring This sort of "rotection is not "erfect# as the remo'al of tem"tations to $reach non8fiduciary duties is not a guarantee that those non8fiduciary duties will $e "erformed "ro"erly Howe'er# fiduciary doctrine see*s to ma*e such $reaches less li*ely than if tem"tation were allowed to remain Heydon @4.s comment also highlights that fiduciary doctrine.s "ro"hylactic methodology is $est understood and e-"lained $y reference to its fundamentally "ro"hylactic nature !dentifying that it is difficult to "ro'e certain matters does not esta$lish that "roof of# or failure to "ro'e# those matters should cause any concern 1n the other hand# a "ro"hylactic a""roach to issues of "roof and enforcement is far more easily understood if the 'ery reason for the e-istence of the rele'ant rule is to "ro'ide "ro"hylactic "rotection for other legal duties
(c) 'u!&idiarity of fiduciary dutie& ,eferring to fiduciary doctrine as “su$sidiary” in nature ca"tures the distinct nature of fiduciary and non8fiduciary duties res"ecti'ely Fiduciary duties are su$sidiary to non8 fiduciary duties in the sense that they can $e seen to "erform a different# "ro"hylactic "rotecti'e# function when com"ared with non8fiduciary duties Fiduciary duties are distinct from non8fiduciary duties and "roof of $reach of a fiduciary duty is in no way de"endent u"on "roof of $reach of a non8fiduciary duty Hence# fiduciary doctrine does not achie'e its "rotecti'e function merely $y increasing or su"erseding the remedies made a'aila$le for $reach of non8fiduciary duties Fiduciary doctrine see*s to avoid $reaches of non8fiduciary duty# not to stigmatise them as a more egregious form of such $reach%%0 Fiduciary duties are su$sidiary duties# in the sense that they "rotect non8fiduciary duties# $ut they are not secondary duties as that conce"t is normally understood in the law of contract and tort /econdary duties are duties that arise u"on $reach of "rimary duties# such as the secondary duty to "ay damages that arises where the "rimary duty to "erform a contract has $een $reached%%% Fiduciary duties do not ser'e that sort of function 4s Finnis has e-"lained in a different conte-t# “ Asu$sidiarityB Dhere signifies not secondariness or su$ordination# $ut assistance the ?atin for hel" or assistance is su%sidium ” %%2 Fiduciary duties assist with securing the "ro"er *L.Q.R. 472 "erformance of non8fiduciary duties $y see*ing to insulate fiduciaries against situations where they might $e swayed away from "ro'iding such "ro"er "erformance
I*. I+%LI"'TIONS
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Ha'ing outlined what is meant $y the "ro"osition that fiduciary doctrine "ro'ides a su$sidiary and "ro"hylactic form of "rotection for non8fiduciary duties# it is now "ossi$le to consider some of the im"lications of concei'ing of fiduciary doctrine in this way
(a) ora$ity The foregoing argument suggests# for e-am"le# that the relati'ely common 'iew of fiduciary doctrine as moralistic in its outloo* is an inaccurate re"resentation of the "ur"ose of fiduciary doctrine The moralistic 'iew# that fiduciary doctrine is concerned with maintaining “the highest standards of "ro$ity” %%( in fiduciaries# was gi'en much im"etus $y CardoJo C@.s well8*nown dictum in Meinhard v Salmon “4 trustee is held to something stricter than the morals of the mar*et "lace ;ot honesty alone# $ut the "unctilio of an honor the most sensiti'e# is then the standard of $eha'ior” %% English &udges ha'e also# at times# referred to the fiduciary conflict "rinci"le as “founded u"on the highest and truest "rinci"les of morality”#%%5 as ha'e other Commonwealth &udges%%3 Fiduciary doctrine is not concerned with eliciting more moral conduct on the "art of a fiduciary# nor with eliciting more than "ro"er "erformance of the non8fiduciary duties he owes !ts "ur"ose# as has $een e-"lained# is to increase the li*elihood of "ro"er "erformance of those duties $y insulating the fiduciary from situations that in'ol'e tem"tations not to do so !n addition to the "oints already made a$out the nature and function of fiduciary doctrine# two further "oints reinforce its amoral nature First# English fiduciary doctrine does not interfere with the "ro"osition that trustees may $e duty8$ound “to act dishonoura$ly =though not illegally> if the interests of their $eneficiaries require it” #%% contrary to what one might e-"ect if CardoJo C@ were correct in saying that fiduciary doctrine is designed to ensure that “the le'el of conduct of fiduciaries Dis *e"t at a le'el higher than that trodden $y the crowd” %%6 /econdly# in addition to *L.Q.R. 473 o$ser'ing that fiduciary doctrine is $ased on a cynical 'iew of human nature rather than on considerations of morality#%%7 ?ord Herschell# and also ?ord atson# $oth em"hasised in Bray v 0ord that “a $reach of Dfiduciary duty may $e attended with "erfect good faith# and it is insufficient to &ustify a charge of moral o$liquity# unless it is shewn to ha'e $een committed *nowingly or with an im"ro"er moti'e” %20 !n other words# fiduciary doctrine a""lies no matter how honest the fiduciary may ha'e $een%2% /imilarly# courts refuse to consider whether the fiduciary.s conduct was for the $enefit of the "rinci"al %22 Fiduciary analysis does not de"end u"on such matters as the doctrine.s fundamental concern is not with im"ro'ing the standards of conduct of fiduciaries !t can# of course# $e argued that increasing the chance of "ro"er "erformance of non8 fiduciary duties could $e descri$ed as a moral outcome# in the sense that it is for the $enefit of the "rinci"al !f all that were meant when fiduciary doctrine is descri$ed as $ased on "rinci"les of “morality” is that it is moral to ma*e "ro"er "erformance of someone.s duties more li*ely# then the "ro"osition is uno$&ectiona$le# although relati'ely uninformati'e :ut that is not what is normally meant $y the high8handed moral rhetoric which frequently encrusts discussion of fiduciary doctrine /uch rhetoric should $e discarded as it misguides inquiry into the true nature and function of fiduciary doctrine Fiduciary doctrine is fundamentally far more instrumentalist or functionalist in outloo* than it is moralist
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(!) otive& /mith has argued recently that “the essence of the fiduciary o$ligation lies in the &usticia$ility of moti'e” %2( More fully# his argument is that “the attem"t to understand the duty of loyalty in terms of results will always fail# $ecause the duty is not directed to any result# not e'en a negati'e one ,ather# it is a required manner of doing what one does# or not doing what one does not do !t is a duty to act =or not> with the right moti'e” %2 /mith.s focus on ensuring that fiduciaries act for the right "ur"oses or moti'e leads him to conclude# somewhat sur"risingly# that# $ecause the *L.Q.R. 474 fiduciary duty is concerned with moti'e# the conflict and "rofit rules are not themsel'es fiduciary duties+ rather# they are "ro"hylactic rules designed to "rotect against 'iolation of the fiduciary o$ligation to act with the right moti'e %25 !t is a fundamental "remise of /mith.s argument that the requirement that holders of "owers e-ercise those "owers for a "ro"er "ur"ose is a fiduciary doctrine %23 That doctrine argua$ly is concerned with the "ro"riety or otherwise of the reasons for action or inaction of the "erson whose decision is under re'iew# rather than with the result of that decision%2 Howe'er# as was discussed in detail earlier#%26 it is far from clear that the doctrine is "eculiar to fiduciaries and so it is far from clear that it "ro'ides a solid foundation on which to construct a theory as to the nature of fiduciary do ctrine /mith.s argument is consistent with# and see*s to su""ort# the ;orth 4merican 'iew that there is a “fiduciary duty to act in what Dthe fiduciary "ercei'es to $e the $est interests of the $eneficiary” %27 This duty seems to deri'e from the frequent failure in 4merican fiduciary &uris"rudence to distinguish $etween doctrines that a""ly only to fiduciaries and those that a""ly $oth to fiduciaries and to non8fiduciaries Canadian fiduciary &uris"rudence seems to ha'e $een influenced $y this a""roach# “de'elo"ing notions of Athe fiduciaryB and Afiduciary dutiesB which are rather different from those used elsewhere in the Commonwealth” %(0 English and 4ustralian courts ha'e refused to acce"t that the "ositi'e duties%(% that flow from such analysis are fiduciary in nature 4nglo84ustralian fiduciary doctrine “tells the fiduciary what he must not do !t does not tell him what he ought to do” %(2 !n 4nglo84ustralian law# a fiduciary.s duty to act in the interests *L.Q.R. 475 of his or her "rinci"al is gi'en legal force through "ositi'e non8fiduciary duties which are "rotected $y negati'e fiduciary duties /mith.s analysis does not sit well with the fundamental "rece"ts and case law of 4nglo84ustralian fiduciary doctrine 4t one le'el# fiduciary doctrine can $e said to $e concerned with moti'e remo'ing the fruits of tem"tation is designed to a'oid fiduciaries $eing moti'ated $y those tem"tations /mith is also correct that fiduciary doctrine is not generally “&udged $y result”#%(( $ut this does not mean that moti'es# rather than results# are the normati'e concern under"inning fiduciary doctrine /mith argues that “the "ro"hylactic rules entitle the $eneficiary not to have to wonder a%out the +iduciary;s motive ” %( :ut "ro"hyla-is is not merely an e'idential or methodological as"ect of fiduciary doctrine+ it is its fundamental "ur"ose That "ur"ose is "ro"hylactic in the sense that it is concerned to reduce the li*elihood of a fiduciary acting in $reach of non8fiduciary duty+ it is “$ased on the consideration that# human nature $eing what it is# there is danger# in such circumstances# of the "erson holding a fiduciary "osition $eing swayed $y interest rather than $y duty# and thus pre.udicing those whom he is %ound to protect ” %(5 Moti'es do not cause "re&udice in themsel'es+ fiduciary doctrine "rotects against the "ossi$ility of
Page1#
"re&udice $eing caused $y $reach of non8fiduciary duties
(c) 'co"e of fiduciary dutie& and re$ation&#i" to nonfiduciary dutie&
are to $e defined $y the terms of the contract of agency” %(7 The fiduciary duty a""lies ine-ora$ly %0 if there is a real sensi$le "ossi$ility of conflict $etween duty and interest# $ut that analysis must logically $e moulded to the "articular duties and interests that actually e-ist in each fiduciary relationshi"%% Fiduciary doctrine.s su$sidiary nature also e-"lains why “the essence of a fiduciary relationshi" is that it creates o$ligations of a different character from those deri'ing from the contract itself” %2 hile fiduciary duties can legitimately $e considered "art of the law of ci'il wrongs#%( it ris*s losing sight of their true nature and function to treat them as equi'alent to# or "art of# the law of torts or of contract The doctrines that constitute the “rag$ag” % of tort law do not ser'e the "rotecti'e function that fiduciary duties ser'e with res"ect to other duties Tort law o$ligations are generally either directly res"onsi'e to the infliction of harm# such as negligence# or constituti'e of "ro"erty rights# such as tres"ass and con'ersion ;or do *L.Q.R. 477 contractual o$ligations generally e-hi$it the "rotecti'e function of fiduciary doctrine !t is# of course# "ossi$le for contractual rights to $e crafted in such a way as to $e "rotecti'e of other rights# $ut this reflects the fle-i$ility of the institution of contract rather than its fundamental nature or "ur"ose The "ro"hylactic "rotecti'e function ser'ed $y fiduciary doctrine also hel"s to e-"lain the
Page1(
