Law of Equity and Trusts - Exam Revision Notes (Part 3)

Introduction to Fiduciary and ‘Conflicts of interest’

Different aspect: nature of trusteeship. Starting today with fiduciary relationship

Class of fiduciary relationship is not close
Conflict of interest is topical
We have rules to manage the inevitably of conflict
Next week we will look at trusteeship, focusing on delegation.
Today we are looking at the duty of loyalty – the fudiciary duty and next week we are looking at care
Today – one duty is the duty to avoid conflicts. Always put the trust first. Next week –being careful. So these two weeks about what should be done. Today and next week duties
After that was happens if breached
Then – tracing and following. Tracing the value when it is another asset. Following money that is misapplied

Lord justice millet (see handout for quote)
Fudsiciary – two types of being disloyal – buying for yourself – the selfish lack of loyalty. Or preferring smoone elses interest – e.g. buying for someone else (selfless maybe)
Must not make a profit. Not strictly true: must not make an unauthorised profit
A conflict can be authorised. Example – suppose x is a tenant of the land. Someone wants to make hima trustee. As a tenant, wants to lower rent and trustee wants to increase. Can accept – can be in that position of conflict , someone else put u there but cant lower the rent. Cannot do this because this would be making aprofit
Last line: what makes someone a fudiciary: it is that you have a duty
Does someone owe a fudiciary duty? Finn pointing out that this is the important question
Shaggy dog: Makes the distinction between loyalty and care. The dog didn’t do anything careful, just loyal. Example: X owns company, has trust money. No doubt that he can carefully take trust moent and carefully produce profit. But it’s nto loyal. Created a conflict between his interest and trust
There is loyalty and care. What about recklessness? What if people are so careless, not putting other peoples interests first ? :S:S:S:S
Mothew case and millet judge will say carelessness and duty, but what about recklessness?
Quote taken from mothew case – see handout. VERY important. Must understand this.
Must not make a profit. Must not make an unauthorised profit. Keech case.. theres a beneficiary living in a hosue as a tenant, the beneficiary would like to take over a new lease and continue as a tenenat. Landlord says no. trustee sees a chance.. can i ahve the lease? No.
No harm done to beneficiary, he was never going to get it.
No profit.
But lord king chancellor – thought tthis may seem harsh..
This is very important. It is key to this lecture. See quote underlined on handout

Lease with a willing tenant yet the landlord is not allowed, commercially to take this tenant. Restriction on free commerce in 1726. Unusual
Landlord wants to give it to this person but cant! They had an advantage over rest of world, had an advantage that belonged to the trust. He found out about it through a trust. You cannot benefit from a trust unless it is authorised
Think carefully before you accept a trusteeship.
Football club case
So – in keech –sayign no real problem, just let them take the lease.
Lord Upjohn tried it and it didn’t work.. see handout
Boardman v Phipps:
Theres a trust and a solicitor acting for the trust. Solicitor bought shares in the company, trust has more money because of the solicitors advice, soliciort happy – got more money. No loss.
House of lords: applying the strict rule – you are not authorised to keep a profit
Solicitor is the only person in the woruld who cannot buy shares, he found out because he was advising. Even if he made the trust better, still cant make a profit
He is a connected person who has made a profit through his knowledge

The principle of prophylaxis:
This is a barrier that protects. Being on the safe side. Preventative measure.
Innocent fiduciary must suffer- in the case above, the solicitor suffered.
The reason we have a strict rule is to encourage everyone else to do the right thing
It is about setting a public example, it’s not about negligence.
The idea of history is important.
It’s efficient to have a strict rule. Beginning of enlightment – have to do things strict.
strict rule: cant have unauthorised profit
BUT – the trust will pay you for your hard work. Shout the rule. Whisper this. General rule – strict rule not to be relaxed but IN THIS case.. quantum merit – in THIS particular case.
So in reality : in some respects undermining general rule
Law says two things silmultaneously
Shout the rule and whisper equity
Gilbert
So even if they say must pay the artist more money – took advantage, owe him royalties from the past.
Said – we’ll make sure they pay you a lot because u worked hard to make him the person he is
The reality is that they
See handout – peter smith J -This judge says maybe we should start shouting the truth : we would make the fiducirary pay but we wont make him pay if it would unjustly enrich the principal. We will not insist that the fisucaciary pays gilbert if it was unjustly enrich him
Shout a new rule
But they don’t.. still whisper
The law soesnt want to make gilbert rich.. but would rather do this than shout
Would still be strict if dishonest – see hanout
Regal hastings v Gulliver – see handout. This is the general rule.
Its a rule of economic effeiciency
Positional breach.. see handout. Example: i am a tenant and a trustee. Idea to use trust moeny to buy the freehold.. can reduce the rent. NO. cant put yourself in that position. What if they say they wont reduce rent. And will make it fair. NO, cant even put yourself in the position of conflict of interest.
But if someone else puts your in that position. No positional breach. But still cant act on it, cant take advantage
Then there’s actual conflict. See quote. The quote says – there are some situations where the conflict is unavoidable. Advice in mothew – give up both is best way to respond to actual position of conflict. In reality –first come first served.
Point of theory – see handout – matthew conaglen ‘the nature and functiuon...
The theory is that he reason we have fiduciary duty is only to make sure that the non fudiciary duty us fulfilled. So, the main non fiduciary duty is duty of care.
(written before banking crisis 2005).. As a result of crisis..we may live in a world where its about sending a message to trustees but also bankers – anyone in power. So stillw ant this strict barrier. Mathew conalgelen has a different view – only there to make things careful. Gary: no-sets out a message asw ell.
Difference between a fiduciary and a trustee. A ttrustee is always a fiduciairy but a f is not always a trustee. A f is not a trustee when: eg... solicitor has a client. The solicitor is a f for the client. Is he a trustee?
A dfidcuaiory is someone who owes someone a duty. Where there is property to care for, he is
So when client deposits money to fund, solicitor is a f --- careing for money
English law trusts: judges are prgamtic.. judges bend the rules a lot. What was practically needed?
Look at realitiy of family – holder v holder
Depending on context, not always about conflict. Yeh, theoretical conflict but isn’t going to become one. This is what is sometimes said
Longest reported case –
Tido case – vice chancellor – megarry:
[said before –positional berach and transactional breach] megarry says -Two types of trasnsactional breach
Self dealing is prohibited. Will be set aside. See handout
No matter how fair it is. It is about justice
Contrast this with the fair dealing rule.
Self dealing is when i as a trustee sell to myself as a private individual.
Fair dealing – go to beneficiary.. have to prove its fair by getting independent financial advice etc
Chinese walls – meaning: metaphor..
Internal partition –
Millet said you have to erect your walls before the clients come
Have to have systems that are not ad hoc. Have to be set up before.
You have erect it in advance and have a sytem ready that is robust
Case about solicitoras firm – separate offices – seapprate groups of people, this was ok