I. Introduction
From today's perspective it is difficult to conceive of the fiduciary landscape as was a little over 60 years ago when Len Sealy commenced his Cambridge PhD studies on the fiduciary duties of company directors and promoters. Cambridge did not then have an undergraduate equity course, nor a course on company law;Footnote 1 the newly published textbook by Gower contained almost nothing on directors’ duties;Footnote 2 Regal Hastings v Gulliver Footnote 3 (on company directors as fiduciaries) had not been officially reported and Boardman v Phipps Footnote 4 (concerning a solicitor as a fiduciary) was yet to be decided.Footnote 5 It is not that there was no law on fiduciaries, of course, just that it lay hidden in a mass of cases, with no useful and reliable guide to the territory.
In three pathbreaking articles in the 1960s, Sealy showed how such a task of map-making might be tackled, and delivered an early and extraordinarily perceptive account of the terrain. In contributing to this Centenary Edition, it is a privilege to look back at those three articles and reflect on their impact on current understandings of fiduciary law.Footnote 6 The three pieces are “Fiduciary Relationships” in 1962, “Some Principles of Fiduciary Obligation” in 1963, and “The Director as Trustee” in 1967.Footnote 7
With the benefit of hindsight, it is easy to see how firmly Sealy set the path for the future. Nowadays the most cited description of a fiduciary is Millett L.J.'s observation in Bristol and West Building Society v Mothew (a case dealing with whether a solicitor's conduct amounted to breach of fiduciary duty):Footnote 8
A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of the fiduciary.
For reasons which emerge later,Footnote 9 I suspect Sealy would have preferred – perhaps with some refinements – Leggatt L.J.'s more recent variation, set out in Al Nehayan v Kent:Footnote 10
fiduciary duties typically arise where one person undertakes and is entrusted with authority to manage the property or affairs of another and to make discretionary decisions on behalf of that person …. The essential idea is that a person in such a position is not permitted to use their position for their own private advantage but is required to act unselfishly in what they perceive to be the best interests of their principal.
Yet, whatever the criticisms made of these and many other descriptions of fiduciaries, the territory under observation is in plain sight. The paradigm case of a fiduciary relationship is that between trustees and beneficiaries.Footnote 11 Other settled categories include partners, company directors and their companies, solicitors and their clients, and agents and their principals. Besides these status-based fiduciaries, other individuals, often joint-venture partners, may also be found on the facts to be in relationships that are fiduciary, and thus to owe fiduciary duties.Footnote 12
All this matters not simply for the (seemingly elusive) satisfaction of a clear definition, but because remedies for breach of these fiduciary duties are generous, including both compensation for losses to the property under management and proprietary and personal disgorgement of any unauthorised profits made within the scope of the engagement.
In each of the sections which follow I endeavour to highlight a particular insight from Sealy's scholarship that continues to illuminate the modern fiduciary landscape. The first section reveals the outcomes of Sealy's early excavation work. He took the unsorted mass of cases in which courts had said they were dealing with “fiduciaries” and identified the legally significant facts which, he held, predictably delivered some distinctive form of equitable intervention. From this he worked backwards to identify the distinctive prohibitions that equity had effectively put in place in each of these classes of cases. For us, who are now used to starting with a clearly identified legal duty, and from that assessing whether the necessary legally relevant facts exist, out of which a predictable remedial conclusion can be expected, Sealy's approach looks like reverse-engineering of the highest order. But in truth it is the common law method in action. The relevant legal principles are built out of the mass of decisions in similar cases. The trick is to see precisely what makes the cases similar, and precisely what legal consequences – what rights and remedies – are impressed on those legally significant facts.
