Introduction to fiduciary relationships

Trusts page, definition and essential elements of trusts

This page was last updated on 05 Sep 99.

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One of the questions considered in section 1 of the Swansea undergraduate course is the fiduciary nature of trusteeship, and whether all trustees are fiduciaries. We need therefore to examine in slightly more detail what is meant by a fiduciary.

Millett stated in Restitution and Constructive Trusts (1998) 114 LQR 399, at 403, that the "paradigm example of the fiduciary is the express trustee". An express trustee is certainly a fiduciary, but other relationships are also fiduciary in nature - from this it follows that if we are concerned with the duties of an express trustee, we can look at cases on other types of fiduciary, e.g., the solicitor in Boardman v. Phipps, or the public prosecutor in A-G for Hong Kong v. Reid [1994] 1 AC 324, [1993] 3 WLR 1143, [1994] 1 All ER 1.

Who is a fiduciary?

Fiduciaries include (this list is taken from Maudsley and Burn's cases and materials book):

Agents, solicitors, company directors, company promoters, partners, confidential employees, non-commissioned officers in the Army.

But a plumber, or taxi driver, or someone with whom one enters into an ordinary commercial contract, is not in a fiduciary relationship with his / her employer or other contracting party.

It is very difficult to define a fiduciary precisely, or to state clearly what are the distinguishing features of a fiduciary relationship, but a fiduciary is in a position of trust, and is expected always to act in the interests of the other party. It is also fundamental that there should be no conflict of interest between the fiduciary's duties, and his / her own interests. In other words, where there is a discretion to be exercised, the fiduciary ought always to be able to act entirely impartially, with no personal interest in exercising the discretion in any particular way.

By contrast, ordinary commercial relationships, where the parties act independently in their own interests, are not fiduciary relationships. In Re Goldcorp Exchange Ltd. [1995] 1 A.C. 74, the Privy Council refused to recognise the existence of any fiduciary relationship between a company which had sold gold bullion for future delivery, and its customers. Lord Mustill observed that "the essence of a fiduciary relationship is that it creates obligations of a different character from those deriving from the contract itself", and that that was not the case here. One effect of the lack of a fiduciary relationship between the parties was that the customers were unable to trace in equity.

Commercial and fiduciary relationships contrasted

The nature of civil liability depends on the closeness of the relationship between plaintiff and defendant - the relationship between a fiduciary and the person for whom he/she acts is very close indeed. The following summary is intended only to be that, a summary. It is intended to do no more than give a basic idea of what a fiduciary relationship is.

Strangers owe only the most limited duties, not negligently to injure the person or property of others, not to convert or trespass upon their property, not to defame them, etc. But a competitive society demands that they can damge the economic interests of others, even deliberately, subject only to the restrictions (for example) imposed by the economic torts. Damages for breach of these duties generally attempt to undo the wrong done, to put the wronged party as far as possible into the position that he or she would have been in had the wrong not been committed.

Parties in contractual relationships (which are usually entered into voluntarily) owe greater duties to each other. A contracting party has undertaken to perform obligations, which the other party believes to be legally enforceable obligations and may have relied on - if the contracting party breaks those obligations he or she will be liable for losses, including economic losses, the aim of which is (so far as possible) to put the innocent party into the position he or she would have been in had the obligations undertaken been properly performed.

Most commercial relationships are contractual in nature, and there are two important points to notice about these. First, damages are compensatory, so that if there is no loss there will be no substantial damages, and this will be so even if the contract-breaker has made a profit from his or her breach. Secondly, the obligations of the parties are fully defined by the contract; there is no requirement, for example, for a contracting party generally to act in the interests of the other contracting party. Suppose, for example, an engine supplier contracts with a manufacturer of sports cars. As long as the contract is performed, and does not contain any terms that the supply is to be exclusive, there is nothing to stop the same engine supplier supplying engines to other car manufacturers, including even other sports car manufacturers in direct competition. Nor is there anything to stop the sports car maunfacturer from obtaining engines from elsewhere, or even manufacturing his own engines, in direct competition with the supplier.

A fiduciary relationship is quite different. The fiduciary is required to a far greater extent to look after the interests of his or her principal. A trustee who is a fiduciary, for example, must not set himself or herself up in competition with the trust. Nor may a fiduciary act for a competitor (e.g., solicitors, who are fiduciaries, must not act for both sides in a conflict). Moreover, a fiduciary is required to account any profits obtained from the fiduciary position. It does not matter that no loss has been occasioned to the person for whom the fiduciary acts, or even that the fiduciary has acted so as to make a profit for his or her principal. The profits must nevertheless be accounted, and this differs fundamentally from common law damages, which (apart from the very rare punitive damages) are only compensatory in nature.

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This page was last updated on 05 Sep 99.

The site is maintained by Paul Todd: