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What Is the Purpose of the Ongoing Use of Fiduciary Duties in English Business Law, with Particular Reference to Breaches Of

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What is the purpose of the ongoing use of fiduciary duties in English business law, with particular reference to breaches of duty in relation to bribery, secret profits, conflicts of interest and unconscionability? Matthew Atkins September 2017 Acknowledgements This thesis was researched and written with the invaluable assistance of my supervisors Professor David Milman and Mr Philip Lawton of Lancaster University Law School. I am very grateful for all their efforts on my behalf. i Contents Page Introduction 1 Chapter 1: The Current State of Fiduciary Duties in English Law 7 Chapter 2: The Content of Fiduciary Obligations 30 Chapter 3: The Question of Remedy for Breach of Duty by Secret Profits and Bribery 53 Chapter 4: Issues on the Limits of Fiduciary Liability 92 Chapter 5: The Effectiveness of Fiduciary Regulation 137 Conclusion 177 Bibliography 189 ii Introduction Fiduciary duties are complex legal obligations. The duties arise from the presence of an equitable obligation of trust and confidence owed by one party in a fiduciary relationship to the other.1 This is known as the fiduciary obligation.2 Yet a fiduciary is not said to be subject to the rules of the duties because he occupies the position of a fiduciary in a relationship, but rather he is said to be a fiduciary because he is subject to the rules of the duties for the purposes of that relationship.3 The duties restrain the behaviour of fiduciaries by proscribing actions at a high level of generality, through the duty to avoid conflicts of interest and the duty to avoid unauthorised or secret profits. Thus they are usually considered to be proscriptive legal rules,4 prohibiting any activity which leads to those consequences. However, the fiduciary obligation which gives rise to the duties has been called prescriptive, and a “compound obligation”.5 This is because, in the words of Lord Millett, “the distinguishing obligation of a fiduciary is the obligation of loyalty”.6 The objective of the fiduciary obligation is that the fiduciary will pursue the best interests of his principal or beneficiary, that he will be loyal to the interests of another. This is a prescriptive idea. The intention is not merely that the fiduciary will avoid taking actions which are negative to his legal obligations, but rather that he will act positively to promote the interests of his trust. Fiduciary duties are about the service of a deeper purpose, an equitable purpose, which grasps at a more complete justice than the common law obligations to merely fulfil bargains and meet minimum standards of behaviour. The question posed by this thesis is the extent to which that purpose accords with the values and expediencies of law in the business environment. Law which regulates business transactions must be streamlined and efficient, only restraining economic activity where strictly necessary. In a free market economy a law which costs the market money or opportunities must be justified either by facilitating the creation of greater wealth elsewhere or by some strong moral or social imperative. It stands to be proven whether an equitable concept such as the fiduciary duty, with its origins in the rules of the management of traditional trusts, can remain analytically coherent and practically justifiable when transferred to the context of arms-length and competitive commercial relationships. 1 Bristol and West Building Society v Mothew [1998] Ch 1 2 Finn, P; Fiduciary Obligations, (1977, Law Book Company) 3 Ibid. n1 & n2 4 Tito v Waddell (No. 2) [1977] Ch 106 5 Birks, PBH: “The Content of Fiduciary Obligations” (2000) 34 Israel Law Review 3, pp 12 6 Supra n1, p18 1 In the final report of a government review Professor Kay gave a positive assessment of the potential for fiduciary duties, or at least “fiduciary standards” to contribute to the regulation of business in English law.7 He believed they were essential in promoting responsible and sustainable business practices, something of an expansion of the classic role of the obligation in protecting the proprietary interests of beneficiaries from the power and excess of dishonest trustees. At around the same time, fiduciary duties and the imposition of a proprietary remedy in cases of breach of the “no profits” rule took centre stage in two landmark cases in the courts. The cases of Sinclair v Versailles8 and FHR European Ventures LLP v Cedar Capital Partners LLC9 reignited a fierce academic debate about the proper role and formulation of the fiduciary duty. This was especially focused on the severity of the remedy imposed in cases of breach of duty and the difficulty in establishing the proper justification required for such an imposition.10 This debate calls into question Kay’s confidence in the appropriateness of the fiduciary obligation in a commercial context, given the