The next two sections turn to the modern cases to expose the relevance of Sealy's conclusions on the distinctive working mechanisms of the law relating to fiduciaries. Despite our routine insistence that the “distinguishing obligation of a fiduciary is the obligation of loyalty” (see the earlier quotation from Mothew), Sealy held that there is no positive or prescriptive obligation to act loyally, and indeed that such an obligation could not be legally enforced. Instead, specific and limited proscriptive obligations are imposed – the duty to avoid conflicts and not to take unauthorised profits. Further, the common translation of “the obligation of loyalty” into an obligation “to act in the interests of the counterparty” carries its own risks. Used loosely, as it so often is, it is apt to cover not only what is required of fiduciaries, but also what is required of all manner of power-holders, whether fiduciaries or not. With fiduciaries, the form of loyalty required is to act in the interests of the counterparty and in denial of the self-interests of the fiduciary. With power-holders, self-denial is not required; the loyalty required is merely good faith in pursuit of the endeavour: the power is to be used for its proper purposes, and not for the purpose of advancing the power-holder's separate interests (note especially that selflessness is not necessary – it is the “purpose” that is in issue, and self-interest may well be advanced, incidentally, by good faith proper pursuit of the endeavour). Sealy spells all this out, testing the principles in the complex context of directors (as fiduciaries) and shareholders (as non-fiduciaries) both being required to act “in the interests of” their companies. Moreover, here too the much-asserted prescriptive version of what is required cannot bear the burden of defining a legally enforceable obligation, and the law again resorts to proscription.
Finally, Sealy engaged in significant work on remedies, both proprietary and personal. Much of his proprietary analysis has now been realised in the cases, although in some limited respects not in a way that he welcomed. But with personal remedies, he was decades ahead of the curve in recognising the significance of equitable compensation.Footnote 13 Even at that early stage, Sealy described it as compensation for loss, and loss assessed against the counterfactual of performance,Footnote 14 but performance in managing the principal's assets, and thus directed at remedying or repairing the loss to the assets under the fiduciary's control, not common law damages directed at repairing the harm to the claimant herself. Where there are no such assets under the fiduciary's control, the remedy is not available. The issue has become a hot topic, but many of the answers to modern questions lie here in plain sight.
In all of these undertakings, Sealy held unerringly to the findings in the cases; he sought out the basic principles that underpinned the different findings; and he tested those against hard cases. Not for him the paradigm fiduciary context of a trustee of a straightforward trust of chattels, cash and equities, with a handful of beneficiaries to care for. He resorted to directors’ duties to their companies, companies with broad agendas and differing risk appetites, and a myriad of stakeholder interests to hold in the balance. In all of this, Sealy was both a true academic and a lawyer for the real world.
II. “Fiduciaries” as Revealed by Sealy
Sealy's first task in his 1962 article was to identify his targets and what the law required of them: when cases referred to “fiduciaries”, which individuals warranted the label and what consequences followed? The task was complicated by language. The early language in the cases was of “trust” and “confidence”, merging only later into the language of “fiduciaries”, and these terms all lacked a defined technical meaning. Generalising, C (our claimant beneficiary or principal) could be said to repose “confidence” in D (the defendant “fiduciary”) not only where D held property on trust for C in the technical sense in which we now understand a trust, but also when D undertook to exercise a power, to conduct a sale, to supervise an estate or business, or in some other way act as C's employee or agent. Confidence was also reposed where C was especially dependent on D's advice, perhaps because D was a professional adviser, or more familiar with the subject matter, or was a trusted servant or friend, or even simply a person of dominant character or position who was able to influence C's decisions. Confidence might also be induced where D, by words or conduct, represented that he would deal fairly with C, either in a transaction or in keeping information secret, or in some other way. In all these cases, a broad general principle applied: if a confidence was reposed, and that confidence was abused, a court of equity would give relief.Footnote 15
In these descriptions of all the various scenarios in play, we can now see the early foundations of what later became the modern common law of negligence, negligent misstatements and employment law, and the equitable rules on actual and relational undue influence, breach of confidence and the constraints on the exercise of powers. In many of these arenas we still describe the situations as ones where trust and confidence are reposed, but that terminology is not part of defining the technical legal requirements and legal consequences of the rules in play. And certainly we do not find it essential, or even useful, to think of all these areas as a seamless part of some coherent body of law on “trust and confidence”.
But there was something more in these early decisions, something not clearly captured in the scenarios just listed. This only became clearer with the adoption of technical meanings for “trust” and “trustee”, and a corresponding need for another word which could be used where the context was “like a trust, although not technically a trust”. This was where “fiduciary” came into its own, with “fiduciary relationships” and “fiduciaries” mapping onto “trusts” and “trustees”. The crucial analogy was noted by Fry J. in Ex parte Dale & Co.:Footnote 16
What is a fiduciary relationship? It is one in respect of which if a wrong arise, the same remedy exists against the wrongdoer on behalf of the principal as would exist against a trustee on behalf of the cestui que trust.
