Dr Eleanor Constructive Trusts and Fiduciary Duties

Harries
Module Leader:
Equity & Trusts

March 2024
Fiduciaries
Defining a Fiduciary
• Bristol & West BS v Mothew Millett LJ:

• The imposition of a constructive trust as a remedy requires a trust or fiduciary relationship to exist
Identifying a Fiduciary
• Someone acting in the best interests of another and who is afforded trust and confidence
• Not a closed category – would include solicitors, doctors, trustees, agents, company directors,
confidential employees etc.

• Reading v Attorney-General – sergeant in the Royal Army Medical Corps a fiduciary in relation to the
Crown
• English v Dedham Vale – architect for purchaser, purporting to act as agents for the vendor, a fiduciary in
relation to the vendors
• Swain v Law Society – Law Society not a fiduciary in relation to the solicitors’ profession, it was
exercising power in the public interest
• Westdeutsche v Islington LBC – council not in a fiduciary position with the bank because they did not
receive the money from the bank as a trustee, having no knowledge the contract was invalid
Fiduciary Duties
Distinguishing Fiduciary Duties
• Lord Hardwicke (Knight v Earl of Plymouth): “an act of great kindness in any one to accept it”
• Must obey the trust instrument and rules of equity to not be in breach of trust
• Bristol & West BS v Mothew Millet LJ – fiduciary duties are peculiar to fiduciaries and the consequences
for breach are different
• Common law claim – lack of reasonable care and skill = remedy of damages, compensatory
• Equity – breach of fiduciary duty = restore trust property, restitutionary
• Target Holdings v Redferns (No. 1) – where restitution is not possible, compensation is an alternative
remedy to put the trust back to what it would have been had the breach not been committed
Fiduciary Duties
• Non-exhaustive list – Bristol & West BS v Mothew by Millett LJ:

• Having fiduciary obligations makes an individual a fiduciary – not vice versa

• A breach requires disloyalty or infidelity, rather than incompetence

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Duty not to Profit from the Trust
• Keech v Sandford – rule applied to avoid dangerous consequences, constructive trust imposed over the
property
• Regal (Hastings) Ltd v Gulliver – proof of fraud not required, just the mere fact of profit
• Bray v Ford – per Lord Herschell it is not a rule about morality:

• Traditionally trustees could not even be paid for their work, but this has now changed – Trustee Act
2000 s 28
• Fiduciary who purchases trust property breaches the self-dealing rule – even where they overpaid at
auction ex parte Lacey Lord Eldon
• Exceptional case – Holder v Holder invalidly renounced executorship, played no part in administration
and no conflict of interest
Secret Profits
• Fiduciaries cannot make a secret profit from the trust – it is a breach of fiduciary duty
• Sugden v Crossland – office of trusteeship was purchased for £75 and had to be held on trust for the
beneficiaries
• Often involves side-deals related to the trustee’s work or using knowledge gained as a trustee:
• Boardman v Phipps – agents made use of an opportunity and information obtained acting on behalf of
the trustees, so liable to account for secret profit as based on fact of profit which arose from the trust
• Re Allied Business and Financial Consultants – should have made opportunity known to the company
who could have given consent
• Imageview Management v Jack – undisclosed conflict of interest is a breach of duty of good faith and
liable to account for secret profit per Jacob LJ:
Fiduciary must not have a Conflict of Interest
• Fiduciaries must not operate in competition with the trust:
• IDC v Cooley – architect took job the company he was managing director of failed to acquire, creating a
conflict of interest so must account for the profits

• Securing benefits for family:

• Glenn v Watson – securing benefits for family of an agent is bribery because it creates a conflict of
interest

• Working for both sides in a legal dispute:

• Prince Jefri Bolkiah v KPMG – KPMG took on work that caused a conflict of interest with the work
undertaken for Bolkiah and their arrangements to prevent inadvertent disclosure were insufficient
Constructive Trusts as a Remedy
Personal vs Proprietary Remedies
• Personal Duty to Account • Constructive Trust

• Compensation for loss caused to the trust • Proprietary remedy

• An account of monies due to the trust • Can be traced
• Specific restitution of property due to the trust • Lister v Stubbs – stated trust property needs to
be removed in order to be available
Constructive Trust Remedy for Secret Profits
• Secret profits are often not trust property, so is a constructive trust available as a remedy?

