Onus of proof in breach of fiduciary duties

Once a claimant seeking to void a contract made with a defendant in conflicted self interest has established that a defendant was in a fiduciary relationship to him/her, the onus passes to the defendant to prove he/she had the claimant’s authority to act in conflict of duty and in his self interest.

Snells Principles of Equity, 25th Edition, 1960, p 25 states that agents cannot deal with their principals without full disclosure. This is an “inflexible rule”. No man acting as an agent can be allowed to put himself in a position in which his interest and his duty will be in conflict; and that no agent, in the course of his agency, in the matter of his agency, can be allowed to make any profit without the knowledge and consent of his principal.

Aberdeen Railway Co. v. Blaikie Bros. (1854) 1 Macq. H.L. 461, considered, at pp. 471-472

…the general question, whether a director of a railway company is or is not precluded from dealing on behalf of the company with himself, or with a firm in which he is a partner. The directors are a body to whom is delegated the duty of managing the general affairs of the company. A corporate body can only act by agents, and it is of course the duty of those agents so to act as best they can to promote the interests of the corporation whose affairs they are conducting. Such agents have duties to discharge of a fiduciary nature towards their principal. And it is a rule of universal application, that no one, having such duties to discharge, shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound to protect. So strictly is this principle adhered to, that no question is allowed to be raised as to the fairness or unfairness of a contract so entered into. It obviously is, or may be, impossible to demonstrate how far in any particular case the terms of such a contract have been the best for the interest of the cestui que trust, which it was possible to obtain. It may sometimes happen that the terms on which a trustee has dealt or attempted to deal with the estate or interests of those for whom he is a trustee, have been as good as could have been obtained from any other person — they may even at the time have been better. But still so inflexible is the rule that no inquiry on that subject is permitted.

Parker v. McKenna (1874) L. R. 10 Ch. 96, 118, p 124 – 125, Sir W. M. James, L.J. in the Divisional Court said;

no agent in the course of his agency, in the matter of his agency, can be allowed to make any profit without the knowledge and consent of his principal; that that rule is an inflexible rule, and must be applied inexorably by this Court, which is not entitled, in my judgment, to receive evidence, or suggestion, or argument as to whether the principal did or did not suffer any injury in fact by reason of the dealing of the agent; for the safety of mankind requires that no agent shall be able to put his principal to the danger of such an inquiry as that. All persons who stand in a fiduciary position must refund with interest all profits they have made by means of their position or by means of property held by them, see for example Tate v. Williamson. – (1866) L.R. 2 Ch. App. 55 (resulting in the setting aside of the purchase of property by a former trustee and manager), unless they made the profit with the “full knowledge and approval” of the persons to whom they owe the duty.

The onus on the fiduciary to obtain informed consent is stated in Tate v. Williamson (1866) at page 65 by Lord Chelmsford in the Court of Appeal; it is quite clear to my mind that the confidential relation between the parties had not terminated when the negotiation for the purchase of the property by the Defendant commenced, and that he did not then, or at any time afterwards, stand in the situation of an ordinary purchaser. This being so, the Defendant, pending the agreement, was bound to communicate all the information he acquired, which it was material for the intestate to know in order to enable him to judge of the value of his property.

In De Bussche v Alt [1873 D 53] (1877) 8 ChD 286, 311 – 312, (CA) …we think that Gilman & Co. could not, after having once appointed and allowed the Defendant to act as agent for the Plaintiff in connection with the proposed sale of his vessel, and without any authority from the Plaintiff, change the Defendant’s position in the transaction from that of an agent to that of a purchaser from the Plaintiff. All the reasons which would apply to prevent the original agent from changing his position without the assent of his principal, would equally apply to the case of the substitute, and if such a transaction were held to be valid so as to entitle the substitute to make a profit out of it, it would open the door in a variety of cases to agents, who could not themselves directly become purchasers, indirectly doing the same thing through the intervention of substitutes, and to the commission of serious frauds upon principals.

Emile Erlanger and Others v The New Sombrero Phosphate Company and Others (1878) 3 App.Cas. (HL), regarding promoters also a fiduciary as a nominee and director, 1218 Page 1229. It was the vendors, in their character of promoters, who had the power and the opportunity of creating and forming the company in such a manner that with adequate disclosures of fact, an independent judgment on the company’s behalf might have been formed. But instead of so doing they used that power and opportunity for the advancement of their own interests. Placed in this position of unfair advantage over the company which they were about to create, they were, as it seems to me, bound according to the principles constantly acted upon in the Courts of Equity, if they wished to make a valid contract of sale to the company, to nominate independent directors and fully disclose the material facts. The obligation rests upon them to shew they have not made use of the position which they occupied to benefit them selves; but I find no proof in the case that they have discharged that obligation. There is no proof that either Sir Thomas Dakin or Admiral Macdonald was aware of the price at which the property had just been brought under the authority of the Court of Chancery, nor, indeed, that they even knew that the real vendors were also the promoters of the company. And there is certainly no proof that in the selection of the directors who were to be the company’s agents for accepting and affirming the proposed purchase, the vendors used their power as promoters in such a way as to create an independent body capable of acting impartially in defence of the company’s interests. A contract of sale effected under such circumstances is, I conceive, upon principles of equity liable to be set aside.