But, as Sealy noted:Footnote 17
[This] is really not a definition at all: although it describes a common feature, it does not teach us to recognise a fiduciary relationship when we meet one. Still less does it assist us when we are faced with a particular relationship and asked the practical question: does a certain principle of the law of trust and trustee apply?
The problem, as Sealy recognised, was that trustees are subject to all manner of obligations, enabling beneficiaries to pursue different claims delivering different remedies in different contexts. What we needed to know, in the context of fiduciaries, is which particular aspects of the “trust-like” relationship were apt to deliver which particular “trust-like” consequences. This was the goal Sealy sought in his early excavation of the cases which dealt with “fiduciaries”. It was his early scholarship which demonstrated that we must not trust verbal formulae: in these old cases, the label “fiduciary” meant quite different things in different contexts:Footnote 18
The word “fiduciary,” we find, is not definitive of a single class of relationships to which a fixed set of rules and principles apply. Each equitable remedy is available only in a limited number of fiduciary situations; and the mere statement that John is in a fiduciary relationship towards me means no more than that in some respects his position is trustee-like; it does not warrant the inference that any particular fiduciary principle or remedy can be applied.
This conclusion was a surprising one for its time, much as we now take it for granted. The term “fiduciary”, as used in these old cases, had to be examined and defined, class by class, to identify the rules which governed each class. Sealy identified five possible categories.Footnote 19
Category I captured those cases where the fiduciary had “control” of property which, in the eyes of equity, was the property of another. This class differs from trusts, in that it sweeps up all manner of relationships where the property in issue remains legally (and beneficially) the principal's. Moreover, Sealy used the word “control” in the sense that the fiduciary had power to dispose of the property, whether or not he had authority to do so. This category thus captures company directors controlling the property of their companies, bailees controlling the property of their bailors, agents for sale controlling the goods which were to be sold, or those running errands with cash to purchase the requested goods. All these people have control over property, and thus the power to use it for authorised ends or for unauthorised ones. A fiduciary who falls within this category, so Sealy determined from the cases, must keep the property separate from his own, and is debarred from trading with it for his own benefit. If the fiduciary fails to adhere to this proscription, the consequences are the same as those that apply to trustees, including entitling the principal to trace, to assert proprietary remedies, and to recover equitable compensation for unauthorised losses the fiduciary has caused to the assets under his control.
Sealy noted that some commentators would extend these Category I rules to cover conscious wrongdoers, such as thieves.Footnote 20 He disagreed. He suggests the better view is that although there is a continuing right of property sufficient to invoke the doctrine of tracing in these cases of wrongdoing, there is not, without more, a fiduciary relationship.Footnote 21 He did not elaborate, but the context suggests his possible reasoning. In all the “fiduciary” cases which Sealy examined, and from which he extracted his five categories, the material facts suggest the relationship cannot function effectively unless equity intervenes to offer protection to the fiduciary's counterparty. With thieves, such intervention is not essential to protect the victim's property rights: the victim has personal and proprietary claims against the thief, and against third-party transferees whether good faith purchasers or not, and to the extent that the thief uses the stolen assets to generate lucrative investment gains, these might be seen as more properly pursued by the state.Footnote 22
Category II is loosely defined as covering agents, or all cases where “the plaintiff entrusts to the defendant a job to be performed”.Footnote 23 Worded so broadly, the class clearly includes employees, Crown servants, solicitors, agents, partners, directors and promoters. All those in Category I are also likely to be in Category II, but not vice versa. However, this wide classification of “all those with a job to do” may mislead.Footnote 24 Sealy's description continues immediately with the nuance that this category covers only those cases where D has undertaken or is under an obligation “to act on another's behalf or for another's benefit” and, importantly, that this undertaking must also be one which carries with it “the assumption that [the fiduciary] will not act in his own interest” (emphasis added).Footnote 25 It follows naturally from that prohibition that, in this category, the fiduciary is barred from engaging in acts where his interest conflicts with his duty: in particular, there is a prohibition on self-dealing, taking fiduciary opportunities (i.e. the fiduciary taking for himself the benefit of something which might have been done for C), and taking bribes or secret profits.Footnote 26
Category III captures “Keech v Sandford Footnote 27 situations” (this being a case where the trustee was held unable to renew a lease for his own benefit even though it was impossible to renew it for his beneficiary). Sealy regarded this situation as within Category II if the real concern was with the propriety of the fiduciary's exercise of an option or discretion to renew the lease. Alternatively, he considered it might merit a distinct category if the renewal of benefits could be regarded as an accretion to the original property. Viewed anew, however, it might be more accurate to say that the latter circumstances would put the case in Category I: if the original property under a fiduciary's “control” was shares or a debt or an apple tree, we would not create a distinct category to cover the fiduciary's dealings with dividends, bonus shares, debt proceeds or apples: these would all be accretions to and properly part of the entitlements inherent in the original property. But this only serves to reinforce Sealy's instinct that “accretion” is not apt as a justification for the outcome, at least on the facts in Keech v Sandford, and his Category II allocation may be preferable. More importantly, it emphasises that we do a disservice to the law by hiding difficult analytical issues behind easy but uninformative invocations such as “the rule in Keech v Sandford”.Footnote 28
Category IV, which captures cases of undue influence,Footnote 29 and Sealy's “possible” Category V, which captures cases of breach of confidence,Footnote 30 can be dealt with more briefly. This is not because they are unimportant – far from it – but because they are now routinely regarded as self-standing categories, with their own well-developed core principles and doctrinal learning that is not, at least in its important detail, enhanced by remaining in the “fiduciary” fold.Footnote 31 After noting Category V as a category where fiduciary language was used, Sealy himself dismissed it from his own core four-category “fiduciary” fold for just this reason, and in his further writings he did not pursue Category IV examples as illustrating core fiduciary law. But dismissing undue influence and breach of confidence from the fiduciary fold is not the same as dismissing them from sight. “Fiduciaries”, especially those in Categories I and II, may still find themselves in situations where claims of undue influence, breaches of the fair-dealing rule, or breaches of confidence can be advanced against them. The elements of the claim and the remedies which then follow are not the same as those which follow from infringements of the rules of the Categories to which those fiduciaries belong. This is important. We rarely forget that Category I and II fiduciaries are individuals against whom claims in contract, tort and unjust enrichment might be brought, but claims relating to undue influence, breach of the fair-dealing rules and breach of confidence are often ignored, or pushed into the Category I and II rules. Some of the modern problems with “duties of disclosure” in the fiduciary context can be sourced to this failure.Footnote 32
Clearly one key lesson to be learnt from Sealy's breakdown of the cases into different categories is “the danger of trusting verbal formulae”:Footnote 33 the label “fiduciary”, at least as used in these older cases, can mean quite different things in different contexts. Each category comes with its own rules, and an individual labelled as a “fiduciary” in one of Sealy's identified categories does not automatically owe the duties described in any of the other categories.
More helpfully, having pushed to one side Categories IV and V, and wondered if Category III really deserves its own separate space, we are left with Categories I and II as the “core” fiduciary categories. These are the categories where the fiduciary has control of another's property or has undertaken to act on another's behalf and for that other's benefit and not the fiduciary's own benefit. Especially where these categories overlap, we have individuals – fiduciaries – who are in a position to manage at least some aspects of the property or the affairs of another, and must do so for that other's benefit and not the fiduciary's. This takes us full circle, in that this description does indeed capture obvious similarities between fiduciaries and trustees.
As indicated earlier, Sealy did not find this similarity with trustees useful as a definition of fiduciaries, nor useful as an indicator of what was required of fiduciaries and when. What Sealy sought to uncover were the legally significant facts, and the very particular obligations imposed by equity which arose from those facts. As lawyers, we do this routinely: if facts A, B and C, then there is a trust and certain legal obligations follow, with legal consequences if those obligations are breached; if facts X, Y and Z, then there is a legal duty to take care, and legal consequences follow for failure to do so.
