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Fiduciary relationships and constructive trusts

10. For the purpose of imposing **a constructive trust**, which of the following relationships will be treated as **fiduciary relationships**?

(a) The Queensland Bank mistakenly credits Peter's account with a cheque for £1 million.

(b) Ray is a general practitioner doctor. Sandy is addicted to heroin. In exchange for sexual favours, Ray prescribes heroin to Sandy.

(c) In 1998 Tina invested her life savings in opening a franchised branch of Udderwise, a lingerie chain on the corner of Market Street and Station Road. Udderwise's documentation predicted that, because of the favourable location, she could expect 10,000 customers a year. She has lost a considerable amount of money since then, because she has only been visited by 2,500 customers a year.

A fiduciary relationship is commonly taken to involve a certain level of trust or confidence between two or more parties – i.e. the ‘trustee’ and the ‘beneficiary’ – according to Lord Millett, in Bristol & West Building Society v. Mothew[1], who said A fiduciary is someone who has undertaken to act for and on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence”[2]. Therefore, on this basis, a fiduciary duty is recognised as being the highest standard of care at either equity or law. This is because of the fact that a fiduciary is expected to be extremely loyal to the person to whom they owe the duty and they must not put their personal interests before the duty, or profit from their position as a fiduciary, unless the beneficiary consents to the trustee doing this because they owe a duty of good faith, loyalty and trust. As a result, whilst it may be argued that an express trustee is the original model of a fiduciary, the idea of a person, through the nature of their work or conduct, has been extended to others including personal representatives, agents and company directors.

With this in mind, it is arguable that each of the relationships described in (a) to (c) would seem to fall within the scope of this simplistic definition of the fiduciary relationship. By way of illustration, it is clear that in (a) Peter holds the money that is mistakenly credited to him on trust for the Queensland Bank, whilst in (b) doctor Ray is in a position of trust with Sandy because he will supply her with heroin in return for sexual favours, and in (c) Tina invested her life savings in opening a franchised branch of Udderwise on the basis of their customer prediction. But it is also important to note that, generally, where a fiduciary relationship between parties to a transaction exists, undue influence may be presumed, illustrated by the decisions in Lancashire Loans Ltd v. Black[3] and Allcard v. Skinner[4], and this is particularly true of Ray’s relationship with Sandy because he is in a position of trust within the community as a doctor and is exploiting this, along with Sandy’s addiction, to take advantage of her.

This is because a fiduciary must be seen to conduct themselves “at a level higher than that trodden by the crowd”[5] and that “[t]he distinguishing or overriding duty of a fiduciary is the obligation of undivided loyalty”[6] because a trustee is under a legal obligation to not act in their own interest, but in the best interests of the trust since they are in such a powerful position in relation to their beneficiaries. But, in spite of this, with regards to the relationship in (b), this is always unlikely to be considered to be fiduciary for the purposes of a constructive trust. This view arises because of the fact that, whilst there is a conflict between Ray’s personal interest (i.e. getting sex) and Sandy’s need for heroin, Ray cannot return what Sandy has given to him through his exploitation of their relationship[7] in spite of the level of trust and confidence between them.

However, in terms of being able to impose a constructive trust, it is important to recognise that a constructive trust is a flexible remedy resembling a trust that arises by operation of law as a response to certain events that are usually deemed a wrong. As a result, the most significant aspect of a fiduciary relationship is the strict rule that a fiduciary may not keep any unauthorised profit arising from a position where there is a possibility of conflict of personal interest and duty to their beneficiaries. Instead, the trustee must disgorge such profit by way of constructive trust, whether or not it was made at the direct cost of the trust, illustrated by the decisions in Boardman v. Phipps[8] and Regal (Hastings) v. Gulliver[9]. Therefore, with this in mind, it could be argued that, for the purposes of imposing a constructive trust, a fiduciary relationship arises in (a) because the money that Peter ends up with in his account is not his and he has, thus, received an unjust enrichment.

