Edad Moderna: desde los Tudores hasta la Revolución de 1798

In the intervening period between the decisions in Reid and Sinclair, a number of academic commentators expressed their view as to the appropriateness and applicability of the proprietary remedy in cases of bribery. Their differing answers to this question were built on similarly different conceptions of the fiduciary duty, and its function.

William Swadling, comments in an article arguing against the imposition of the proprietary remedy in cases of bribery that the situation is “not amenable to unjust enrichment analysis”.110 _{In fact he applies that argument to all cases of where a secret commission is paid}

to a fiduciary by a third party as this cannot be said to be an enrichment at the expense of the principal. Thus in his view it cannot give rise to property rights. Rather what is occurring is compensation and disgorgement is used to remedy an ‘equitable wrong’ which is similar in nature to a tortious or civil wrong, and the claim is in personam only. He later argues there is no fundamental difference in approach between common law and equity in such matters.111

On this approach, the fiduciary duty is a legal obligation with the same basic character as any other legal obligation, breach of which requires a remedial response in the same way a breach of contract would require a remedial response. While efficient, logical and straightforward as an approach, this does leave open to question many of the foundational principles of the fiduciary duty itself. If breach of the fiduciary obligation is merely of the nature of a common law wrong, why is it said that the obligation is one of loyalty, rather than simple obligation itself? Why is it that no defence is allowed to a fiduciary who breaches his obligation of honesty, good intentions, or even no loss suffered on the part of the principal? It even becomes difficult to justify why the fiduciary obligation is imposed as a matter of status on trustees, directors, agents etc., rather than being a subject for specific agreement and negotiation. Such an approach appears to call into question the use and function of the fiduciary duty entirely, what does it do that could not be achieved in simpler terms by contractual provisions between parties?

107 _{See for example Ang, T; “All of your bribes and secret commissions belong to me: an analysis of remedies}

for breach of fiduciary duty” (2016) BSL Rev 52

108 _{Houghton, E; “Equity’s new darling and the pitfalls of remedial absolutism” (2016) 22 Trusts & Trustees 956} 109 _{Worthington, S; “Four questions on fiduciaries” (2018) 32 Tru. LI 22}

110 _{Swadling, W; “Constructive Trusts and Breach of Fiduciary Duty” (2012) Trusts & Trustees 18 985, p988} 111 _{Ibid. p998}

88 Sir Roy Goode is similarly against the imposition of a proprietary remedy in cases of bribery, but his reasoning is a little more limited. For him it is simply a question of the fact that he can find no compelling reason in property law or property rights why the principal should have a right to the gain received through bribery by the fiduciary.112 _{To him the principal has}

no proprietary base on which to make such a claim where a bribe has been taken as he can have no expectation of receipt of such a bribe for himself. Such an approach is focused on a straightforward approach to property rights. The default position is that the fiduciary owns the bribe when he receives it. He criticises the approach of Lord Templeman in Reid when quoting the maxim that, ‘Equity looks on as done which ought to be done’, for already assuming the principal has the right of ownership without first justifying that position. However, his own approach in assuming the dishonest fiduciary takes ownership for himself similarly has no independent justification if the Equitable maxim is taken to mean that in the eyes of equity he cannot be treated as the beneficial owner of the property which constitutes the bribe.

Adopting a pragmatic middle ground approach, referenced by the court in Mankarious itself, Sarah Worthington emphasises the need for a clear taxonomy of those situations where a proprietary remedy is applicable and those where it is not.113 _{Accepting that the fiduciary}

obligation has a unique character which is derived from the relationship between fiduciary and principal, she proposes a threefold classification where a proprietary remedy would be applicable in the first two classes but not in the third. The first class are situations where the fiduciary makes gains through use of trust property. The second, where they make gains by exploiting opportunities within the purview of the activities they agreed to undertake for the principal. The third class are all other gains, made merely because of the fiduciary position. In such a situation some bribes would fall in the second class and some in the third. Where undertaking transactions on behalf of the principal, a bribe affecting the value of those transactions might fall in the second class. As most likely would the facts of Mankarious, Lister, Keech, Phipps, and practically every other case mention in this chapter. Perhaps most surprisingly, according to Worthington Sinclair would fall in the first category, leaving only Reid as a category three case which would attract an in personam remedy. The main attraction for Worthington of this classification does appear to be here belief in its simplicity and practicality. However, I think this arguably turns out to be truer in theory than when actually confronted with factual scenarios. Worthington seems dissatisfied with all existing theoretical justifications for why the proprietary remedy may or may not be applicable. Like Goode, she takes the view that what is needed is a valid justification for why the fiduciary must have the property, but