4nglo84ustralian ma-im which holds that fiduciary duties are "roscri"ti'e# rather than "rescri"ti'e%5 The "roscri"ti'e nature of fiduciary duties is a consequence of the "rotecti'e function they ser'e Fiduciary doctrine see*s to increase the li*elihood that a fiduciary will "ro"erly "erform his non8fiduciary duties $y insulating him from influences which ha'e a tendency to sway the fiduciary away from such "ro"er "erformance 4s the remo'al of such influences is an essentially negati'e tas*# it is quite natural that the fiduciary duties im"osed to achie'e that result are themsel'es essentially "roscri"ti'e or negati'e in nature
(d) ""roac#in+ unre&o$ved i&&ue& The understanding of the nature and function of fiduciary doctrine ad'anced here is also "otentially hel"ful in a""roaching currently unsettled issues within fiduciary doctrine 4n e-am"le is the question whether a fiduciary might $e a$le to argue contri$utory fault on the "art of his "rinci"al to reduce an award of equita$le com"ensation made for $reach of fiduciary duty !t is clear in England that where a $reach of fiduciary duty in'ol'ed intentionally fa'ouring one client o'er another# contri$utory fault on the "art of the "rinci"al cannot $e claimed%3 !t has $een assumed that this means contri$utory fault cannot $e claimed in any case in'ol'ing $reach of fiduciary duty# % although this has not yet $een decided formally in England /uch "leas are una'aila$le in 4ustralia#%6 $ut ha'e $een u"held in ;ew Lealand %7 ,emaining true to its "rotecti'e function# fiduciary doctrine ought not to allow such "leas Consider# for e-am"le# a situation where a fiduciary is acting for two "rinci"als and owes duties to each which are inconsistent# such that the fiduciary cannot "erform his duty to one "rinci"al without $reaching his duty to the other The fiduciary "rinci"le regarding conflicts $etween inconsistent duties requires the fiduciary to *L.Q.R. 478 cease acting for at least one "rinci"al# and "refera$ly $oth#%50 in order to a'oid $reach of the fiduciary.s non8 fiduciary duties !f the fiduciary fails to heed that "roscri"tion and continues to act# there$y $reaching at least one non8fiduciary duty# he ought to $e lia$le for the loss which flows from that $reach without reduction for contri$utory fault# as it was that 'ery result against which fiduciary doctrine sought to "rotect Further# a "ro"er understanding of the nature and function of fiduciary doctrine is 'ital when considering the increasingly frequent calls for alle'iation of its strictness %5% For e-am"le# when de$ating whether mechanisms such as Chinese walls ought to "ro'ide immunity from allegations of $reach of fiduciary duty where solicitors act for more than one "rinci"al in a single matter# Mitchell has argued that the disqualification rules that fiduciary duties create “may limit the sco"e for multidisci"linary "ractices# seen $y some consumers of legal ser'ices as the way of the future” %52 !t is not suggested that analysing fiduciary doctrine as ser'ing a "rotecti'e function necessarily resol'es this de$ate# as the question is ultimately one of "u$lic "olicy !t is# howe'er# suggested that the de$ate can only "roceed at an im"o'erished le'el of so"histication if it fails to recognise# and to engage with# the fundamental nature and function ser'ed $y fiduciary doctrine as it "resently stands
Page1-
com"anies such as Enron# than it did 0 years ago %5( “The history today of the acti'ities of many cor"orate $odies has disclosed scandals and loss to the "u$lic due to failure of the directors to recogniJe the requirements of their fiduciary "osition” 4nother "oint that calls for mention is the effect that understanding fiduciary doctrine as suggested in this article might ha'e on the e-tent of *L.Q.R. 479 secondary lia$ility for assistance "ro'ided to those who act in $reach of fiduciary duty or for recei"t of "ro"erty transferred in $reach of fiduciary duty 4s is well *nown# "ersons who are not trustees or fiduciaries themsel'es# may ne'ertheless $e held "ersonally lia$le if they assist in a $reach of trust or of fiduciary duty# or if they recei'e "ro"erty that was transferred to them as a direct result of a $reach of trust or of fiduciary duty %5 Treating fiduciary duties as only those duties that are "eculiar to fiduciaries %55 need not limit the e-tent of such accessory lia$ility The reason is that in the conte-t of accessory lia$ility the fiduciary conce"t is $eing used only in order to e-"ort the incidents of the trustee8 $eneficiary relationshi" to other relationshi"s %53 hen that is understood# a $reach of any duty which would constitute a $reach of trust in an ordinary trust situation should suffice for accessory lia$ility in other fiduciary relationshi"s+ not merely those $reaches which would constitute a $reach of fiduciary duty in the restricted sense %5 !n other words# not e'ery $reach of duty $y a fiduciary is a $reach of fiduciary duty# $ut a $reach of duty $y a fiduciary can nonetheless suffice for accessory lia$ility to arise in third "arties on the $asis that it is sufficiently similar to a $reach of trust %56
