10/26/2022

JD Equity & Trusts 2022-2023

Topic 4

Duties and Powers of Fiduciaries

Ken T.C. Lee

Barrister-at-law, Alan Leong S.C.’s Chambers

When are fiduciary duties

imposed?

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Who are fiduciaries?

 “A fiduciary is someone who has undertaken to act for or on
behalf of another in a particular matter in circumstances which
give rise to a relationship of trust and confidence. The
distinguishing obligation of a fiduciary is the obligation of
loyalty.” (Bristol v Mothew (1998))

 “Fiduciary relationships arise when a person holds power on

behalf of another. Fiduciary relationships are characterised by
the requirement of loyalty, the no-conflict and no-profit rules.”
(Lionel Smith)

Who are fiduciaries?

 Status-based: recognised categories
 Directors, solicitors, partners, personal representatives
(administrator/executor)

 Fact-based: relationship of trust and confidence etc

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Who are fiduciaries?

 Employees?
 Canadian Aero v O’Malley (1973)
 Nottingham University v Fishel (2001)

 J Edelman (voluntary undertaking) vs L Smith (fiduciary

relationships arise when a person holds discretion on behalf of
another)

What are the contents of

fiduciary duties?

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Contents
 Prophylactic approach: rules to prevent fiduciaries from
not acting in the exclusive interests of beneficiaries

 2 aspects:
 Conflict of duties
 Conflict of interests

Conflicts of duties
 Divided loyalty; eg solicitors – no double employment
 Bristol v Mothew (1998): Solicitor acted for the lender and
the purchasers in the mortgage transaction. Market
collapsed.
 Millett LJ:
 Not every breach by fiduciary is a breach of fiduciary duty

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Conflict of interests
 Keech v Sandford (1726)

 (1) No unauthorised remuneration

 (2) No self-dealing
 Aberdeen Railway v Blaikie (1854)
 (3) Fair dealing

Conflict of interests
 (4) Loans by fiduciaries: Swindle v Harrison (1997)

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Conflict of interests
 (5) No secret bribes or
commissions
 Reading v AG (1951)
 AG for Hong Kong v Reid
(1993)
http://www.icac.org.hk/new
_icac/eng/cases/ddpp/home
page.htm

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Conflict of interests
 (5) No secret bribes or commissions (cont’d)
 FHR European Ventures LLP v Mankarious (2014)

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(6) No unauthorised profits

 Regal (Hastings) v Gulliver (1942)
 “The rule of equity which insists on those, who by use of a
fiduciary position make a profit being liable to account for that
profit, in no way depends on fraud or absence of bona fides; or
upon such questions or considerations as whether the profit
would or should otherwise have gone to the plaintiff, ... The
liability arises from the mere fact of a profit having, in the
stated circumstances, been made.” (per Lord Russell [1967] 2
AC 134 at 167G)

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(6) No unauthorised profits

 Boardman v Phipps (1967)

 Lord Cohen (majority):

 Possibility of conflict. Application. Liable to account as a constructive
trustee.
 Lord Upjohn (minority):
 Real sensible possibility of conflict in the eyes of a reasonable man.
Application.

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 How do Regal (Hastings) and Boardman v Phipps illustrate

the strictness of the fiduciary doctrine?

 Pros and Cons?

 Responses?

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Corporate opportunities: Canada / Australia

 No conflict:

 Peso Silver Mines Ltd v Cropper (1966): Directors took up a

mining proposal opportunity after the Board rejected it.

 Queensland Mines v Hudson (1978): Director made disclosure

to Board before taking up certain mining exploration licences.

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Corporate opportunities: Canada / Australia

 Resigning to take up opportunity:

 Canadian Aero Services v O’Malley (1973): O’Malley resigned to

take up certain business opportunities of the company.

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Corporate opportunities: Hong Kong

 Kao Lee & Yip v Koo Hoi Yan (2003)
 Koo set up his own firm to get business from BoC, quit KLY,
and persuaded a few solicitors to join his new firm.
 Ma J:
 Claim♯2: Setting up own law firm - Diversion of maturing business
opportunity?
 Claim♯5: Taking of preparatory
steps to set up rival business?

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Corporate opportunities: Hong Kong

 Poon Ka Man Jason v Cheng Wai Tao (2016)

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Corporate opportunities: England

 IDC v Cooley (1972):
 See also CMS Dolphin Ltd v Simonet (2001), Bhullar v Bhullar
(2003)

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Corporate opportunities: England

 Relaxation: a more flexible approach in Murad v Al-Saraj
(2005)?