112 _{Goode, R; “Proprietary Liability for Secret Profits: a Reply” [2011] 127 LQR 493}

113 _{Worthington, S; “Fiduciary Duties and Proprietary Remedies: Addressing the Failure of Equitable Formulae”}

89 unlike Goode, for her the accusation that the fiduciary has used something belonging to the principal is sufficient to support such a finding. This is a narrow line to tread, especially when the practical outcome is to leave only a tiny lacuna of case which attract only an in personam remedy, limited to cases as where there is dishonesty, but which constitutes only a misuse of position with no financial overlap with the property or sphere of influence of the subject matter of the trust. If it were not for the facts of Reid, it would be difficult to imagine factual scenarios in which this would be the case. At the same time what is adopted is still a conception of the fiduciary obligation as merely a limited vehicle for remedying wrongs, rather than part of a technically distinct equitable ethic. Though Worthington does take a broader approach to the nature of the wrongs than Swadling, accepting they are governed by the nature of the individual fiduciary relationship, rather than being of a universal and fixed nature.

The true alternative approach is that proposed by Lord Millett and in a slightly simpler form by Lionel Smith. Lord Millett posits his theory of the good man of equity, as discussed in chapter one. The Equitable maxim in Reid and the rule that Equity will not allow a fiduciary to deny a proprietary claim by his principal or assert his own where he is in breach of duty, mean that the fiduciary will be looked on at Equity as having behaved properly. The property in question will be treated as having been acquired on trust for his principal.114 _{Lionel Smith}

deems it satisfactory merely to assert that given the relationship between the fiduciary and the principal is one in which rights belonging to the principal are vested in the fiduciary, then all profits and all costs associated with that fiduciary management accrue to the principal.115

These accounts take a fully equitable approach to the problem, the key is that the nature of the relationship vests legal ownership and power over rights in the fiduciary but the beneficiary remains beneficially entitled to all profitable activity within the sphere of that relationship. This is ensured by the fiduciary obligation which acts in this context to protect the trust necessary for this relationship to function and to channel all gains made by the fiduciary to the principal. The response of the Courts to breach of fiduciary is not a question of remedying an ‘equitable wrong’ but rather of correcting an aberration in the fulfilment of the functions of the trust relationship.

3.5 Conclusion

Following the case history in relation to the imposition of a proprietary remedy for breach of fiduciary duty by secret profits has served to demonstrate than in its early beginnings

114 _{Millett, P; “Bribes and Secret Commissions” [1993] RLR 7 and more especially in Millett, P; “Bribes and}

Secret Commissions Again” [2012] CLJ 583

90 it was clearly understood that a fiduciary was bound to hand over any such gains in specie to his principal. As the law has developed this is best understood as the imposition of a proprietary remedy through the award of a constructive trust in favour of the principal. The exception to this rule in the case of bribes now appears to have been ruled to have been a wrong turn. It is easy to see how the mistake was made. Rather than adopting the simple analysis of automatic equitable ownership from the moment the gain is made by the fiduciary in breach of duty, which is the clearest interpretation of the early law, attempts were made to rationalise what had occurred in specific cases based on a chain of property rights connecting ownership of existing property owned by the principal to the property which was the subject of the gain made the fiduciary. This chain cannot always be linked. When the fiduciary obligation is understood, as proposed by this thesis, as being an integral part of the fiduciary relationship, designed to protect and uphold the loyalty, trust and confidence necessary for that relationship to function, by guaranteeing all property acquired under the purview of the relationship is directed to the principal, then the final decision reached in Mankarious seems far more analytically straightforward and satisfactory. When treated as simply a prohibition, breach of which gives rise to a mere ‘legal wrong’ which requires only a basic remedial response, the fiduciary obligation ceases to be subject to completely coherent analysis and indeed its usefulness and function are open to question.

The question of whether or not the remedy is proprietary is a very important one from the perspective of the beneficiary. In making a claim the beneficiary is taking a significant risk, to invest the time and effort into making a claim against his fiduciary. Since the fiduciary has been in charge of the property of the beneficiary or exercising powers on his behalf, the fiduciary will be in control of much of the evidence of his own behaviour. If he is truly dishonest then he may be hard to pursue as he may simply leave the jurisdiction. He will have passed the property through many hands to hide it. He may also be insolvent. From this perspective it is much easier to pursue property than it is to pursue the individual. The proprietary claim opens up to the beneficiary the opportunity to use the more robust equitable tracing rules to recover his property from the hands of the dishonest fiduciary or a thrid party. It also potentially allows the beneficiary to make a more straightforward claim against third parties via accessory liability claims.116 _{Once the beneficiary is armed with a beneficiary interest in property that}

removes at least one layer of facts which he must prove in order to make a successful claim. Without these stronger remedies the beneficiary may decide it is simply not worth pursuing a claim. This undermines almost all the practical and theoretical arguments for the use of fiduciary duties in the law. If claims are not pursued in the cases of flagrant dishonesty,