In the context of fiduciaries in the core Categories I and II, the legally significant fact is not that a relationship is one of trust and confidence.Footnote 34 That might loosely be said of many relationships, including many contractual relationships, or relationships where we rely on others to take care, or to act appropriately in exercising their powers. It is not even that the relationships are “something like trusts, but not trusts” which is, if anything, even less informative as a description. Sealy was much more specific. He identified the legally significant facts as being those italicised earlier: namely, that the individual has control of another's property or has undertaken to act on another's behalf and for that other's benefit and not the fiduciary's own benefit. When those facts describe the situation in play, then certain special legal consequences follow.Footnote 35 Sealy identified those consequences as the imposition of various legal prohibitions on the fiduciary taking personal benefits, and there then followed remedies for breach which removed those benefits from the fiduciary.Footnote 36 These, in his view, were the key equitable duties and remedial interventions that matched the use of fiduciary language in all the cases within the factual scenarios in issue.
Sealy elaborated further on these prohibitions on taking personal benefits, identifying them as specific prohibitions on using the property under the fiduciary's control for the fiduciary's own benefit, prohibitions on self-dealing (though he did not use this term),Footnote 37 prohibitions on taking fiduciary opportunities (i.e. D taking for himself the benefit of something which might have been done for C), and prohibitions on taking bribes or secret profits. These were the distinctive equitable constraints imposed on individuals the courts had identified as “fiduciaries” in Categories I and II.Footnote 38
Any other duties owed by these fiduciaries, like the many other duties owed by trustees, were not distinctively “fiduciary”: not only were these other types of duties commonly owed by non-fiduciaries; they were also duties which, even when owed by fiduciaries, were not distinctively different from the duties owed by non-fiduciaries. For example, a fiduciary must comply with his contractual undertakings or with the terms of the engagement, or must exercise due care and skill,Footnote 39 in just the same way as a non-fiduciary.Footnote 40 The context may be different, and that matters of course, but no more than it matters in all cases: the various contractual and tortious duties owed by a surgeon, or a factory-manager or a school-teacher are different, but not so different that the general contract and tort rules become inapplicable.Footnote 41
The significance of all of this should not be underestimated. In Al Nehayan v Kent, Leggatt L.J. observed that:Footnote 42
While it is clear that fiduciary duties may exist outside [the established categories of trustees, partners, company directors, solicitors and agents], the task of determining when they do is not straightforward, as there is no generally accepted definition of a fiduciary. Indeed, it has been said that a fiduciary “is not subject to fiduciary obligations because he is a fiduciary; it is because he is subject to them that he is a fiduciary”: see Finn, Fiduciary Obligations (1977), p2 … If this is right, it simply begs the question of how to determine when a person is subject to fiduciary obligations if not by analysing the nature of their relationship with the person to whom the obligations are owed. (Emphasis added)
What Sealy's analysis does is provide for us, in remarkably clear and incisive form, the legally significant facts within any relationship which determine whether fiduciary obligations will be imposed.
So the real innovation in this early work done by Sealy lies in addressing the lawyer's need to know which facts are legally relevant, and precisely which obligations are then imposed, and, finally, what legal consequences will then follow if these obligations are breached by the individuals we call “fiduciaries”. Sealy provided exceptionally precise and practically useful answers to each of these questions.
III. “Fiduciaries” as Revealed in the Modern Cases: Proscriptive and Prescriptive Tensions
In large measure, the modern fiduciary cases reflect precisely the analytical distinctions set out by Sealy. We do not label as “fiduciaries” those who exercise undue influence, or who breach confidences;Footnote 43 we regularly say that not every breach of duty by a fiduciary is a breach of fiduciary duty; and, further, that those breaches labelled as “fiduciary” are confined to breaches of the conflicts and profits rules, with the relevant remedies then requiring the fiduciary to disgorge the unauthorised benefits acquired from the breach.
But it took over 30 years before this was articulated forcefully in the cases, most famously by Millett L.J. in Bristol and West Building Society v Mothew:Footnote 44
The expression “fiduciary duty” 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. Unless the expression is so limited it is lacking in practical utility. In this sense it is obvious that not every breach of duty by a fiduciary is a breach of fiduciary duty. …
… 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. … Mere incompetence is not enough. A servant who loyally does his incompetent best for his master is not unfaithful and is not guilty of a breach of fiduciary duty.