• Attorney-General for Hong Kong v Reid – constructive trust remedy was available in a bribe case, so the
fiduciary could not retain an increase in value and must account for a decrease in value, per Lord
Templeman:

• FHR European Ventures v Cedar Capital Partners – Supreme Court pointed to the rule focusing on a
conflict of duty and the policy consideration of bribes/secret commissions being an evil practice to find
that a constructive trust can be imposed, per Lord Neuberger:

• CPS v Aquila – Supreme Court followed FHR where secret profit also intended to benefit the principal
Different Types of Constructive Trust
• Generally imposed upon the conscience of the legal owner because of their unconscionable conduct –
Westdeutsche Landesbanke Girozentrale v Islington BC per Lord Browne-Wilkinson:

• Generally accepted there are two types of constructive trusts:

• Selangor United Rubber Estates v Cradock (No. 3) – where an individual assumed the duties of a trustee
and acts in breach of trust; and an equitable remedy imposed by the court to meet a wrongdoing
• Westdeutsche Landesbanke Girozentrale v Islington BC per Lord Browne-Wilkinson:
• Institutional:

• Remedial:
Constructive Trusts Imposed upon Third Parties
• Where a person who is not a trustee knowingly or dishonestly takes, receives or helps to dispose of
trust property – equity imposes a remedial constructive trust
• Widens available defendants – does not require a contractual relationship to be found liable
• Recovers the property itself – including increase in value and with an account for a decrease in value
• However the Limitation Act 1980 applies to remedial constructive trusts – claims must be brought
within 6 years, Williams v Central Bank of Nigeria
• Requires a trust or fiduciary relationship and a breach of trust – Westdeutsche there was no
trust/fiduciary relationship

• Categories of third party liability Barnes v Addy:

i) trustee de son tort – intermeddler
ii) knowing receipt of trust property
iii) knowing assistance in a dishonest and fraudulent design (now dishonest assistance)
Liability of Third Parties to the Trust
Trustee de son tort / Intermeddler
• Trustee of his own wrong – agent assumes duties of a trustee
• Jasmine Trustees v Wells & Hind – improperly appointed trustees. Trustees of the settlement are
trustees to the whole abstract concept of the trust; trustees de son tort are trustees only of the property
vested in them and have a duty to transfer it to the trustees
• James v Williams – son acting as an executor (who holds property on trust) for his mother’s estate
without being appointed was an executor de son tort and therefore a constructive trustee
• Dubai Aluminium v Salaam Lord Millett:
Knowledge Spectrum
• Knowing receipt and knowing assistance focused
on the third party’s level of knowledge

• Baden v Société Générale

i) actual knowledge
ii) wilfully shutting one’s eyes to the obvious
iii) wilfully and recklessly failing to make such
inquiries as an honest and reasonable man would
make
iv) knowledge of circumstances which would
indicate the facts to an honest and reasonable
man
v) knowledge of circumstances which would put
an honest and reasonable man on inquiry
Knowing Receipt / Recipient Liability
• Third party receiving trust property takes subject • Re Montagu
to the trust (unless equity’s darling) – proprietary
remedy
• Third party also personally liable where they no
longer have the property or its proceeds –
requires the requisite degree of knowledge
• Older cases accepted constructive knowledge –
Polly Peck International v Nadir
• Modern cases look for knowledge that affects the
conscience:
• Re Montagu’s ST – is the level of knowledge • BCCI v Akindele
sufficient to affect his conscience and bind him as
a constructive trustee?
• BCCI v Akindele – is the recipient’s knowledge
such as to make it unconscionable for him to
retain the benefit?
• Arthur v Attorney-General of the Turks and Caicos
Islands – endorsed the approach
• Re Brothers Produce applied it using the Baden
levels of knowledge
Dishonest Assistance / Accessory Liability
• Agent dishonestly participates in a breach of trust he is liable to make good the loss – described as a
constructive trustee despite liability being personal, or prefer ‘accountable in equity’ (Dubai Aluminium
v Salaam)
• Barnes v Addy – Lord Selborne: “assist with knowledge in a dishonest and fraudulent design of the
trustees”
• Used to be based on actual knowledge (Williams-Ashman v Price and Williams) or constructive
knowledge (Selangor United Rubber Estates v Cradock (No. 3), Rowlandson v National Westminster
Bank)
• Dishonesty is a necessary feature – Carl Zeiss Stiftung v Herbert Smith (No. 2), AGIP (Africa) v Jackson
Test for Dishonesty
• Dishonesty of whom? – Barnes v Addy suggests it is the trustee who must be dishonest but Royal Brunei
Airlines v Tan (Privy Council) confirms the third party must be dishonest as liability is fault-based
• Royal Brunei Airlines v Tan per Lord Nicholls:

• Twinsectra v Yardley – House of Lords two-stage test: objective and subjective mens rea element
• Barlow Clowes v Eurotrust International – Privy Council Lord Hoffman argued misreading of Twinsectra
and it did not introduce a separate mens rea, just knowledge of the transaction making their conduct
contrary to ordinary standards of honest behaviour
• Abou-Rahmah v Abacha – Court of Appeal followed Clowes
• Ivey v Genting Casinos – Supreme Court approved the Tan test as objective taking into account the
subjective knowledge of the accessory
• Group Seven Ltd v Notable Services - CA confirmed this settles the law for DA
Vicarious Liability
• A firm may be liable for the acts of the partner where they act in the ordinary course of business
• Where the liable third party works for a firm, it may be vicariously liable for those acts
• Dubai Aluminium v Salaam – House of Lords found wrongful acts include equitable wrongs, not just
common law torts, and despite the actions not being authorised by the firm, he was acting in his
capacity as a partner so the firm was vicariously liable