Therefore, although it is in Peter’s personal interests to keep the money and use it to meet his own ends, he is holding the money on trust for the bank because the duty on Peter not to seek a personal profit will clearly be broken if a trustee attempts to use trust assets for their personal benefit. Such is effectively supported by the decision in Webb v. Earl of Shaftesbury[10] because in this case it was recognised that where a trustee was exercising sporting rights over trust land then they had to look to account for the financial profit made from doing so[11] and also look to effectively reimburse any loss to the trust caused by the sporting rights not having been let out to others to bid for. Moreover, liability will also be accrued if the trustee uses their position to be able to make a personal profit[12] and this view, regarding (a) Peter and his relationship with the Queensland Bank, is further supported by the decision in Chase Manhattan Bank v. Israel British Bank[13] on analogy. This is because, in this case, one bank paid another bank a large sum of money by mistake, Justice Goulding held the money was held on (constructive) trust for the first bank. But the House of Lords distanced itself from this view in the decision of Westdeutsche Landesbank Girozentrale v. Islington London Borough Council[14] the House of Lords so that this remains an area of some uncertainty.

Nevertheless, it must also be recognised that the rule in relation to the need to account, as constructive trustee, for unauthorised profits is not limited to those occasions where the trustee has actually acted in bad faith and/or put personal interest before duty. But the rule is a strict one that is designed to prevent there being any possibility of conflict and interest and duty because, as a deterrent, no profits may be retained if there is any possibility of conflict without the need to prove motive. Such a view was effectively recognised in the decision of Keech v. Sandford[15] where a trustee of a lease on behalf of a minor took a renewal of the lease in his own name after his application to renew on behalf of the trust was refused and it was still, nevertheless, held that the renewed lease was held by way of a constructive trust. But an absolutely strict rule could work against the interests of the beneficiaries by making it difficult to get anyone to act as trustee.

Therefore, it has been recognised by Lord Herschell, in the decision in Bray v. Ford, that, “this positive rule … might be departed from in many cases, without any breach of morality, without any wrong being inflicted, and without any consciousness of wrong-doing. Indeed, it is obvious that it might sometimes be to the advantage of the beneficiaries that their trustee should act for them professionally rather than a stranger, even though the trustee were paid for his services”[16]. On this basis, this means that the rule is not that a trustee may not make any profit at all but that there should be no secret profit without consent[17] because the judiciary retain an inherent power to authorise the making or retention of profit where this is in the best interests of the trust[18] that may be illustrated by the relationship in (c) depending on the perspective taken.

However, it must be recognised that the rule will not apply if the nature of the trust is such that the trustee is automatically in a position of potential conflict of interest and duty because of the fact that it is not the trustee who has created that situation, but the terms of the trust. With this in mind, by way of illustration, in the decision of Sergeant v. National Westminster Bank[19] it was recognised that a will appointed the testator’s sons as trustees for sale of freehold properties of which they were the agricultural tenants and it was held by the Court of Appeal that they were under no duty to give up their tenancies so that a better price could be obtained on sale. This decision was then also followed in the decision of Edge v. Pensions Ombudsman[20] in respect of employee trustees of a pension fund because the Pension Schemes Act 1993 required employees to be appointed as trustees and thus in a position of potential conflict between their role and their personal interest as members of the scheme. Therefore, with this in mind, they were not in breach of trust in approving a variation that reduced contributions required by members in service, including themselves, but did not increase pensions payable to existing pensioners. Moreover, this was similarly supported by decision in Vyse v. Foster[21] where partnership articles provided that on death of a partner their share should be sold to the remaining partners in accordance with its value at the last annual stocktaking. One partner died appointing one of his co-partners trustee of their estate, but the partners delayed making payment of the deceased partner’s share so that the House of Lords held that the trustee was not liable to the beneficiaries for using trust assets in trade with consequent liability for profits made – with this in mind, the only possible liability was for delay in enforcing payment.

Nevertheless, with this in mind, it may also be possible to argue that there is a also a fiduciary relationship in (c), on this basis, for the purposes of a constructive trust, because clearly there is a conflict with Udderwise’s personal interests (i.e. to sell franchises) and those of their beneficiary (i.e. Tina investing on the basis of the information that Uddewise) that could lead to the returning of her money. This is because of the fact that it has been generally recognised that a party that is taken to in fiduciary position within a relationship must not put themselves in a position where their interest and duty as a fiduciary conflict[22], since they must always look to effectively serve the principal’s interests so that the fiduciary’s state of mind is irrelevant; that is, in effect it does not matter whether the fiduciary had any ill-intent or dishonesty in mind. Such a view is supported by Lord Nicholls of Birkenhead, in the decision of AG v. Blake[23], when he said that Equity reinforces the duty of fidelity owed by a trustee or fiduciary by requiring him to account for any profits he derives from his office or position. This ensures that trustees and fiduciaries are financially disinterested in carrying out their duties. They may not put themselves in a position where their duty and interest conflict. To this end they must not make any unauthorised profit. If they do, they are accountable”.