 “It may be that the time has come when the court should
revisit the operation of the inflexible rule of equity in harsh
circumstances, as where the trustee has acted in perfect good
faith …, and in the belief that he was acting in the best
interests of the beneficiary. … the harshness of it should be
tempered in some circumstances.”

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Corporate opportunities: England

 Pre-resignation preparatory activities
 Shepherds Investments v Walters (2007)

 Post-resignation liability
 CMS Dolphin Ltd v Simonet (2001); IDC v Cooley (1972)
 Cf Canada: Canadian Aero Services v O’Malley (1973).

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Remarks: Corporate opportunity cases

1. Trustees’ duties were transplanted to directors.
Tension.

2. What are the different approaches and principles

governing fiduciary duties?

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Codification of duties of company directors

 Companies Act 2006 (Eng), ss 172, 175-177:
 avoid conflict of interests
 not accept benefit from third party
 declare his interests in proposed transactions with his company
 new duty to promote success of company (s.172)

 Cf. Hong Kong: non-statutory guidelines on directors’

duties.

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Duty of disclosure of misconduct

 Item Software (UK) Ltd v Fassihi (2004)
 Alleged breaches: diversion of business; failure to disclosure
misconduct.
 Arden LJ (again!)

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Nature and function of the fiduciary obligation

 Why does the law impose fiduciary duties on certain
categories of relationships?
 Prophylaxis

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Nature and function of the fiduciary obligation

 Why does the law impose fiduciary duties on certain
categories of relationships?

 Secure performance of non-fiduciary duties (Matthew

Conaglen)
 Ensure loyal exercise of judgment on behalf of another (Lionel
Smith)

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Nature and function of the fiduciary obligation

 Canson Enterprise Ltd v Broughton & Co (1991) 85 DLR
(4th) 129, at 154, per MacLachlin J:

‘The essence of the fiduciary relationship … is that one

party pledges herself to act in the best interest of the
other. The fiduciary relationship has trust, not self-interest,
at its core, and when breach occurs, the balance favours
the person wronged. The freedom of the fiduciary is
diminished by the nature of the obligation he or she has
undertaken…’

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Nature and function of the fiduciary obligation

 Hospital Products Ltd v United States Surgical Corp
(1984) 156 CLR 41, at 96-7, per Mason J:

‘… The critical feature of these [fiduciary] relationships is that

the fiduciary undertakes or agrees to act for or on behalf of or
in the interests of another person in the exercise of a power
or discretion which will affect the interests of that other
person in a legal or practical sense. The relationship between
the parties is therefore one which gives the fiduciary a special
opportunity to exercise the power or discretion to the
detriment of that other person who is accordingly vulnerable
to abuse by the fiduciary of his position…”

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Nature and function of the fiduciary obligation

 Cook v Evatt (No. 2) [1992] 1 NZLR 676

‘… [the essence of a fiduciary relationship involves] an

inequality of bargaining power brought about by the trust or
confidence reposed in, and accepted by, the fiduciary to
perform some function for another’s benefit in circumstances
where the beneficiary lacks the power adequately to control
or supervise the exercise of that function…’

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Nature and function of the fiduciary obligation

 Content of the fiduciary doctrine?
 Proscriptive
 Prescriptive?

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Nature and function of the fiduciary obligation

 Are fiduciary rules rules of disability?
 Disability rules: disable fiduciaries from doing certain acts.
Breach  primary duty to give up profits / pay compensation.

 Cf rules in contract / tort: secondary duty to pay damages.

 Are fiduciary rules really concerned with the notion of

loyalty?

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Nature and function of the fiduciary obligation

 Distinction between fiduciary and non-fiduciary duties

Fiduciary duty Non-fiduciary duty

Causation / Remoteness ? ✔
Remedy Equitable compensation / Damages
Account of profits

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Fiduciary duties in solicitors

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Types of conflicts
 Existing client (same matter) conflicts:
 simultaneous representation
 conflict of duties: Bristol v Mothew

 Former client conflicts:

 successive representation
 confidentiality: Re a Firm of Solicitors (1992)

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Prince Jefri Bolkiah v KPMG (1999)

KPMG

Prince Jefri BIA

Project Lucy Project Gemma

 Lord Millett:
 possession of relevant confidential information
 Chinese walls sufficient? Organisational arrangements

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Notable cases
 Marks & Spencer v Freshfields (2004 CA)

Freshfields

M&S Consortium

Takeover offer

 Extent of Bolkiah principle: PCCW-HKT v David Aitken

(2009)

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