*. "ON"L!SION !n %76%# /he"herd o$ser'ed that the “terms fiduciary relationshi" and duty of loyalty are so much co8e-tensi'e as to $e# in effect# alternate descri"tions of the same thing” %57 4s alternate descri"tions of the same thing# neither can tell us much a$out the other The notion of loyalty in 4nglo84ustralian fiduciary doctrine is an um$rella conce"t# much li*e the conce"t of un&ust enrichment in the law of restitution !t is not something to which fiduciary doctrine resorts directly in order to ascertain the a""ro"riate way to resol'e "articular dis"utes Fiduciary doctrine is not com"rised merely of a single and sim"le duty to $e loyal ,ather# fiduciary doctrine com"rises se'eral doctrines# such as the "rohi$ition on fiduciaries acting where there is a conflict $etween duty and interest# and it is those doctrines that constitute the conce"t of fiduciary loyalty The conce"t of loyalty is equated at times with a duty to act in the $est interests of the "rinci"al $ut this “"ro'ideDs no immediate yardstic* against which to measure the *L.Q.R. 480 "ro"riety or im"ro"riety of a fiduciary.s actions in a "articular case” %30 !nstead# the “distinguishing” or “core” %3% fiduciary o$ligation of loyalty is $est understood as an enca"sulation of an idea which is gi'en effect through the 'arious doctrines "eculiar to fiduciaries# rather than as a directly enforcea$le duty !t is through those doctrines that the "rinci"al.s interests in the relationshi" are secured as "aramount The idea enca"sulated $y the "hrase “fiduciary loyalty” is a su$sidiary and "ro"hylactic mode of "rotection for non8fiduciary duties The "ur"ose of fiduciary duties# and the function ser'ed $y fiduciary doctrine generally# is to enhance the chance of "ro"er "erformance of the non8fiduciary duties that com"rise the fiduciary.s underta*ing $y "rotecting against influences that might sway the fiduciary away from such "ro"er "erformance This understanding of fiduciary doctrine allows it to $e sensiti'e to# and
Page1
moulded $y# the different non8fiduciary duties inherent in the fact that fiduciary duties "rotect a 'ariety of different *inds of underta*ing !t is suggested that this understanding of fiduciary doctrine is well8grounded in 4nglo84ustralian case law# that it "ro'ides a "owerful theoretical $asis for the e-"lanation of numerous im"ortant tenets within fiduciary doctrine# and that it has the "otential to hel" in resol'ing currently unsettled issues regarding the "ractical a""lication of that doctrine M4TTHE C1;4?E;%32 ?N, 2005# %2%=@ul># 52860
___________________________________________________________________________________________ %
Mason# “Themes and 9ros"ects” in Finn =ed># ssays in :uity =%765># "22 at "23 /ee also )$' Minerals )td v nternational 'orona &esources )td D%767 2 /C, 5 at 3(83+ =%767> 3% ?, =th> % at 23
2
/ee# eg *ospital Products )td v %53 C?, % at 73 and %%+ )loyds Bank )td v Bundy D%75 N: (23 at (%+ Maclean v $rklow nvestments )td D%776 ( ;L?, 360 at 37%
(
Bristol and West BS v Mothew D%776 Ch % at %6+ Boulting v $ssociation o+ 'inematograph, =elevision and $llied =echnicians D%73( 2 N: 303 at 3(3+ Bank o+ >ew ?ealand v >ew ?ealand 8uardian =rust 'o )td D%777 % ;L?, 33 at 360836% and 36+ )B v British 'olum%ia D200( 2 /C,0( at (28 ((+ =200(> 2(0 ?, =th> 5%( at 5(5+ 'hirnside v 0ay D200 ( ;L?, 3( at 3+ and see Millett# “Equity.s 9lace in the ?aw of Commerce” =%776> %% ?N, 2% at 2%7
/ee# eg :utler and ,i$stein# “1"ting out of Fiduciary uties a ,es"onse to the 4nti8Contractarians” =%770> 35 ashington ?,e' % at ""%7# (0 and (2+ Easter$roo* and Fischel# “Contract and Fiduciary uty” =%77(> (3 @ ?aw and Econ 25 at ""2 and (%+ hinco"# “1f Fault and efault Contractarianism as a Theory of 4nglo84ustralian Cor"orate ?aw” =%77> 2% Mel$<?, %6 at %67# %778200 and 20
5
/ee# eg :ir*s# “The Conce"t of a Ci'il rong” in 1wen =ed># Philosophical 0oundations o+ =ort )aw =%775># "(% at "(5+ :ir*s “efinition and i'ision a Meditation on nstitutes (%(” in :ir*s =ed># =he 'lassi+ication o+ @%ligations =%77># "% at "% =referring to them as “meta8torts”>+ :urrows# # ""% and (%+ ugdale =ed># 'lerk and )indsell on =orts =%6th ed# 2000># "aras %802# %8%2 and Ch26
3
Mothew, a$o'e# n( at %
/ee# eg i%id, at %3+ *enderson v Merrett Syndicates )td D%775 2 4C %5 at 205+ $:uaculture 'orp v >ew ?ealand 8reen Mussel 'o )td D%770 ( ;L?, 277 at (0%+ )ockwood Buildings )td v =rust Bank 'anter%ury )td D%775 % ;L?, 22 at 23+ B>? v 8uardian =rust, a$o'e# n( at 363836+ Mason# “The 9lace of Equity and Equita$le ,emedies in the Contem"orary Common ?aw orld” =%77> %%0 ?N, 2(6 at 256+ Ma-ton# “Equity and the ?aw of Ci'il rongs” in ,ishworth =ed># =he Struggle +or Simplicity in the )awA ssays +or )ord 'ooke o+ =horndon =%77># "7% at "7+ Ti""ing# “Causation at ?aw and in Equity o e Ha'e Fusion)” =2000> Canter$ury ?, ( at "6
6
/ee# eg the discussion in 9t !O=d># $elow
7
/ee also 4ustin# “Moulding the Content of Fiduciary uties” in 1a*ley =ed># =rends in 'ontemporary =rust )aw =%773># "%5( at "%57+ :ir*s# “The Content of Fiduciary 1$ligation” =2000> ( !srael ?,e' ( at =re8"u$lished at =2002> %3 T?! (>
%0
There is a strong# yet re$utta$le# "resum"tion that fiduciary duties will $e owed in such relationshi"s )$' Minerals, a$o'e# n% at 3383 =/C,>+ 26 =?,>
%%
/ee# eg Hayton and Marshall# 'ommentary and 'ases on the )aw o+ =rusts and :uita%le &emedies =%%th ed# 200%># "ara38%(+ Meagher# Heydon and ?eeming# Meagher, 8ummow and )ehane;s :uityA /octrines and &emedies =th ed# 2002># "ara58005
Page15
%2
/ee# eg 'orpus uris Secundum =%770># Ool%7 'orporations, "ara6+ :loc*# :arton and ,adin# Business udgment &uleA 0iduciary /uties o+ 'orporate /irectors =(rd ed# %767># "2+ Fran*el# “Fiduciary uties as efault ,ules” =%775> 1regon ?,e' %207 at %2%(+ ?ang$ein# “The Contractarian :asis of the ?aw of Trusts” =%775> %05 Kale ?@ 325 at 32# 3( and 355+ Hansmann and Mattei# “The Functions of Trust ?aw a Com"arati'e ?egal and Economic 4nalysis” =%776> ( ;K<?, ( at + /mith# “The Critical ,esource Theory of Fiduciary uty” =2002> 55 Oand?,e' %(77 at %5(
%(
/ee# eg :rudney# “Contract and Fiduciary uty in Cor"orate ?aw” =%77> (6 :oston Coll?,e' 575 at 577# n7+ Co-# HaJen and 1B;eal# 'orporations =looseleaf ed># "ara%0%7# n% ;ot all ;orth 4mericans ado"t this a""roach# howe'er see# eg /he"herd# )aw o+ 0iduciaries =%76%># "7+ Flannigan# “Fiduciary uties of /hareholders and irectors” D200 @:? 2 at 27
%