Therefore, in this context, it is arguable that even if Udderwise were actually able to effectively show that they had no malice in recommending the franchise within the lingerie chain on the corner of Market Street and Station Road, they may well still be found liable under a constructive trust to return (c) Tina’s money that she invested to her. Nevertheless, on the basis of the decision in Re Smith[24] it may be argued that this may not, in fact, be the case in the circumstances as they stand in the case of scenario (c). This is because, in this case, where one of two trustees received a bribe to invest trust funds in certain debentures and was held liable to disgorge the bribe and for any loss caused by the investment, interestingly, the other trustee, who honestly thought it a good investment, was not in breach of trust. On this basis, it may be argued that Udderwise is not liable to return any profits gained by way of a constructive trust.

Bibliography

Curzon. L. B ‘Dictionary of Law’ 5th Edition, Financial Times, Pitman Publishing (1998)

Edwards. R & Stockwell. N ‘Trusts & Equity’ 4th Edition, Financial Times, Pitman Publishing (1998)

‘Halsbury’s Laws of England’ Lexis Nexis, Butterworths (2007)

Martin. J. E ‘Hanbury & Martin – Modern Equity’ 15th Edition, Sweet & Maxwell (1998)

Table of Cases

AG v. Blake [2001] 1 AC 615

Allcard v. Skinner (1887) 36 Ch D 145

ASIC v. Citigroup [2007] 62 ACSR 427

Boardman v. Phipps [1967] 2 AC 46

Bray v. Ford [1896] AC 44

Bristol & West Building Society v. Mothew [1998] Ch 1

Chase Manhattan Bank v. Israel British Bank [1981] Ch 105

Edge v. Pensions Ombudsman [1998] Ch 512

Keech v. Sandford (1726) Sel Cas t King 61.

Lancashire Loans Ltd v. Black [1934] 1 KB 380

McInerney v. MacDonald [1992] 2 SCR 138

Meinhard v. Salmon (1928) 164 NE 545

Re Drexel Burnham Lambert Pension Plan [1995] 1 WLR 32

Re Duke of Norfolk’s ST [1982] Ch. 61

Re Sykes [1909] 2 Ch 241

Regal (Hastings) v. Gulliver [1967] 2 AC 134

Sergeant v. National Westminster Bank (1989) 61 P & C.R. 518

Sugden v. Crossland (1956) 3 Sm & G 192

Vyse v. Foster (1874) L.R. 7 H.L. 318

Wallersteiner v. Moir (No. 2) [1975] QB 373

Webb v. Earl of Shaftesbury (1802) 7 Ves. 480

Westdeutsche Landesbank Girozentrale v. Islington London Borough Council [1996] AC 669

1


Footnotes

[1] Bristol & West Building Society v. Mothew [1998] Ch 1.

[2] Ibid at p.18.

[3] [1934] 1 KB 380.

[4] (1887) 36 Ch D 145.

[5] Meinhard v. Salmon (1928) 164 NE 545 at p.546.

[6] ASIC v. Citigroup [2007] 62 ACSR 427 at p.289.

[7] Although see the Canadian decision in McInerney v. MacDonald [1992] 2 SCR 138.

[8] [1967] 2 AC 46.

[9] [1967] 2 AC 134.

[10] (1802) 7 Ves. 480.

[11] See, for example, the decision in Wallersteiner v. Moir (No. 2) [1975] QB 373.

[12] See, by way of illustration, the decision in Re Smith [1896] 1 Ch. 71 – see also the decision in Sugden v. Crossland (1956) 3 Sm & G 192.

[13] [1981] Ch 105.

[14] [1996] AC 669.

[15] (1726) Sel Cas t King 61

[16] [1896] AC 44 at p.51, per Lord Herschell.

[17] Re Sykes [1909] 2 Ch 241.

[18] Re Duke of Norfolk’s ST [1982] Ch. 61 & Re Drexel Burnham Lambert Pension Plan [1995] 1 WLR 32.

[19] (1989) 61 P & C.R. 518.

[20] [1998] Ch 512 - see also Re Drexel Burnham Lambert Pension Plan [1995] 1 WLR 32.

[21] (1874) L.R. 7 H.L. 318.

[22] See, by way of illustration, the decision in Meinhard v. Salmon (1928) 164 NE 545.

[23] [2001] 1 AC 615.

[24] [1896] 1 Ch. 71 – see also the decision in Sugden v. Crossland (1956) 3 Sm & G 192.


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