Costa Rica Railway Company Limited v. Forwood- [1901] 1 Ch. 746 (CA), Rigby LJ at 757-759 proves an exception when authority is stated in the company’s articles and is as follows: “That no director shall vacate his office by reason of his being a member of any corporation, company, or partnership which has entered into contracts with, or done any work for, the company.” That is a very wide clause indeed. … in Imperial Mercantile Credit Association v. Coleman [L. R. 6 Ch. 558; L. R. 6 H. L. 189], which was the case most relied on, quoted, and dealt with on both sides in the present case, Lord Hatherley L.C. held, upon a similar clause, that the director in that case was not liable to account for profits made from contracts with the company of which he was a director No attempt has been made to shew that Sir A. Forwood ever did what was contrary to the railway company’s articles of association – that he ever voted or joined in any vote about the contracts. I assume, therefore, he never did vote…

Cook v Deeks [1916] 1 A.C. 554 Page 555 (PC), A resolution of a company controlled by their votes is nugatory if it purports to sanction their making a profit.

Regal Hastings v Gulliver [1942] 1 All E.R. 378, [1967] 2 A.C. 134 Page H.L Viscount Sankey The appellants say they are entitled to succeed:

(i) because the respondents secured for themselves the profits upon the acquisition and sale of the shares in Amalgamated by using the knowledge acquired as directors and solicitors respectively of Regal and by using their said respective positions and without the knowledge or consent of Regal;

(ii) because the doctrine laid down with regard to trustees is equally applicable to directors and solicitors. It is not, however, necessary to discuss all the cases cited, because the respondents admitted the generality of the rule as contended for by the appellants, but were concerned rather to confess and avoid it. They sought no authority from the company to do so, and, by reason of their position and actions, they made large profits for which, in my view, they are liable to account to the company. They could, had they wished, have protected themselves by a resolution (either antecedent or subsequent) of the Regal shareholders in general meeting. In default of such approval, the liability to account must remain…

McMaster v. Byrne [1952] 1 All E.R. 1362, 1368, P.C notwithstanding that the respondent was not acting as solicitor for McMaster in the transaction now in dispute, the confidence arising from the relationship of solicitor and client which had existed between the respondent and McMaster must be taken to have continued to be in existence.

Quoting Parker J in Allison v Clayhills (97 LT 712): a solicitor may by virtue of his employment acquire special knowledge and the knowledge so obtained may impose upon him the duty of giving advice or making a full and proper disclosure in any transaction between himself and his client …the respondent did not discharge that duty unless he communicated to McMaster all material facts within his knowledge, a description which their Lordships think would include the facts within his knowledge as to the negotiations between Sovereign Potters Ltd and Johnsons. It is also plain that the onus of upholding the transaction lay on the respondent. ….justice cannot be done without a fresh trial of the issue whether the respondent had discharged the onus resting on him by reason of the confidential relationship existing..

Boardman v Phipps [1967] 2 A.C. 46, Page 100 – Cohen LJ, Fox was the active trustee and where it is not a question of delegating authority to make binding contracts. I agree with Russell L.J. [1965] Ch. 992, 1031 that two trustees, or for that matter one trustee, can come to an arrangement with a third party which will have the effect of placing the latter in a fiduciary position vis-à-vis the trust. The question is this: when in the third phase the negotiations turned to the purchase of the shares at £4 10s. a share, were the appellants debarred by their fiduciary position from purchasing on their own behalf the 21,986 shares in the company without the informed consent of the trustees and the beneficiaries?

Wilberforce J. and, in the Court of Appeal, both Lord Denning M.R. and Pearson L.J. based their decision in favour of the respondent on the decision of the HoL in Regal (Hastings) Ltd. v. Gulliver.

In that case Viscount Dilhorne (dissenting) said If the making of the profits by the appellants constituted a breach of their fiduciary duty, they would be liable to account unless they established that they had done so with the consent of their principals. 

Upjohn LJ, (dissenting)

A solicitor who acts for a client from time to time is no doubt rightly described throughout as being in a fiduciary capacity to him but that means fundamentally no more than this, that if he has dealings with his client, e.g. accepts a present from him or buys property from him, there is a presumption of undue influence and the onus is on the solicitor to justify the present or purchase 

The onus may shift back to the Claimant for example in a partnership when there is acquiescence and delay

In Clegg v Edmondson, 8 DEG. M. & G. 785 Lord Justice Knight Bruce said J said, now what has been the conduct of the Plaintiffs, Before the termination of the old partnership they knew that the Defendants intended to apply for the new lease, if not that it had been actually agreed to be granted. They took no steps to prevent the lease being granted. From the period of the termination of the old partnership they have known that the Defendants have been working these mines and incurred expenditure upon them, and filing this bill in the month of September 1855, they have not taken a single step in prosecution of the claim which they have now set up. This conduct on their part is, I think sufficient to shift the onus of the case and throw it upon them.

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