Law of Agency: Fiduciary Relationship part 1) Obligations owed by the agent

The obligations an agent owes his principal fall into 2 categories

1) Performance Obligations, and
2) Fiduciary Obligations

It is important to keep these two distinct. Disloyalty and incompetence may have very distinct outcomes.

Performance Obligations

The performance obligations are the tasks the agent is engaged for, and are thus determined by contractual interpretation. The standard is always one of reasonable care with reference to the standard of expertise the agent claims. So for an agent to breach his performance obligations he must have been negligent. It is insufficient that he didn't achieve his goal - it is rare for agents to actually guarantee an outcome (and if they do it must be very express). The tighter the instructions, the less likely an agent will be found negligent, as he doesn't have to use his discretion and can simply follow the orders given.

Remedies for Breach

Normal contract rules apply here - the principal receives damages for the loss they can prove is caused by the breach. An injunction is another possibility where an agent breaches a restraint of trade clause.

Fiduciary Obligations

A fiduciary relationship is originally the strictest relationship arising in equity. It is made up of:

Two Fundamental Obligations

1) He must avoid any potential conflict of interests, and if unavoidable, he should prefer the principal's interests over any others (including his own)
2) He may not obtain any 'secret profit' - a benefit due to his position as agent which his principal does not know about

Due to equity's high threshold the test is very strict. Even if the agent's profit benefits the principal extensively, he should still have gone to the principal, informed him and gotten his consent. Whatever the circumstances, equity cannot make exceptions in any cases, as fiduciaries may be encouraged to not seek consent.

1. Aberdeen Railway v Blaikie Bros

The first leading authority on fiduciary obligations. In this case Lord Cranworth in the House of Lords emphasised the severe nature of the rule (universal application) that an agent cannot enter into transactions where there are conflicting interests. Due to this, no question of fairness arises. The agent caused a contract with another company of which he was managing director - there was a clear conflict of interests here.

2. Brown v Inland Revenue Commissioners

Lord Upjohn: an agreement benefiting the agent may be express or implied from the course of dealing between the agent and the principal (the solicitor and client in this case). But it may only implied if the client knew of his rights and by his course of conduct agreed to waiver them.

3. Regal (Hastings) v Gulliver – leading case

CA held the agents should only account for profits if they had acted wrongly or deprived R of profit it’d otherwise make. The HL disagreed. Lord Russel underlined that an agent who profits without consent, no matter how honest and well-intentioned he may be, cannot escape being called to account. He referred to the leading case of Keech v Sandford where Lord King LC said that it may seem strict that an agent (a trustee in this case) isthe only person who may not benefit without the principal's consent, but justified. He also refers to ex parte James where Lord Eldon LC stated that the rule is an arbitrary one, and is necessary in the interests of justice.

4. Boardman v Phipps

Even though in this case the principal was not deprived of any financial advantage, the HL held (3-2) that Boardman and the beneficiary had to account to the trust group for their profits (subject to an equitable allowance for their efforts). Regal (Hastings) applied + absolute nature of rule again affirmed. Lord Upjohn maj: only benefit for principal is possible, there can be no conflict of interest. Distinguished facts from Regal. Lord Hodson maj: can only defeat account of profits with the assent of principal who had knowledge of the situation. The courts cannot relax this absolute responsibility.

In this case and Regal (Hastings) the agent only took action because the principal was incapable of doing so – but this doesn’t matter.

Consent

Consent from the principal to the agent's actions will only be effective if the principal was told all of the material circumstances, as illustrated by: Anangel Atlas v Harima Heavy Industries.
Sometimes the principal agrees that the agent will be remunerated by the third party. In such a case the principal must be told how much the agent will receive. Consent cannot be informed unless the principal knows exactly what they are consenting to. This was confirmed by the Court of Appeal in Wilson v Hurstanger. The burden of proof lies on the agent to demonstrate that they received the full informed consent from the principal: Allwood v Clifford. These restrictions may not apply where the third party is, for example, the agent's spouse, but the transaction will be scrutinised very carefully to ensure the spouse is not simply a front for the agent, who is taking all the commission through them.

Conflict Unavoidable

This could occur, for example, when an agent acts for more than one principal, where honouring their duty to one would mean breaching their duty to another. The House of Lords in Hilton confirmed the law's perspective: this is entirely the agent's fault, and they have to deal with the consequences.

Remedies for Breach of Fiduciary Duty

a) Personal remedy against the agent: account of profits

This is the principal's main financial remedy where an agent breaches their fiduciary obligations. An 'account of profits' strips the agent from the illegitimate gains they have made - a contrast with the usual remedies in tort and contract law which concern remedying loss. The reasoning behind this is that it is better for the principal to make a gain, than to not strictly enforce the breach of fiduciary duties. There are however, 2 possible qualifications:

1) An Equitable Allowance

Where an agent has acted in good faith to their principal, deploying considerable time, expertise, and expenditure, then the law recognises the inequity in not making them account entirely for their efforts, e.g. Boardman v Phipps. In some cases, even some profit may be given (as the CA awarded in O'Sullivan v Management Agency). However, where this may breach another contract or come outside a company's constitution, which provides for the awarding of remuneration, then no remuneration will be allowed. An equitable allowance would come outside of these: HL Guinness v Saunders.