/ee n re West o+ ngland and South Wales /istrict Bank, e p /ale and 'o =%67> %% Ch 2 at 6+ Swindle v *arrison D%77 4ll E, 05 at (+ 8wem%e Calley /evt 'o )td v oshy D200( EC4 Ci' %6+ D200 % :C?C %(% at D67+ Finn# 0iduciary @%ligations =%7># "ara+ Finn# “The Fiduciary 9rinci"le” in Koudan =ed># :uity, 0iduciaries and =rusts =%767># "% at ""(8(5+ :ir*s# a$o'e# n7 at ""( and 687
%5
einri$# “The Fiduciary 1$ligation” =%75> 25 <T?@ % at 5
%3
The search for a "rinci"le to identify such relationshi"s has $een com"ared to the search for the Holy rail aters# “:an*s# Fiduciary 1$ligations and 35 Can :ar ,e' ( at 53
%
;one of the numerous academic suggestions has yet gained uni'ersal &udicial acce"tance see# eg /cott# “The Fiduciary 9rinci"le” =%77> ( Calif?,e' 5(7 at 50+ /ealy# “Fiduciary ,elationshi"s” D%732 C?@ 37 at 287+ einri$# a$o'e# n%5 at and %5+ Finn# 0iduciary @%ligations =%7># "ara3+ /he"herd# )aw o+ 0iduciaries =%76%># "73+ /he"herd# “Towards a 7 ?N, 5% at 83+ Finn# “The Fiduciary 9rinci"le” in Koudan =ed># :uity, 0iduciaries and =rusts =%767># "% at ""3 and 5+ Flannigan# “The Fiduciary 1$ligation” =%767> 7 1@?/ 265 at (078(%0
%6
n( a$o'e
%7
/ee# eg in 4ustralia Permanent BS v Wheeler =%77> % 4C/, %07 at %5+ in Canada 8irardet v 'rease and 'o =%76> %% :C?, =2d> (3% at (32+ )$' Minerals, a$o'e# n% at 57 and 3 =/C,>+ 3% and 26 =?,>+ &o%erts v & D2002 /C, 25 at 266+ =2002> 220 ?, =th> % at (+ and in ;ew Lealand B>? v 8uardian =rust, a$o'e# n( at 360
20
Mothew, a$o'e# n( at %3
2%
i%id
22
*ilton v Barker Booth and astwood 6a +irm7 D2005 6 4?@ 36# es"ecially at 3608 36%# which "ur"orts to ado"t the distinction $ut fails to identify how it is drawn
2(
/ee# eg Med+orth v Blake D2000 Ch 63 at 76+ Dorkshire Bank Plc v *all D%777 % ?, %%( at %26+ /ownsview >ominees )td v 0irst 'ity 'orp )td D%77( 4C 275 at (%3
2
/ee# eg )agunas >itrate 'o v )agunas Syndicate D%677 2 Ch (72 at (5 and (
25
Wheeler, a$o'e# n%7 at %56
23
Mothew, a$o'e# n( at %6
2
$rmitage v >urse D%776 Ch 2% at 25(825 /ee also Hayton# “The !rreduci$le Core Content of Trusteeshi"” in 1a*ley =ed># =rends in 'ontemporary =rust )aw =%773># " at ""5856
26
/ee# eg 8room v 'rocker D%7(7 % I: %7 at 20(+ Price v Bouch =%763> 5( 9 P C, 25 at 23%+ /ownsview >ominees )td v 0irst 'ity 'orp )td D%77( 4C 275 at (%+ $%u /ha%i >ational =anker 'o v Product Star Shipping )ine )td 6=he Product Star7 6>o27 D%77( % ?loyd.s ,e" (7 at 0+ Dorkshire
Page29
Bank Plc v *all D%777 % ?, %%( at %26+ 8an nsurance 'o )td v =ai Ping nsurance 'o )td 6>o27 D200% EC4 Ci' %0+ D200% 2 4ll E, =Comm> 277 at D38D36# D3 and D6%+ Paragon 0inance Plc v >ash D200% EC4 Ci' %33+ D2002 % ?, 365 at D(2 and D(3 27
/ee# eg Price v Bouch, i%id # at 230+ 8an nsurance, i%id # at D36
(0
/ee# eg night v Mar.ori%anks =%67> 2 Mac P %0 at %(8%+ 2 E, at 5+ Warner v aco% =%662> 20 Ch 220 at 22+ 0arrar v 0arrars )td =%666> 0 Ch (75 at (76 and %08%%+ 'olson v Williams =%667> 56 ?@ Ch 5(7 at 50+ 'uckmere Brick 'o )td v Mutual 0inance )td D%7% Ch 77 at 7358733+ Bishop v Bonham D%766 % ?, 2 at 7850+ 'hina and South Sea Bank )td v =an D%770 % 4C 5(3 at 55+ Har"um# Megarry and Wade;s )aw o+ &eal Property =3th ed# 2000># "ara%7803%+ Finn# 0iduciary @%ligations =%7># "ara%+ Mchee =en ed># Snell;s :uity =(%st ed# 2005># "ara(68(6
(%
/ee# eg Dorkshire Bank v *all, a$o'e# n2( at %26+ /ownsview >ominees, a$o'e# n2( at (%+ Finn# i%id + Megarry and Wade, i%id + Snell;s :uity, i%id
(2
/ee# eg Malik v Bank o+ 'redit and 'ommerce nternational S$ D%77 !,?, 32 at 35833 and 36837+ 0orte 8roup )td v Macntosh D%776 ( ;L?, %% at %60+ >ottingham
((
/ee# eg mperial 8roup Pension =rust )td v mperial =o%acco )td D%77% % ?, 567 at 573857
(
!n other words# for "ur"oses unrelated to the effecti'e realisation of the mortgagee.s security /ee /ownsview >ominees, a$o'e# n2( at (%+ Snell;s :uity, a$o'e# n(0 at "ara(68(6
(5
/ee 8room v 'rocker, a$o'e# n26 at 20(# 22 and 226+ Price v Bouch, a$o'e# n26 at 23%+ 8an nsurance, a$o'e# n26 at D3# D3 and D6%+ Paragon 0inance, a$o'e# n26 at D(2 and D(3
(3
/ee# eg Spackman v vans =%636> ?, ( H? %% at %67870+ Mills v Mills =%7(6> 30 C?, %50 at %658%63+ n re Smith and 0awcett )td D%72 Ch (0 at (06+ *ogg v 'ramphorn )td D%73 % Ch 25 at 237+ *oward Smith )td v $mpol Petroleum )td D%7 4C 62% at 6( and 6(86(6+ Bishopsgate nvestment Management )td v Mawell 6>o27 D%77 % 4ll E, 23% at 235+ trasure =ravel nsurances )td v Scattergood D2002 EHC (07( =Ch>+ D200( % :C?C 576 at D6+ a'ies# 8ower and /avies; Principles o+ Modern 'ompany )aw =th ed# 200(># ""(608(6% and (658(6+ :irds# :oyle# Ferran and Oilliers# Boyle and Birds; 'ompany )aw =th ed# 2000># ""500850% and 508503+ Ferran# 'ompany )aw and 'orporate 0inance =%777># ""%58%30 and %328%36+ ;olan# “The 9ro"er 9ur"ose octrine and Com"any irectors” in ,ider =ed># =he &ealm o+ 'ompany )aw =%776># "% at "%2 /ee also /mith# “The Moti'e# ;ot the eed” in etJler =ed># &ationaliEing Property, :uity and =rusts =200(># "5( at ""36837
(
/ee also ?indgren# “The Fiduciary ;ature of a Com"any :oard.s 9ower to !ssue /hares” =%72> %0 <4?, (3 at (37+ Ford# 4ustin and ,amsay# 0ord;s Principles o+ 'orporations )aw =6th ed# %77># "ara6200+ rantham# “Com"any irectors and Com"liance with the Com"any.s Constitution” =200(> 20 ;L<?, 50 at 5
(6
/ee /ealy# “The irector as Trustee” D%73 C?@ 6( at 65863 and 7%8%0(# /ealy# “Fiduciary ,elationshi"s” D%732 C?@ 37 at %8(# and see# eg the a""roach in Spackman v vans, a$o'e# n(3 at %678%70+ n re 8resham )i+e $ssurance Society =%62> ?, 6 Ch 4"" 3 at 7+ n re )ands $llotment 'o D%67 % Ch 3%3 at 3(% and 3(6+ >ew )am%ton )and and 'oal 'o )td v )ondon Bank o+ $ustralia )td =%70> % C?, 52 at 5%852+ Wallersteiner v Moir 6>o27 D%75 % N: (( at (78 (76 !ndeed# directors were e'en sometimes referred to as trustees see# eg 8reat astern &ailway 'o v =urner =%62> 6 Ch 4"" %7 at %52 /ee also 'harita%le 'orp v Sutton =%2> 2 4t* 00 at 05+ 23 E, 32 at 3+ Selangor o37 D%736 % ?, %555 at %55
(7
Spackman v vans =%636> ?, ( H? %% at %678%70
0
Catcher v Paull D%7%5 4C (2 at (6 /ee also Farwell# Powers =(rd ed# %7%3># ""57830
