Constructive Trusts II
Fiduciaries
Constructive trusts may be imposed where fiduciaries, such as company directors, partners etc., benefit from business opportunities belonging to the company, partnership, principal, employer etc. The principle behind constructive trusts is that the particular opportunity is in the nature of the property of the beneficiary or other protected person and belongs to him or her.
A fiduciary relationship applies to a range of circumstances and positions in which a person might be able to take advantage of a dominant position in respect of another. Where a trustee or other person in a fiduciary relationship derives benefit or profit from his position, the law will require that such benefit is held on behalf of the beneficiaries under the terms of the trust or other relationship.
Types of Fiduciaries
The principle applies to all fiduciaries, which is a much wider category of persons than trustees. Fiduciaries are persons who stand in a position of authority, influence or power in respect of another.
It can include company directors in respect of the company, employers in respect of employees, employees in respect of the employers, confidential information and trade secret, partners in respect of their business dealings (mutual duty of good faith), bankers and solicitors in respect of their clients.
A fiduciary relationship applies to personal representatives (to the beneficiaries), company directors (to the company), partners(to each other), joint owners of the property (to each other), solicitors (to their clients), bankers (to their customers) and agents (to the principal). A fiduciary relationship will also apply, where a person is in a position of influence, due to another’s vulnerability.
Employees may owe quasi-fiduciary duties to their employees, at least in some circumstances and to some extent. This is often expressed as a duty of fidelity / good faith. The duty is not as strict as that which applies to true fiduciaries. Where there is a breach of duty, for example involving the misappropriation of proprietary information or a business opportunity, a constructive trust may be imposed.
Trustees
In the case of trustees, this duty is very strict. If, for example, a trustee comes across a business opportunity and avails of it himself, he must hold it on trust under the trust.
He will have to account to the trust for the profits. If there are losses, the losses will not be borne by the trust. Effectively the trust gets the benefit of any upside but does not suffer any downside.
In the case of trustees, the principle applies irrespective of whether the trust would have been in a position to benefit from the prospective transaction or opportunity. In the case of a trustee, fraud or dishonesty is not required. It is a basic part of the principle that a trustee must not benefit from his office other than in accordance with a valid charging clause in the trust or will trust.
Constructive Trust as Graft
The best-established application of the principle of a constructive trust arises where a trustee obtains benefits using trust money. However, the principle is wider.
Where the trustee takes advantage of his position, in order to obtain benefits which he would not otherwise have received, he must generally hold these benefits under the trust itself by way of constructive trust. It is said that this further constructive trust is a “graft” on the original principal trust.
The principle applies, even where the trust itself could not have taken advantage of the opportunity or benefit. It follows from the principle that trustees must be beyond reproach. He may not take advantage of his position, nor may he appear to do so. He may not judge the matter of conflicts of interest himself.
Fiduciary Duties
Fiduciaries do not owe the same strict duties as trustees. However, they must not generally benefit from their position other than where this is expressly allowed or provided for.
Fiduciaries will be held to the same principles as trustees in relation to dealing with a protected party or with third-party opportunities affecting the assets of the protected party. For example, a company director may come across a business opportunity in the course of business.
If he takes advantage of if he will generally have to hold the benefit under a constructive trust for the company if it becomes profitable. As for the trustee, the protected party to whom the fiduciary duty is owed takes the benefit of the upside of the opportunity under a constructive trust.
Relief
In some cases, it may be possible for the protected party with independent advice and full knowledge to waive the opportunity in favour of the trustee or fiduciary.
In some cases, the trust deed (or will trust) itself may permit the trustee to do what might otherwise be a breach of the trust. Most trusts provide some measure of protection against self-dealing and conflicts of interest on pragmatic grounds. For example, a professional trustee must, of necessity, be entitled to charge remuneration.
There are common mechanisms to provide relief for fiduciaries for reasons of practical necessity. For example, agents and solicitors may receive remuneration. Company directors may receive remuneration and other benefits from the company, subject to a mechanism which requires disclosure.
The fiduciary may be relieved in the relevant deed, agreement, appointment or company constitution. He may be relieved contemporaneously with the relevant transaction or event in some cases, where the protected party can be shown to have freely consented with appropriate independent advice. Non-trustee fiduciaries may be able to retain the benefits where they can show that they have acted reasonably in the circumstances.