This has been emphatically reiterated by Lady Arden in the Supreme Court in Lehtimäki v Cooper:Footnote 45
There has been considerable debate as to how to define a fiduciary, but it is generally accepted today that the key principle is that a fiduciary acts for and only for another. He owes essentially the duty of single-minded loyalty to his beneficiary, meaning that he cannot exercise any power so as to benefit himself …. So “the distinguishing obligation” of a fiduciary is that he must act only for the benefit of another in matters covered by his fiduciary duty. That means that he cannot at the same time act for himself. If a person is a fiduciary then, as part of his core responsibility, he must not put himself into a position where his interest and that of the beneficiary conflict (“the no-conflict principle”) and he must not make a profit out of his trust (“the no-profit principle”). The fiduciary is likely to owe other fiduciary duties as well, such as the duty to act in the best interests of the person to whom the duty is owed. Section 178(2) of the 2006 Act expressly makes this a fiduciary duty in the case of company directors. It is not necessary to consider whether these duties are fiduciary duties in all cases. It is not enough that a person has agreed to perform certain duties by agreement. As the Privy Council held in In re Goldcorp Exchange Ltd. [1995] 1 AC 74, 98 “The essence of a fiduciary relationship is that it creates obligations of a different character from those deriving from the contract itself”. (Emphasis added)
The “fiduciary” label is thus reserved for individuals who – in Sealy's version, as in Lehtimäki and Mothew Footnote 46 – are obliged to put their counterparty's interests ahead of their own. This demand is rarely made by law. When it is, those made subject to it are described as fiduciaries. But the narrow label is correspondingly more informative: it is shorthand for a great deal of detailed law. The language then means something. Further, this narrowing does not limit the obligational landscape, just its labelling: for example, a trustee will owe fiduciary duties (of self-denial), but also duties in contract and tort, statutory duties and duties constraining the exercise of discretionary powers. So too, in different contexts, fiduciaries will owe a range of duties beyond the ones described, restrictively, as “fiduciary duties”.Footnote 47 Why it took so long to reach this point is not entirely clear.
However, in one other respect the transition has not been entirely successful. We have paid far less attention to defining the legally material facts that give rise to these tightly defined duties and their unusual defendant-focused remedies. This matters. Indeed, it matters a great deal. If we have not clearly settled on the legally significant facts, then we may be under- or over-inclusive in identifying the situations where the law imposes fiduciary obligations and affords disgorgement remedies. We do not make this mistake in other areas of the law: consider the consequences if we adopted rather loose and flexible rules around when a contract had been made, or when a trust arises, or when a duty of care is owed. Sealy's tightly circumscribed legally material facts capture only individuals who have control of another's property or have undertaken a role to act on another's behalf and for that other's benefit and not the fiduciary's own benefit.
By contrast, assertions in some judgments can be taken out of context and then read – or mis-read – as suggesting that the legally material facts are far looser. Consider Millett L.J. in Mothew:Footnote 48
A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. [Millett L.J. then continued with the conflicts and profits rules cited earlier.]
Similarly see Leggatt L.J. in Al Nehayan v Kent:Footnote 49
Thus, fiduciary duties typically arise where one person undertakes and is entrusted with authority to manage the property or affairs of another and to make discretionary decisions on behalf of that person. (Such duties may also arise where the responsibility undertaken does not directly involve making decisions but involves the giving of advice in a context, for example that of solicitor and client, where the adviser has a substantial degree of power over the other party's decision-making.[Footnote 50])
Such broad statements of the legally material facts giving rise to fiduciary obligations, read without context, might seem to support, first, an expanding fiduciary terrain to cover any situation where the “fiduciary” has a job to do for another or a discretion to exercise for another; and, second, pushed still further, as imposing prescriptive obligations on the “fiduciary” to act loyally in the interests of the other.
Whatever the superficial emphasis on a wider fiduciary context or a positive obligation of loyalty in Mothew and Al Nehayan v Kent, the other paragraphs in those judgments are all firmly rooted in the closely confined and exclusively proscriptive approach advocated by Sealy.Footnote 51 This is the general approach in the English authorities.
But if the judges have made little of these potentially looser statements of the legally significant facts and the possibility of reworking the obligations so as to impose prescriptive duties, commentators have not been so reticent. True, most commentators still hold to the orthodox restrictive context/proscriptive duties view,Footnote 52 but the fiduciary powers theory of the fiduciary relationship has now become a persistent theme in the modern literature. As Paul Miller puts it:Footnote 53
fiduciary duties are premised on the formation of a fiduciary relationship, which in turn arises upon the authorization of one person or a group of persons to exercise discretionary legal powers for another person or group in pursuit of other-regarding purposes.
