Legal Assessment of Fiduciary Duties: Advising QLT Ltd on Claims Against BIA

Introduction

This essay is based on a scenario involving QLT Ltd and BIA and contains advice to QLT Ltd on their legal position in connection to certain claims against BIA for breach of fiduciary duty owed to QLT Ltd. focusing on law dissertation help. The advice is based on the law of trust and equity, particularly in connection of breach of fiduciary duties. The principal issues in the case are whether BIA owes a fiduciary duty to QLT Ltd and if so, what are the legal claims of QLT Ltd against BIA for the breach of this duty. The essay first considers the relationship of fiduciary and principal between BIA and QLT Ltd, then considers the possible breach of duty by BIA, and finally considers the claim of QLT Ltd against BIA.

BIA as a fiduciary

The first issue that arises is whether BIA owes a fiduciary duty to QLT Ltd. If BIA is a fiduciary of QLT Ltd, then certain duties will arise towards QLT Ltd for the breach of which a claim may be made by QLT Ltd. This section discusses the conditions based on which fiduciary duty is determined in the authorities.

In one judgment, the court has defined fiduciary duty as “the obligation of loyalty” and the breach of such obligation as the “disloyalty or infidelity” of the fiduciary. The question arises as to who is subject to fiduciary duties. Fiduciary duty is defined in different ways, but in legal sense, it is generally defined in the context of trusts and equities and is applied to intermediaries who are considered to owe fiduciary duties to an investor who has authorised them to act on their behalf. The purpose of recognising such fiduciary duties for intermediaries is that the investors on whose behalf such intermediaries are acting should be able to sue for breach of such duties. Therefore, fiduciary duties can arise for intermediaries like BIA if they are acting on behalf of an investor under certain circumstances that are explained below.

Generally, the relationship of fiduciary and principal may arise in two circumstances: first, where a relationship falls within a previously recognised category, such as a solicitor and client, which are also termed as Status-based fiduciary relationships; and second, where the particular facts and circumstances of a relationship justify the imposition of fiduciary duties, which are termed as Fact-based fiduciary relationships. Status based fiduciary relationships would also include the relationships between trustee and beneficiary and principal and agent. In the current situation, as BIA was acting as an intermediary for QLT Ltd for the purpose of purchasing a hotel, the relationship may be described as that of agency, with BIA being an agent of QLT Ltd. Acting on behalf of another person has been described by Lord Justice Millet as an important aspect of defining fiduciary relationship because a fiduciary is generally a person who undertakes to act for or on behalf of another person in a particular matter giving rise to a relationship of trust and confidence. It is also important to note that fiduciary duties may arise where there is a degree of trust, vulnerability, power and confidence reposed by the principal in the fiduciary and leading to the expectation for a reasonable person that the fiduciary will behave in a certain way. This may also arise in cases like the present one where the principal reposes trust and confidence in the agent and expects that the agent will act in a certain way. Based on this discussion, it may be noted that the key test for determining the relationship of the fiduciary and principal is whether there is a legitimate expectation of one party that the other party will act in its interest. This expectation may arise when the other party is given some discretion, power to act and there is vulnerability as these are indicators of the possibility of expectation.

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1. Bristol & West Building Society v Mothew [1998] Ch 1, [18].
2. Law Commission, Fiduciary Duties of Investment Intermediaries, Law Com No. 350 (Williams Lea Group for HM Stationary Office 2014).
3. Ibid.
4. Lac Minerals Ltd v International Corona Resources Ltd (1989) 61 DLR (4th) 14
5. Price v Blakemore (1843) 6 Beav 507.
6. Korkontzilas v Soulos (1997) 146 DLR (4th) 214.
7. Bristol & West Building Society v Mothew [1998] Ch 1,[18]; L Sealy, ‘Fiduciary Relationships’ (1962) Cambridge Law Journal 69, 72-79.

The facts of the present case indicate that BIA was acting for QLT Ltd for the purchase of a hotel in Brazil for £15m from Rio de Janeiro Hotels SA. In this, BIA was acting as an intermediary and a consultant for QLT Ltd. This denotes a relationship of agent and principal between BIA and QLT Ltd as BIA was acting on behalf of QLT and was entrusted with some power to act and discretion that can be claimed by QLT as grounds for leading to legitimate expectation on their part that BIA would act in QLT’s interest. The relationship of fiduciary is therefore created based on the law and authorities in this area. As this relationship of fiduciary and principal can be established, it can also be argued that BIA as a fiduciary owes certain duties to QLT Ltd. The specific duty owed by BIA is discussed in the next part of the essay with reference to relevant authorities.

Duties of the fiduciary

Fiduciaries have both fiduciary and non-fiduciary duties. In Bristol, the court has defined the nature of “fiduciary duty” by saying that this term is properly confined “to those duties which are peculiar to fiduciaries and the breach of which attracts legal consequences differing from those consequent upon the breach of other duties.” Therefore, one of the key areas for testing the claim of QTC Ltd. against BIA is in the area of the fiduciary duty owed by the latter to QTC Ltd.