%
n re 'ourage 8roup;s Pension Schemes D%76 % ?, 75 at 505 /ee also $leyn v Belchier =%56> % Eden %(2 at %(6+ 26 E, 3( at 3(+ /uke o+ Portland v )ady =opham =%63> %% H?C (2 at 5+ %% E, %22 at %25%+ Molyneu v 0letcher D%676 % N: 36 at 35
2
/ee a$o'e# nn(8(5 with accom"anying te-t
Page21
(
Peters; $merican /elicacy 'o )td v *eath =%7(7> 3% C?, 5 at 62 and 50+ >orth!West =ransportation 'o )td v Beatty =%66> %2 4"" Cas 567 at 30%+ 8ower and /avies, a$o'e# n(3 at ""6386
British :uita%le $ssurance 'o )td v Baily D%703 4C (5 at 2 /ee also $llen v 8old &ee+s o+ West $+rica )td D%700 % Ch 353 at 3%+ >gurli )td v Mc'ann =%75(> 70 C?, 25 at (68(7+ Peters; $merican /elicacy, i%id, at 75# 505 and 5%%85%2+ 8am%otto v W'P )td =%775> %62 C?, (2 at 83 and 5%85( This restriction clearly a""lies where shareholders e-ercise their "owers to alter the articles of association =see the cases &ust cited and 4lcoc* =en ed># 8ore!Browne on 'ompanies =th ed# %763># "ara6># and it may a""ly more $roadly to other resolutions where a ma&ority of shareholders affect the "osition of a minority =see# eg 8ower and /avies, a$o'e# n(3 at ""70 and 7# n5%+ Menier v *ooper;s =elegraph Works =%6> ?, 7 Ch 4"" (50+ Burland v arle D%702 4C 6( at 7(87+ /ominion 'otton Mills 'o )td v $myot D%7%2 4C 53 at 552855(+ orthington# “Cor"orate o'ernance ,emedying and ,atifying irectors. :reaches” =2000> %%3 ?N, 3(6 at 38 36>
5
/ee# eg 0earon v /es%risay =%65%> % :ea' 3(5 at 32+ 5% E, 26 at (%+ Beere v *o++mister =%653> 2( :ea' %0% at %058%03+ 5( E, 0 at 2+ n re 'rawshay decFd D%76 Ch %2( at %+ n re /ick D%75( Ch (( at (33+ n re Brook;s Settlement D%736 % ?, %33% at %337 The fact that the $eneficiaries in these cases were mostly tenants for life does not diminish the "oint life tenants are not fiduciaries vis!"!vis the remaindermen = n re Biss D%70( 2 Ch 0 at 3%> and# in Beere v *o++mister, the a""ointment was scrutinised against the fraud on a "ower doctrine des"ite the fact that one of the holders of the "ower that had $een e-ercised was not a life tenant The cases cited also in'ol'ed trusts of funds rather than land E'en where the life tenancy is in settled land# the trusteeshi" im"osed on the life tenant under the /ettled ?and 4cts =see# eg /ettled ?and 4ct %725# s%0> was not as “stringent” as that im"osed on ordinary trustees =Har'ey# Settlements o+ )and =%7(># "73>
3
Farwell# a$o'e# n0 at ""56857 /ee also Han$ury# “Frauds on a 9ower88an 1""ortunity for /toc*ta*ing” =%76> 3 ?N, 22% at 223+ Finn# 0iduciary @%ligations =%7># "ara6+ orthington# “irectors. uties# Creditors. ,ights and /hareholder !nter'ention” =%77%> %6 Mel$<?, %2% at %22+ Thomas# Powers =%776># "aras 780 and 78%+ orthington# a$o'e# n at 36
Har"um# “Fiduciary 1$ligations and Fiduciary 9owers88here 4re e oing)” in :ir*s =ed># Privacy and )oyalty =%77> %5 at "%
6
einri$# a$o'e# n%5 at %3
7
Boardman v Phipps D%73 2 4C 3 at %2+ Boulting, a$o'e# n( at 3(83(6
50
=%65> % Macq 3% at %+ %7 ,, (2 at (7
5%
i%id # at (+ ,, at 0
52
i%id
5(
/ee also e p Bennett =%605> %0 Oes (6% at (7+ (2 E, 67( at 67+ &e Bloye;s =rusts =%67> % Mac P 66 at 75+ % E, %(5 at %(5+ u"held on a""eal to the House of ?ords su% nom )ewis v *illman =%652> ( H?C 30 at 32783(0+ %0 E, 2(7 at 27
5
=%76> ( Oes 0 at 50+ (0 E, %26 at %25(
55
i%id # at 52+ (0 E, at %25
53
=%62> 7 Cl P Fin %%% at %2(+ 6 E, (5 at (32
5
4lthough such comments are not uncommon see# eg Mow$ray# Tuc*er# ?e 9oide'in and /im"son# )ewin on =rusts =%th ed# 2000># "ara208%2+ Hollander and /alJedo# 'on+licts o+ nterest and 'hinese Walls =2000># "ara(82%+ 'han v ?acharia =%76> %5 C?, %6 at %76+ $rmitage v Paynter 'onstruction )td D%777 2 ;L?, 5( at 55+ Douyang Pty )td v Minter llison Morris 0letcher =200(> 2%2 C?, 6 at D%6+ Marks and Spencer Plc v 0resh+ields Bruckhaus /eringer 6a +irm7 D200 EHC %(( =Ch>+ D200 % ?, 2((% at D%2
56
/mith# “The Moti'e# ;ot the eed” in etJler =ed># &ationaliEing Property, :uity and =rusts =200(>#
Page22
"5( at "53 57
:ir*s# a$o'e# n7 at 27# (% and ((
30
=%67> 2 Mac P %0 at %2+ 2 E, at 5 /ee also 'osta &ica &ailway 'o )td v 0orwood D%70% % Ch 3 at 5(
3%
=%666> (7 Ch ((7 at (5
32
=%66> 6 Ch 263 at (%3
3(
c+ :urrows# a$o'e# n5 at "%+ 'lerk and )indsell, a$o'e n5# "ara%8%2
3
=ito v Waddell 6>o27 D%7 Ch %03 at 2%
35
/ee# eg $rmstrong v ackson D%7% 2 I: 622 at 62
33
/ee# eg Boston /eep Sea 0ishing v $nsell, a$o'e# n3% at (55 and (3
3
/ee# eg $tt!8en +or *ong ong v &eid D%77 % 4C (2 at ((3+ /araydan *oldings )td v Solland nternational )td D200 EHC 322 =Ch>+ D2005 Ch %%7 at D638D66
36
4s to the a'aila$ility and rele'ance of equita$le com"ensation as a remedy for $reach of fiduciary duty# see the discussion in Conaglen# “Equita$le Com"ensation for :reach of Fiduciary ealing ,ules” =200(> %%7 ?N, 23
37
*arris v /igital Pulse Pty )td =200(> 53 ;/?, 276 at D%3%# D%378D%0 and D08D06
0
/mith# a$o'e# n56 at ""3083%
%
i%id, at "30
2
This "oint has $een made $efore see /he"herd# )aw o+ 0iduciaries =%76%># "62# n%22+ Cooter and Freedman# “The Fiduciary ,elationshi" its Economic Character and ?egal Consequences” =%77%> 33 ;K<?, %05 at %05( /ee also illiams# “The 4ims of the ?aw of Tort” D%75% C?9 %( at %
(
/ee# eg $tt!8en v $l+ord =%655> e M P 6( at 65%+ ( E, ( at %+ Burdick v 8arrick =%60> ?, 5 Ch 4"" 2(( at 2%+ Cyse v 0oster =%62> ?, 6 Ch 4"" (07 at ((( =affirmed on a""eal Cyse v 0oster =%6> ?, H? (%6 at ((3>+ Westdeutsche )andes%ank 8iroEentrale v slington )B' D%773 4C 337 at 372837( and 2(+ *arris v /igital Pulse, a$o'e# n37 at D((38D((# D06# D%5 and D20 '+ the "osition in ;ew Lealand $:uaculture, a$o'e# n at (0%8(02+ 'ook v vatt 6>o27 D%772 % ;L?, 33 at 05
8uinness Plc v Saunders D%770 2 4C 33( at 0%
5
=%6(> 2 My P I 355 at 335+ (7 E, %075 at %076 /ee also *arris v /igital Pulse, a$o'e# n37 at D08D06+ )indsley v Wood+ull D200 EC4 Ci' %35+ D200 2 :C?C %(% at D(0
3
