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Dundee Student Law Review, Vol. 5 (1+2), No. 1
Can mere incompetence constitute a breach of
fiduciary duty?
George Beaton^
Introduction
Trustees, when given the responsibility of administering a trust, are subjected to a number of duties. These general duties are commonly found within a trust instrument, should one exist. Simultaneously, whilst in office, trustees are required to act with good faith and confidence on behalf of the beneficiaries, giving rise to what is said to be a ‘fiduciary relationship’. This relationship bestows upon the trustee another category of obligations, known as ‘fiduciary duties’. This essay will give a brief overview of what seems to be the most reliable definition of a fiduciary and their function within a trust relationship. In addition, it shall identify the fundamental obligations which derive from fiduciary relationships. It will then critically discuss the courts’ disinclination to regard mere incompetence as a breach of fiduciary duty. Rather, it will illustrate that the courts are likely to place incompetence under negligence in tort or the breach of a general duty of care, as is evidenced by the common law.
What are fiduciary duties, and what are their functions?
An appropriate starting point is to explore what the obligations under a fiduciary relationship may entail. The English legal system does not have a settled definition for the term ‘fiduciary’. That said, a number of relationships have been regarded as fiduciary per se. These include: principal and agent; director and company, solicitor and client; and, in trusts law, trustee and beneficiary.^1 A frequently cited, and therefore reliable, definition is delivered by Millet LJ in Bristol & West Building Society v Mothew ,^2 who describes a fiduciary as someone who has elected to act for another ‘in circumstances which give rise to a relationship of trust and confidence’.^3 Such a definition leaves the situations in which (^) Graduated English LLB Student at the University of Dundee. George would like to thank the editorial board and the anonymous peer reviewer for their kind comments. (^1) Sukhninder Panesar, ‘The nature of fiduciary liablity in English law’ (2007) 12 Cov. L. J. 1, 2. (^2) Bristol & West Building Society v Mothew [1998] Ch 1. (^3) ibid [18].
someone can be defined as a fiduciary open. This has traditionally been the intention of the courts, in order to preserve a malleable definition that can be applied without any restrictive contextualisation on a case-by-case basis.^4 Similarly, the term ‘fiduciary duty’ is used in varied contexts within the legal profession. Traditionally numerous duties have been held under the fiduciary umbrella. The Courts have expressed concern with this extensive approach, and have even gone as far as to say that ‘the phrase “fiduciary duties” is a dangerous one’,^5 with a narrower model of fiduciary duties being offered up by the Court. Again, it is Millet LJ who has provided the relevant direction, stating that ‘The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary’.^6 While courts have offered up numerous facets of this core obligation, it is easier to sum these up under two key fiduciary duties: the duty to avoid conflicts of personal interest and the duty to avoid making any unauthorised profits that may surface when performing one’s fiduciary duties. In broad terms, these have been classified as the ‘no conflict’ and ‘no profit’ rules. Historically, the courts have recognised the need to interpret these duties strictly.^7 This view has been disseminated in recent precedence, where the courts have ensured that fiduciaries will be held liable even in cases where they were acting honestly and to the best of their ability, without causing fraud or acting in bad faith.^8 A case that illustrates both of these key duties well is Boardman v Phipps.^9 Here, a solicitor for a trust fund used his position to become aware of an opportunity that resulted in a sizeable profit for the trust and himself. The Court held that he breached his fiduciary duty not to make any unauthorised profit. Furthermore, having acted in his own interests, he was also in breach of the ‘no conflict’ rule. The result of this was that all personal profit made by the solicitor was to be held on constructive trust for the beneficiaries. Can mere incompetence cause a breach? With the general obligations of a fiduciary established as loyalty and fidelity, the question remains whether mere incompetence can constitute a breach of fiduciary duty. Much like the law of fiduciaries as a whole, there is seemingly no clear answer. It would be appropriate again to start off with what appears to be the leading response in the aforementioned case of Mothew. The pertinent issue here was whether a solicitor breached his fiduciary duties when he incompetently neglected to make his client aware of an existing debt, which may have influenced the granting of a mortgage. The Court of Appeal held that there was no breach of fiduciary duty, as the solicitor’s conduct was neither intentional nor dishonest. However, there was a breach of duty of care under the tort of negligence. Millet LJ provided the cogent (^4) Lloyds Bank Ltd v Bundy [1975] QB 326 [341]. (^5) Henderson v Merrett Syndicates [1995] 2 AC 145, [206]. (^6) Mothew (n.2), [18]. (^7) Keech v Sandford (1726) Sel Cas Ch 61. (^8) Regal (Hastings) Ltd v Gulliver [1967] AC 134 (Lord Russell). (^9) Boardman v Phipps [1967] 2 AC 46.
Instead, the duty to exercise reasonable care and skill is categorised within the general, statutory duties owed by a trustee.^17 The duty of reasonable care and skill requires a fiduciary to complete their duties to an objective standard; that of a reasonable prudent and careful man. However, as Rebecca Lee notes, the fiduciary obligation of loyalty is not standard- orientated.^18 It merely necessitates a fiduciary’s duty not to depart from acting in the beneficiary’s interests. In other words, it does not require a particular standard to be met by a fiduciary. If a fiduciary performs negligently, and subsequently breaches their duty of care, one cannot simply infer that that fiduciary has not still acted to the best interest of their beneficiary. Their act could very well be below the competent standard expected, but this does not render the act a disloyal one. Loyalty is not a concept that can be assessed to a standard; a fiduciary either acts in their beneficiary’s interests or they do not. Thus, if competence is a concept that requires assessment against a standard, but the fiduciary obligation of loyalty does not, it is difficult to conclude the two are connected. It follows that the concepts of incompetence and fiduciary duty are distinct from one another. Conclusion It has proven difficult to obtain a decisive definition of the term ‘fiduciary’. As a result, the phrase ‘fiduciary duty’ has traditionally been applied elastically and, perhaps snowballed, into a dangerously loose term. The judgment of Bristol & West Building Society v Mothew sought to amalgamate these accrued applications into a narrower definition. It would appear it has been successful in this, as it remains an often relied upon precedent across the different branches of law where fiduciary duties emerge. Moreover, the judgment of this case provided a conclusive statement that mere incompetence cannot alone constitute a breach of fiduciary duty. When examining the court’s reasoning, it cannot be concluded that a fiduciary’s incompetence may be synonymous with disloyalty or infidelity and therefore a breach of fiduciary duty. Subsequent case law and academic opinion appear to emulate this notion, furthering that an incompetent act will fall under either the tort of negligence or the general duty of care and reasonable skill in equity. Nonetheless, one can draw a reliable conclusion that mere incompetence is not enough to constitute a breach of fiduciary duty. (^17) Trustee Act 2000, s.1. (^18) Rebecca Lee, ‘Rethinking the content of the fiduciary obligation’ (2009) 3 Conv. & P. L. 236, 251.