The exact nature of duty owed by the fiduciary to the principal is explained in Bristol as follows:

“The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal. This is not intended to be an exhaustive list, but it is sufficient to indicate the nature of fiduciary obligations. They are the defining characteristics of the fiduciary.”

Based on the above excerpt from the Bristol judgment, the duties of the fiduciary towards the principal can be summarised as duties that include acting in good faith, duty not to make a profit, duty not to allow his self-interest conflict with his duty to the trust, and duty not to act for his own benefit or for the benefit of another party without the consent of the beneficiary. These fiduciary duties of the trustee were recognised in Bristol with the court holding that the overarching duty of the fiduciary is single-minded loyalty to the principal. Among the above mentioned duties, the one duty that is relevant in the context of the scenario involving BIA and QLT Ltd is the duty of BIA to not act for his own benefit or the benefit of a third person without the informed consent of his principal.

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8. J Edelman, ‘When do fiduciary duties arise?’ (2010) 126 Law Quarterly Review 302, 317.
9. Law Commission, Fiduciary Duties of Investment Intermediaries, Law Com No. 350 (Williams Lea Group for HM Stationary Office 2014) 38.
10. Ibid.
11. Bristol and West Building Society v Mothew [1998] Ch 1, [16].
12. Ibid, [18].
13. Ibid.

In Bristol, the court has also explained that only duties peculiar to fiduciaries are properly called as fiduciary duties and that every breach of duty by the fiduciary is not a breach of fiduciary duties. This implies that a fiduciary may have both fiduciary as well as non fiduciary duties. The duty of loyalty is however, the distinguishing duty of the fiduciary. As discussed in the previous section, there is also the notion of legitimate expectation which is linked to the fiduciary concept as the relationship of fiduciary with the principal is such that it gives rise to a legitimate expectation recognised by law of equity and premised on the expectation that the fiduciary will not use their position in a manner detrimental to the interests of the principal. Due to the nature of trust, the duties of trusteeship have been described as a fiduciary duties “par excellence’. A beneficiary of the trust derives his interests from the trust and is also protected in these interests under the trust. In this situation, BIA definitely had duty of loyalty to QTC Ltd as BIA was acting as an agent entrusted with the task to purchase a hotel for BIA. The question is which specific duty has been breached by BIA.

Coming back to the specific duty to not act for his own benefit or the benefit of a third person without the informed consent of his principal, it may be argued that it is this duty that is breached by BIA. In this case, the facts indicate that unknown to QLT Ltd, BIA had a secret arrangement with Rio de Janeiro Hotels that the latter will pay BIA £1.5m if the hotel is sold to QLT Ltd. The arrangement was not disclosed to QLT Ltd as its secret nature indicates. Thus, BIA earned a benefit from the fiduciary relationship with QLT Ltd by getting a payment from Rio de Janeiro Hotels amounting to £1.5m for the sale of the hotel to QLT Ltd without disclosing the same. Is this a breach of duty of loyalty?

The Law Commission has clarified that the duty to not make a profit by reason or in virtue of the fiduciary office is a breach of duty of loyalty owed by the fiduciary to the principal. A fiduciary is only allowed to make a profit or derive a benefit from his office if he has received authorisation from the principal and not otherwise. An authorisation to make a profit can be given by the principal in a trust instrument or otherwise prior to the making of such a profit. In cases where the fiduciary is alleged to have made profits without disclosing the same to the principal, the court also looks for evidence that the fiduciary made “full and frank disclosure of all material facts.” In this case, BIA cannot prove that it made such a full and frank disclosure to QLT Ltd. In the event that the principal does not authorise such action on the part of the fiduciary, the only other way for such action to not amount to breach of fiduciary duty is for the court to have authorised it. For the no-profit rule to apply for establishing the breach of fiduciary duty by the fiduciary, it is not necessary that the principal should have suffered from some disadvantage due to the actions of the fiduciary. It is also not relevant to the case for principal to show that he could have obtained the profit for himself.

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14. Ibid
15. Ibid
16. Arklow Investments Ltd v Maclean [2000] 1 WLR 594, [598].
17. Jonathan Garton, Graham Moffat, Gerry Bean, and Rebecca Probert. Moffat's Trusts Law 6th Edition: Text and Materials (Cambridge University Press 2015) 403.
18. Ibid
19. Law Commission, Fiduciary Duties and Regulatory Rules (1992) Law Commission Consultation Paper No 124 (The Stationary Office 1996).
20. Clark Boyce v Mouat [1994] 1 AC 428, 435; Bristol and West Building Society v Mothew [1998] Ch 1, [18].
21. Murad v al-Saraj [2005] EWCA Civ 959.
22. New Zealand Netherlands Society ‘‘Oranje’’ Inc v Kuys [1973] 1 WLR 1126, [1132], per Lord Wilberforce.
23. Holder v Holder [1968] Ch 353, [398], [402].