einri$# =he dea o+ Private )aw =%775># ""2038206
/ee einri$# “Correcti'e @ustice in a ;utshell” =2002> 52 <T?@ (7 at (7
6
/ee# eg 'assell G 'o )td v Broome D%72 4C %02 at %0638%06+ uddus v 'hie+ 'onsta%le o+ )eicestershire 'onsta%ulary D200% # "aras 520852% and 526+ :ee'er# “The /tructure of 4ggra'ated and E-em"lary amages” =200(> 2( 1@?/ 6 at %058%%0
7
/ee# eg 'assell v Broome, i%id, at %%%+ uddus, i%id, at D and D36+ $ v Bottrill D2002 # ""782%
60
Smith >ew 'ourt Securities )td v 'iti%ank >$ D%77 4C 25 at 278260
6%
illiams# a$o'e# n2 at %2
Page23
62
Hac*ney# “More than a Trace of the 1ld 9hiloso"hy” in :ir*s =ed># =he 'lassi+ication o+ @%ligations =%77># "%2( at "%55
6(
Mothew, a$o'e# n( at %68%7 =em"hasis original>
6
=%605> %0 Oes (6% at (77+ (2 E, 67( at 677
65
/e Bussche v $lt =%66> 6 Ch 263 at (%3
63
i%id
6
Boardman v Phipps D%73 2 4C 3 at %2( /ee also Bray v 0ord D%673 4C at 5%+ >ew ?ealand >etherlands Society [email protected] nc v uys D%7( % ?, %%23 at %%27
66
'han v ?acharia =%76> %5 C?, %6 at %77 4do"ted in /on ing Productions nc v Warren D2000 Ch 27% at D08D( /ee also Juarter Master < )td v Pyke D200 EHC %6%5 =Ch>+ D2005 % :C?C 25 at D5(8D55 and D08D2
67
D%73 4C 2 at 253 and 235 /ee also &e )ewis =%7%0> %0( ?T 75 at 7
70
D%73 2 4C %(n
7%
D%73 2 4C 3
72
?ord Cohen and ?ord Hodson did consider there to $e a "ossi$ility of conflict $etween duty and interest in Boardman v Phipps D%73 2 4C 3 at %0(8%0 and %%%# $ut u"on close ins"ection the conflict seems wholly illusory see Finn# 0iduciary @%ligations =%7># "ara53
7(
'han v ?acharia =%76> %5 C?, %6 at %76
7
i%id # at %77
75
D%73 2 4C 3 at %2(
73
/ee McClean# “The Theoretical :asis of the Trustee.s uty of ?oyalty” =%737> 4l$erta ?,e' 2%6# es"ecially at 2%7822
7
$tt!8en v Blake D200% % 4C 236 at 260 /imilarly# see Boston /eep Sea 0ishing and ce 'o v $nsell =%666> (7 Ch ((7 at (3(+ Williams v Barton D%72 2 Ch 7 at %% and %2
76
/ee 'han v ?acharia, a$o'e# n7( at %77
77
/ee# eg Hayton and Marshall# a$o'e# n%% at "ara382+ Pilmer v /uke 8roup )td =200%> 20 C?, %35 at D%5(+ Maguire v Makaronis =%77> %66 C?, 7 at 72+ :rudney# a$o'e# n%( at 30(+ :erryman# “Equita$le Com"ensation for :reach $y Fact8$ased Fiduciaries Tentati'e Thoughts on Clarifying ,emedial oals” =%777> ( 4l$erta ?,e' 75 at 76 and %0
%00
/ee# eg references to “o'er8inclusion” and “under8inclusion” in rules in :rudney# i%id, at 30# n20
%0%
=%23> /el Cas t Iing 3%+ 25 E, 22(
%02
i%id, at 32+ 25 E, at 22(
%0(
/ee# eg :ec*# “The /age of 9eso /il'er Mines Cor"orate 1""ortunity ,econsidered” =%7%> 7 Can :ar ,e' 60 at 63+ 4ustin# “Fiduciary 4ccounta$ility for :usiness 1""ortunities” in Finn =ed># :uity and 'ommercial &elationships =%76># "%% at ""%8%6
%0
=%602> 3 Oes 325 at 32+ (% E, %226 at %227 /ee also e p ames =%60(> 6 Oes (( at (5 and (7+ (2 E, (65 at (66 and (67+ e p Bennett =%605> %0 Oes (6% at (658(63+ (2 E, 67( at 67+ Parkes v White =%605> %% Oes 207 at 223+ (2 E, %036 at %0+ Hayton and Marshall# a$o'e# n%% at "ara382
%05
/ee# eg ?ang$ein# a$o'e# n%2 at 3558353+ 9almer# “The 4'aila$ility of 4llowances in Equity ,ewarding the :ad uy” =200> 2% ;L<?, %3 at %37
%03
:ir*s# ntroduction to the )aw o+ &estitution =re' ed# %767># ""((28((( =em"hasis original> /ee also
Page24
/mith# a$o'e# n56 at "53 %0
The classic e-am"les are &egal 6*astings7 )td v 8ulliver D%73 2 4C %(n at 5( and Boardman v Phipps, a$o'e# n7 at %27 /ee also e p ames, a$o'e# n%0 at (7 =E, at (67>+ and see the comments in $%erdeen &ailway v Blaikie Bros, a$o'e# n50 at 2 =,, at (7>+ 'anadian $ero Service )td v @FMalley D%7 /C, 572 at 30683%0+ =%7(> 0 ?, =(d> (% at (6(8(6+ Swain v )aw Society D%762 % ?, % at 27
%06
D%673 4C at 5% This statement was cited with a""ro'al $y ?ord Hodson and ?ord <"&ohn in Boardman v Phipps, a$o'e# n7 at %%% and %2(
%07
4$o'e# n37 at D%8D%5
%%0
This is em"hasised $y the fact that a fiduciary can act in $reach of fiduciary duty des"ite there $eing no $reach of non8fiduciary duty and des"ite the fact that his action has $enefited the "rinci"al see a$o'e# n%0
%%%
/ee# eg Photo Production )td v Securicor =ransport )td D%760 4C 62 at 66867
%%2
Finnis# >atural )aw and >atural &ights =%760># "%3
%%(
Hayton# )aw o+ =rusts =th ed# 200(># "( /ee also ?ang$ein# a$o'e# n%2 at 356
%%
%3 ;E 55 at 53 =%726>
%%5
Parker v Mcenna =%6> ?, %0 Ch 4"" 73 at %%6 /ee also $%erdeen =own 'ouncil v $%erdeen 2 4"" Cas 5 at 57+ )agunas >itrate, a$o'e# n2 at 2+ $rmstrong v ackson D%7% 2 I: 622 at 62+ @;Sullivan v Management $gency and Music )td D%765 % N: 26 at 55
%%3
/ee# eg 8irardet, a$o'e# n%7 at (32+ Warman nternational )td v /wyer =%775> %62 C?, 5 at 55+ B>? v 8uardian =rust, a$o'e# n( at 366
%%
'owan v Scargill D%765 Ch 20 at 266+ Buttle v Saunders D%750 2 4ll E, %7( at %75+ Hayton and Marshall# a$o'e# n%% at "ara%8%5
%%6
4$o'e# n%%
%%7
Bray v 0ord D%673 4C at 5% /ee also 'osta &ica &ailway 'o )td v 0orwood D%70% % Ch 3 at 3%
%20
D%673 4C at 6# per ?ord atson and 52# per ?ord Herschell ?ord Herschell.s comment at 52 is often misunderstood and thought to recognise e-ce"tions to fiduciary lia$ility =see# eg Bad+inger Music v vans D200% T?, % at %+ 9almer# a$o'e# n%05 at %0+ Thomas and Hudson# )aw o+ =rusts =200># "ara%0%%%> $ut a careful reading of the case ma*es it clear that he meant "recisely the o""osite =see also n re /reel Burnham )am%ert < Pension Plan D%775 % ?, (2 at (>
%2%
/ee# eg e p )acey =%602> 3 Oes 325 at 3(0+ (% E, %226 at %2(0+ e p ames =%60(> 6 Oes (( at (5+ (2 E, (65 at (66+ *amilton ' Wright =%62> 7 Cl P Fin %%% at %2+ 6 E, (5 at (32+ /e Bussche v $lt =%66> 6 Ch 263 at (%3 /ee also a$o'e# n%0
%22
/ee# eg $%erdeen &ailway 'o v Blaikie Bros =%65> % Macq 3% at 2+ %7 ,, (2 at (7+ Wright v Morgan D%723 4C 66 at 76
%2(
/mith# a$o'e# n56 at "5(+ see also at ""3 and 36837
%2
i%id # at "35 =em"hasis original>
%25
i%id # at "(
%23
/ee i%id # at ""38%
%2