legal complexity and analytical difficulty it created. The case law ultimately resolved in a clear but arguably unsatisfying conclusion.11 At the same time there is ongoing tension in English law at the cutting edge of the law’s understanding of the fiduciary obligation in the business context.12 The duty to avoid conflicts of interest, and the requirement of “good faith” created by the obligation of loyalty, have been at the centre of a number of legal controversies. These include: fiduciary obligations arising out of commercial and contractual relations in joint ventures,13 allied questions about the ability of parties to modify or exclude fiduciary duties in the terms of their contracts,14 the precise confines of the duty to avoid conflicts placed on professional advisors who act for multiple clients with competing interests,15 and the extent of the restriction the fiduciary duty places on 7 Final Report of the Kay Review of UK Equity Markets and Long-Term Decision Making 2012 http://webarchive.nationalarchives.gov.uk/20121204121011/http://www.bis.gov.uk/assets/biscore/business- law/docs/k/12-917-kay-review-of-equity-markets-final-report.pdf, last accessed July 2018 8 [2012] Ch 453 9 [2014] UKSC 45 10 See for example: Worthington, S; “Fiduciary Duties and Proprietary Remedies: Addressing the Failure of Equitable Formulae” [2013] 72 CLJ 720, Millett, P; “Bribes and Secret Commissions Again” [2012] CLJ 583, Smith, L; “Constructive Trusts and the No Profit Rule” [2013] CLJ 260, and Goode, Roy; “Proprietary Liability for Secret Profits: a Reply” [2011] 127 LQR 493, among others 11 See below, Chapter 3 12 See Yip, M and Lee, J; “The commercialisation of equity” (2017) 37 Legal Studies 647 as well the legal disputes referenced in fn 13-15 below 13 See Ross River Ltd & another v Waverly Commercial Ltd & ors [2013] EWCA Civ 910 14 Law Commission Report No. 350; Fiduciary Duties of Investment Intermediaries (2014) HMSO Cm 350 para 3.37-3.39 15 Marks and Spencer plc v Freshfields Bruckhaus Deringer [2004] EWCA Civ 741 2 actions of directors which may compete with the interests of their company or former company.16 Purpose of this Review Set against this backdrop, this thesis examines the following key questions regarding the use of the fiduciary obligation as a regulatory tool in the business environment: 1. What theories underlie the imposition of the fiduciary obligation, and how do these translate to the business environment? What are the intended regulatory aims in using the fiduciary duty to regulate commercial actors and are they valuable? 2. Is fiduciary law sufficiently certain to provide effective business regulation without damaging commercial certainty and efficiency? Can acceptable answers or ways forward be identified in existing situations of legal controversy? 3. How effective is the fiduciary obligation in regulating the behaviour of commercial actors? Can this be measured or is the effectiveness of this jurisdiction essentially to be taken on trust? Answers to these questions can provide a valuable contribution to scholarship in this area of law. The aim of pursuing such answers is to create a more complete picture of the purpose behind the regulation created by the fiduciary obligation in order to draw together disparate strands of legal thought and isolated principles into a more coherent and functional jurisdiction. It has been observed that, like equity itself, there may be no universal rule which governs the imposition of the fiduciary obligation.17 A fiduciary relationship arises from the confluence of a sufficient number of a loose set of legal principles. However, it is the hypothesis of this review that there may be a common purpose in the specific examples of fiduciary regulation. Identifying this is an as yet unexplored avenue towards clarifying and illuminating this complex and often difficult area of law. 16 Lim, E; “Directors’ fiduciary duties: a new analytical framework.” (2013) 129 LQR 242 17 Bristol and West Building Society v Mothew [1998] Ch 1, and Finn, P; Fiduciary Obligations, (1977, Law Book Company) 3 This thesis builds on existing scholarship by recognising that the discussion on fiduciary duties has stagnated into, broadly speaking, two almost irreconcilable positions. The first could be loosely described as the proprietary approach.18 This asserts the necessity of justifying trusts concepts as flowing from the best and most coherent analysis of property rights. It asserts that the best description of the fiduciary obligation is merely as a system of rules and causes of action designed to vindicate the rights of the beneficiary.19 The alternative to this is what might be called the equitable approach.20 This asserts a foundation of the fiduciary duties in equitable principles which are designed to mitigate against the arbitrary consequences of the strict application of legal rules. As a result the lack of full proprietary justification does not undermine the analytical basis of the duties.
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