2) 'Remoteness of gain' principle

Unfortunately we don't know if there is a point where an account of profits becomes too remote from the original breach. The leading case is Sinclair Investments v Versailles Trade Finance where the Court of Appeal said an account of profits should carry into investments (made with that money). This was not the ratio decidendi of the case however, and the Privy Council seems to make the opposite assumption in Reid.

Additional Remedy Against the Agent in Case of Bribes

The classic example of a breach of fiduciary duty is a bribe. This gives the principal an action in the tort of deceit in accordance with general tort law; compensation for the loss suffered. But as the agent has the bribe, the principal can make the agent account for profits and force the agent to hand it to them. However, he cannot do both as this would amount to double recovery: Mahesan v Malaysia Officers Housing Society. The third party who knowingly gave the bribe is also jointly and severally liable to the principal: Daraydan Holdings v Solland. The losses the principal may recover also include damages for the investigation costs and wasted time of employees: National Grid Electricity v McKenzie.

Personal Remedy against the third party

Where the third party causes the agent to commit a breach of fiduciary duty, then they may be sued by the principal for equitable compensation: Wilson v Hurstanger. 

Proprietary Remedy: the 'constructive trust'

All the above remedies have been personal remedies. But if the agent goes bankrupt, their assets wil be divided and distributed amongst creditors by rules of insolvency. With a personal remedy, the principal would recover very little, if anything. However, if he has a proprietary interest, he will secure priority over the over creditors. One of the most controversial questions in the law of equity is who receives the money (most often a bribe), the principal or the creditors?

If the agent profits by interfering with the principal's assets, then it is uncontroversial that the principal gets a proprietary remedy: Cook v Deek (Company directors negotiating contract for principal signed for themselves, held to be constructive trustees of company's contract/profits).

But why should a bribe go to a principal and not the agent, even though this does not usually represent gains the principal might have made?

In the Court of Appeal case of Lister v Stubbs there was held to be no proprietary remedy in such a case. The fundamental point in the ratio was that to establish a proprietary remedy, the principal must show that the assets somehow represent his property. Since the bribe comes from a third party, how can it be said the principal has a proprietary right over this? This received strong criticism, because if an agent accepts a bribe, the loss comes out of the principal's bank account and goes to the agent.

Just over a century later, the Privy Council held Lister v Stubbs to be wrong in:

AG for Hong-Kong v Reid. In this case the Privy Council was acting as the Supreme Court of Hong Kong, so it is worth noting at the outset that its decisions aren't binding on UK courts. But the court consisted of a powerful panel of law lords. Despite this however, there is no concrete ratio decidendi. They referred to the equitable maxim that 'equity looks on that as done what ought to be done' stating that this gives the principal a proprietary remedy over the bribe as it belongs to him. Although they didn't exactly explain as to why. The methods they used to get to this result involved creating a 'constructive trust' which the agent owes the principal. The confusion probably occurred because the fiduciary in this case embezzled and the invested the money. While there is no doubt the fiduciary could not keep these second generation profits, the Privy Council seems to assume that this cannot be done via an account of profits. They thus declared Lister as incorrect.

However, the reasoning in Reid disappears if we say an account of profits can reach into next generation gains. This is what Sinclair Investments v Versailles Trade Finance is prepared to accept, and thus a proprietary claim is not needed. But then, how can we justify giving the principal priority over other creditors? Lord Neuberger's judgment goes over the entirety of this area of the law, and concludes that Lister is the law as due to the doctrine of precedent the CA can't depart from its own decisions, even if the PC disagrees with it. This case set up an appeal to the Supreme Court, but unfortunately never made it there. So for now, Lister IS THE LAW. So in such a case where a breaching fiduciary goes insolvent, the principal cannot claim priority over the other creditors.

The Impact of a Breach of Fiduciary Duty on the Transaction with the Third Party

The result of this depends on 3 different situations:

1) The agent contracts with the principal in breach of fiduciary duty. In this case the contract is voidable and the principal may rescind it: Kimber v Barber. 

2) The third party induces the breach by the agent. In this case the contract is voidable: Daraydan Holdings v Solland. But since the right to rescind is a discretionary remedy arising in equity, it is on occasion refused: Johnson v EBS Pensioner Trustees. 

3) The agent, acting in breach of fiduciary duty, purports to form a contract with the third party on the principal's behalf. In such a case rules of authority are the main concern (Criterion Properties v Stratford Properties). In Hopkins v Dallas Group Lightman J stated that actual authority is conditional upon being exercised honestly and on the principal's behalf. However, if the act is within the agent's apparent authority, the principal may still be bound. Or of course, if the principal ratifies.