That it is the reasons that matter rather than the results a""ears from *enty v Wrey =%662> 2% Ch ((2 at (5+ Catcher v Paull, a$o'e# n0 at (78(60+ n re Burton;s Settlement D%755 % Ch 62 at %00+ n re Brook;s Settlement D%736 % ?, %33% at %333 Howe'er# the doctrine is concerned with "ur"ose# rather than with moti'e =see# eg Cane v )ord /ungannon =%60> 2 /ch P ?ef %%6 at %(08
Page2#
%(%+ 7 ,, 3( at %+ =opham v /uke o+ Portland =%63(> % e @ P / 5% at 5085%+ 3 E, 205 at 22+ =opham v /uke o+ Portland =%637> ?, 5 Ch 4"" 0 at 5+ Farwell# a$o'e# n0 at ""6865+ c+ *ogg v 'ramphorn, a$o'e# n(3 at 237+ *oward Smith v $mpol, a$o'e# n(3 at 6(86(5> 4s such# it is argua$le that “the "ro"er "ur"ose doctrine is not a$out re'iewing the manner in which "ower is e-ercised# $ut a$out controlling the ends for which it is e-ercised” ;olan# a$o'e# n(3 at "2% %26
4$o'e# nn(83 and accom"anying te-t
%27
/mith# a$o'e# n56 at "3 /ee also# eg >or%erg v Wynri% D%772 2 /C, 223 at 2282(+ =%772> 72 ?, =th> 7 at 6+ 'anson nterprises )td v Boughton and 'o D%77% ( /C, 5( at 5(+ =%77%> 65 ?, =th> %27 at %5+ 9almer# a$o'e# n%05 at %3
%(0
;olan# “4 Fiduciary uty to isclose)” =%77> %%( ?N, 220 at 225 /ee also aters# “The ,ece"tion of Equity in the /u"reme Court of Canada =%6582000>” =200%> 60 Can :ar ,e' 320 at 33
%(%
/ee# eg Mcnerney v Mac/onald D%772 2 /C, %(6 at %50+ =%772> 7( ?, =th> %5 at 2
%(2 $tt!8en v Blake D%776 Ch (7 at 55 /ee also Breen v Williams =%773> %63 C?, % at 75# %%( and %(8%(6+ Pilmer v /uke 8roup, a$o'e# n77 at D and D%2+ Douyang, a$o'e# n5 at D% 0assihi v tem So+tware 6<7 )td D200 EC4 Ci' %2+ D2005 !C, 50 may a""ear inconsistent with this# $ut closer ins"ection suggests that the court was not identifying the duty of disclosure in that case as a "eculiarly fiduciary duty in the sense under discussion in this article =see 4rmour and Conaglen# “irectorial isclosure” D2005 C?@ 6 at 5085%> %((
/mith# a$o'e# n56 at "(
%(
i%id # at "5 =em"hasis original>
%(5
Bray v 0ord D%673 4C at 5% =em"hasis added>
%(3
*ospital Products, a$o'e# n2 at %02 /ee also# eg &e 'oom%er D%7%% % Ch 2( at 27+ >ew ?ealand >etherlands Society v uys, a$o'e# n6 at %%(0+ )$' Minerals, a$o'e# n% at 3383 =/C,># 26 =?,>+ elly v 'ooper D%77( 4C 205 at 2%+ *enderson v Merrett, a$o'e# n at 203+ 'lay v 'lay =200%> 202 C?, %0 at D3
%(
/ee# eg $%erdeen &ailway v Blaikie Bros, a$o'e# n50 at 2 =,, at (7>+ Parker v Mcenna, a$o'e# n%%5 at %2
%(6
Finn# 0iduciary @%ligations =%7># "ara5%
%(7
elly v 'ooper, a$o'e# n%(3 at 2%5
%0
+ D2005 % :C?C 25 at D0 Fiduciary doctrine is not a shield $ehind which a fiduciary may hide Boulting, a$o'e# n( at 3(383(
%%
Hence# eg where a director.s normal duties had# in the "articular circumstances of the case# $een “reduced to 'anishing "oint”# he had no conflict $etween his duty and his "ersonal interest when he contracted inde"endently with one of the com"any.s clients n Plus 8roup )td v Pyke D2002 EC4 Ci' (0+ D2002 2 :C?C 20% at D70
%2
n re 8oldcorp change )td D%775 % 4C at 76
%(
:ir*s# “The Conce"t of a Ci'il rong” in 1wen =ed># Philosophical 0oundations o+ =ort )aw =%775># "(% at "(5
%
eir# =ort )aw =2002># "i- /ee also ,ogers# Win+ield and olowicE on =ort =%3th ed# 2002># "ara%2
%5
Breen v Williams, a$o'e# n%(2 at %%(+ $tt!8en v Blake, a$o'e# n%(2 at 55+ Pilmer v /uke 8roup, a$o'e# n77 at D and D%2+ Douyang, a$o'e# n5 at D%
%3
>ationwide BS v Balmer &admore 6a +irm7 6ntroductory Sections7 D%777 ?loyd.s ,e" 9; 2% at 26%
%
/ee# eg /ay v 'ook D200% 9;?, 55 at 2+ )eeds and *ol%eck BS v $rthur and 'ole 6a +irm7
Page2(
D2002 9;?, 6 at 60 %6
Pilmer v /uke 8roup, a$o'e# n77 at D658D63 and D%358D%3
%7
/ee# eg /ay v Mead D%76 2 ;L?, ( at 5%+ =aylor v Scho+ield Peterson D%777 ( ;L?, ( at 86
%50
Mothew, a$o'e# n( at %7+ >eushul v Mellish and *arkavy =%73> %%% /@ (77+ 8oody v Baring D%753 % ?, 6 at 50+ Moody v 'o and *att D%7% 2 Ch % at 6%+ 'ommonwealth Bank o+ $ustralia v Smith =%77%> %02 4?, 5( at 6+ $rmitage v Paynter, a$o'e# n5 at 5
%5%
/ee# eg /ealy# 'ompany )aw and 'ommercial &eality =%76># ""(680+ Teele# “The ;ecessary ,eformulation of the Classic Fiduciary uty to 4'oid a Conflict of !nterest or uties” =%77> 22 4:?, 77 at %%%+ ?owry and Edmunds# “The Cor"orate 1""ortunity octrine the /hifting :oundaries of the uty and its ,emedies” =%776> 3% M?, 5%5 at 5%85%6+ Hollander and /alJedo# 'on+licts o+ nterest and 'hinese Walls =2000># "ara(80%+ ?owry and Edmunds# “The ;o Conflict88;o 9rofit ,ules and the Cor"orate Fiduciary Challenging the 1rthodo-y of 4$solutism” D2000 @:? %22 at %2(
%52
Mitchell# “Chinese alls in :runei Prince e+ri Bolkiah v PM8 ” =%777> 22 <;/?@ 2( at 25
%5(
=%735> 53 ?, =2d> %% at %(7 =C4# :C> For other 'iews contrary to Mitchell.s# see# eg aller# $oo* re'iew “Conflicts of !nterest and Chinese alls” =200%> %% ?N, ((5 at ((8((6+ McOea# “9redators and the 9u$lic !nterest88the A:ig FourB and Multi8isci"linary 9ractices” =2002> 35 M?, 6%% at 6%38 6((
%5
/ee# eg Hayton# # ""7538 77+ )ewin, a$o'e# n5 at "aras 0807 to 08% and 28%6 to 2857
%55
Mothew, a$o'e# n( at %3
%53
/ee a$o'e# n%
%5
/ee# eg Morritt ?@.s reference in this conte-t to a $reach of “fiduciary” duty where a =hy"othetical> trustee allows the trust "ro"erty to fall into a""alling disre"air Brown v Bennett D%777 % :C?C 37 at 355
%56
/ee# eg the treatment of $reaches of duty $y directors as $reaches of trust for the "ur"oses of accessory lia$ility in Selangor o37 D%736 % ?, %555 at %58%55 and %5+ see also n re )ands $llotment 'o D%67 % Ch 3%3 at 3(% and 3(6+ Belmont 0inance 'orp v Williams 0urniture )td 6>o27 D%760 % 4ll E, (7( at 05
%57
/he"herd# )aw o+ 0iduciaries =%76%># "6
%30
Finn# 0iduciary @%ligations =%7># "ara2+ )B v British 'olum%ia, a$o'e# n( at (%8(2 =/C,>+ 5( =?,> c+ 9almer# a$o'e# n%05 at %3 and %%8%2+ rantham# “The octrinal :asis of the ,ights of Com"any /hareholders” D%776 C?@ 55 at 5385
%3%
Mothew, a$o'e# n( at %6
%32