91 then the fiduciary duties are failing to function in the paradigm cases they are meant to regulate. This is far from the core understanding of the duties as guarantors of a fiduciary obligation of loyalty and a relationship of trust and confidence. It also sends the message that if a fiduciary is to breach their duties, then they should do so in the most flagrant way possible to avoid more stringent liability. Imposing a proprietary remedy in both the cases of secret profits and of bribes is perfectly justifiable on the analytical basis laid out in this thesis, and there is very strong policy reason to do so. The decision in Mankarious sends the message that the highest obligations of fiduciary duties cannot be avoided on a technicality. Equity is nuanced enough, and considers fiduciary loyalty important enough, to ensure the strongest remedial response is available in all case of breach of duty.

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Chapter 4

Issues on the Limits of Fiduciary Liability

4.1 Introduction

Thus far this thesis has advanced the proposition that in order to understand the function and purpose of the fiduciary obligation in the commercial context it is necessary to recognise that its foundations lie in a desire to protect the trust and confidence placed in fiduciary relationships. This is an objective which requires incorporating elements of both the specific relationship in question in any given set of facts and issues of public and commercial policy. We have seen that throughout this discussion a key point of contention has been the issue of how the fiduciary obligation and its associated duties can be properly restricted to appropriate cases. For some this is primarily a question of a proper analytical approach to the use of the fiduciary obligation, while others are more concerned with the practical outcomes. For the former, the key issue is that this equitable jurisdiction not make unjustifiable and incoherent advances into property and contract law. For the latter it is important that the drastic remedies that flow from the fiduciary obligation do not interfere unduly with the free and arms- length operation of commerce. However, it is clear either way there is a significant need to properly define the limits of the imposition of the fiduciary duty.

In a number of areas of the law the issue of the proper limit of the fiduciary obligation has proved controversial in recent years. While each of the specific areas of the law is different, there are a number of recurring themes which unite these difficult cases for the fiduciary obligation. The first theme is the question of the extent to which a commercial party or business person while pursuing their own legitimate economic interest can be required to protect the economic interests of another as a result of fiduciary obligations. This is especially at issue where the relationship is governed by a contractual arrangement between the parties. Allied to this is the issue of to what extent a contractual arrangement or specific agreement can be used to limit the scope of fiduciary obligations and how this limitation takes effect. A second common theme of the difficult, border-line cases is the point at which the pursuit of a tangentially related financial opportunity by a fiduciary is a breach of duty. A third related question is the proper scope and limits of the concept of a conflict of interest in practice. When does a business person cross the line, given that they operate in an environment driven by profits and personal gain.

This chapter will review a number of different areas of current legal controversy to examine how the courts have approached these questions. Firstly this chapter will examine

93 the law on the application of fiduciary duties in so called ‘joint venture’ situations. In such cases two or more commercial parties agree to unite to pursue a common business opportunity, usually on the basis of a contractual agreement between them. Where one of the parties takes the lead in managing the exploitation of the opportunity, and may even control the corporate vehicle, the finances, and the assets of the venture, there is undoubtedly scope for fiduciary obligations to arise to protect the interests of the other parties.1

By way of examining the limits and appropriateness of the application of the fiduciary obligation, the second section of the chapter will focus on the so called ‘Pallant v Morgan Equity’. In such cases a commercial party who makes an informal agreement with a competitor that only one of them will pursue the purchase of a particular piece of property for them to share can be found to hold that property on trust for both.2 _{This is not currently classed by the}

law as a situation which results from fiduciary duty but the alternative approach taken in Equity to these situation adds some clarity to the appropriate scope of the fiduciary obligation.

The next section of the chapter will look at attempts that have been made to modify or exclude fiduciary duties by contract provisions. It appears to now be beyond doubt in English law that a specific contract term can be used to modify or limit the scope of fiduciary obligations.3 _{There are potentially valid reasons of commercial flexibility in an arms-length}

transaction for allowing them to do so. However the position is not so clear when it comes to the content of the obligation, the specific duties.4

A similarly nuanced approach can be found in the case law on conflicts of interest in the context of professional advisors, and especially ‘Chinese walls’ used by large firms to allow them to represent a large number of corporate clients with often competing interests.5

Finally the fifth legal controversy that will be discussed is the proper limit of the conflict of interest disability of Directors and other managerial fiduciaries that prevents them from pursuing business opportunities for themselves.6

Thus the chapter will move from examples focused on ad hoc co-operative commercial