Liability to account for profits

The final issue that arises in this case is whether BIA has the liability to account to QLT Ltd for the profits made by them in an unauthorised manner. QTC Ltd has discovered that BIA received a secret commission for the purchase of the hotel from Rio de Janeiro Hotels SA. It now seeks to recover £1.5m from BIA. BIA itself invested the money received into two separate ventures: Brazilian Rubber Industries SA, which failed leading to a loss of £8,00,000; and Sao Paulo Industries with £700,000, which is now worth £2.1m. The issue that arises is whether QTC Ltd can claim these profits to be accounted to it.

The relevant authority in this case is Regal (Hastings) Ltd v Gulliver. In Regal, the directors of a company formed a subsidiary for the company to acquire two new cinemas but as the company was unable to raise the capital to allow the subsidiary to finance the acquisition, the directors subscribed for shares in the subsidiary and then sold them at a profit. In a unanimous decision by the House of Lords, the directors were held liable to account to the company for the profit that they made. Lord Russell’s explanation as to how this liability arose is relevant to the current scenario as well:

“the directors standing in a fiduciary relationship to Regal in regard to the exercise of their powers as directors, and having obtained these shares by reason and only by reason of the fact that they were directors of Regal and in the course of the execution of that office, are accountable for the profits which they have made out of them.”



Thus, the fiduciary can be made liable for the profit made by them in the course of their execution of the office of the fiduciary. In case there is a loss suffered by the principal due to the unjust enrichment of the fiduciary, then also the case for accounting for that loss arises as enrichment of one party at the expense of another can lead to a case for indemnity as provided in the Supreme Court judgment in Bank of Cyprus v Menelaou, wherein the Supreme Court had a sufficient causal connection between the enrichment of one person and the loss suffered by another can be an unjust enrichment, for which the party suffering the loss must be compensated. In this case, QTC Ltd does not appear to have suffered a loss due to the actions of BIA. However, under the principle laid down in an authority, it is not necessary for the principal to have suffered from some disadvantage due to the actions of the fiduciary. Therefore, QTC Ltd can claim accounting for the profit made by BIA even if it did not suffer any loss due to the actions of BIA.

Conclusion

The authorities discussed in this essay make a case for a claim of QLT Ltd against BIA. In this case, BIA was entrusted with the task of purchasing a hotel for QLT Ltd, which put BIA in the position of an agent and also placed certain expectations from BIA for QLT Ltd. These expectations and the power to act on behalf of QLT Ltd makes BIA a fiduciary and places the duty of loyalty for BIA. One aspect of this fiduciary duty of loyalty is the duty to not make a profit without authorisation by the principal as laid down in relevant authorities considered in this essay. BIA was not permitted by QLT Ltd to make a profit through commission from the third party. When such a profit was made, it was part of a secret arrangement between BIA and Rio de Janeiro Hotels SA. QLT Ltd can make a claim against BIA for the recovery of entire profit made from the investment in Sao Paulo Industries with £700,000. That profit is not worth £2.1m and it can be claimed by QLT Ltd on the basis of the relevant authorities that are discussed in this essay, particularly the judgment in Regal (Hastings) Ltd v Gulliver.

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24. Foster Bryant Surveying Ltd v Bryant [2007] EWCA Civ 200.
25. Cobbetts LLP v Hodge [2009] EWHC 786 (Ch).
26. Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134.
27. Ibid
28. Ibid, [149].
29. Bank of Cyprus v Menelaou [2015] UKSC.
30. Foster Bryant Surveying Ltd v Bryant [2007] EWCA Civ 200.

Table of cases

Arklow Investments Ltd v Maclean [2000] 1 WLR 594.

Bank of Cyprus v Menelaou [2015] UKSC.

Bristol & West Building Society v Mothew [1998] Ch 1.

Clark Boyce v Mouat [1994] 1 AC 428.

Cobbetts LLP v Hodge [2009] EWHC 786 (Ch).

Foster Bryant Surveying Ltd v Bryant [2007] EWCA Civ 200.

Holder v Holder [1968] Ch 353.

Korkontzilas v Soulos (1997) 146 DLR (4th) 214.

Lac Minerals Ltd v International Corona Resources Ltd (1989) 61 DLR (4th) 14.

Murad v al-Saraj [2005] EWCA Civ 959.

New Zealand Netherlands Society ‘‘Oranje’’ Inc v Kuys [1973] 1 WLR 1126.

Price v Blakemore (1843) 6 Beav 507.

Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134.

Books

Garton J, Moffat G, Bean G, and Probert R, Moffat's Trusts Law 6th Edition: Text and Materials (Cambridge University Press 2015).

Journals

Edelman J, ‘When do fiduciary duties arise?’ (2010) 126 Law Quarterly Review 302.

Sealy L, ‘Fiduciary Relationships’ (1962) Cambridge Law Journal 69.

Reports

Law Commission, Fiduciary Duties of Investment Intermediaries, Law Com No. 350 (Williams Lea Group for HM Stationary Office 2014).

Law Commission, Fiduciary Duties and Regulatory Rules (1992) Law Commission Consultation Paper No 124 (The Stationary Office 1996).

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31. Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134.