This puts agents at the core of the whole fiduciary story. This in itself is unexceptional; it is entirely consistent with Sealy's vision. But, going further, it suggests that control of the discretionary or delimited power held by the agent lies at the heart of fiduciary regulation. That works a radical redefinition of the fiduciary terrain. This definition would not include the solicitors in Target Holdings Ltd. v Redferns Footnote 54 or AIB Group (UK) Plc. v Mark Redler & Co. Solicitors,Footnote 55 who simply had specific duties to perform, not discretions to exercise, yet were undoubtedly fiduciaries. By contrast, it would include large numbers of individuals who have discretions to exercise, and must exercise them in good faith and for proper purposes, but who are not traditionally regarded as fiduciaries, and are certainly not subject to the no-conflict and no-profit rules.Footnote 56 Consider the cases on contractual discretions,Footnote 57 discretions exercised by shareholdersFootnote 58 and bondholders.Footnote 59 and mortgagees exercising a power of sale.Footnote 60
Adding all these additional people to the fiduciary mix seems to confuse the different issues in the sightlines. If the fiduciaries in Sealy's Categories I and II have discretions to exercise, as they frequently will – and indeed this may be the most important part of their role – then the necessary (fiduciary) constraint identified by Sealy is one which requires the fiduciary, if he acts at all, to act in accordance with the undertaking he is seen to have given not to act in his own interests. This is the legal constraint which addresses the moral hazard of having agents (fiduciaries) in control of the principal's property or in control of acting for and on behalf of the principal. In addition, however, these fiduciaries, and the many other individuals who have discretions to exercise but who have not undertaken to act selflessly, will be subject to additional different legal constraints imposed to address the different risks that arise in the exercise of any discretion. These are not constraints directed at “selfless loyalty”. They are instead constraints designed to ensure the power is used only to achieve the ends for which it was given: the power must be exercised in good faith and for proper purposes. These are constraints which equity applies to the exercise of all discretions.Footnote 61 To the extent that the discretions exercised by the fiduciary are also subject to such constraints (as invariably they will be), these will operate in addition to the proscriptive ban on unauthorised personal gains.Footnote 62 Sealy clearly understood these different types of constraints on the exercise of discretions.Footnote 63
Returning to the concerns that are specifically fiduciary, Sealy also clearly understood that the necessary equitable intervention in the fiduciary context was not an intervention concerned to enforce the fiduciary's undertaking to act “in the interests of the principal”, and see to it that this undertaking was performed; but it was concerned to see that, if the fiduciary acted at all, he acted in accordance with the undertaking he had given not to act in his own interests. Footnote 64 Finn went even further in explaining the significance of this, and the necessity for this approach:Footnote 65
If a fiduciary's liability was to be determined by reference to whether or not the beneficiary's interests had in fact been served, an often impossible inquiry,[Footnote 66] more than curious consequences would follow. Much of the law of trusts, of agency and of companies would, for example, be rendered superfluous. The law of torts and of contract would be displaced from their now accepted roles in many relationships.
The crucial lesson to be taken from the modern cases is thus clear. It is not enough to have cases which set out clearly the legal obligations in issue for fiduciaries, and the consequences which follow from a breach of those obligations, essential though that is. It is also necessary to have cases which set out clearly the legally material facts which give rise to the imposition of those obligations. Without this, the obligations and their remedies are too easily applied inappropriately.
Further, once this is done by the judges, the lesson for academic commentators – as we mostly are – is that we must not then jumble up the different contexts which give rise to the different types of obligations and their distinctive remedies, thereby ignoring all the work of the courts in clarifying the necessary distinctions.
IV. Where Do Powers and Discretions Fit in the Fiduciary Map?
Because the powers and discretions exercised by fiduciaries are such a dominant feature of a fiduciary's role, it is worth expanding a little on what has been said in the previous section.Footnote 67 The label “fiduciary power” is not a term of art. It is sometimes used to indicate that the power must be exercised (a conclusion based on construction of the grant of power), but usually and more generally it is used simply to mean that the power is held by a fiduciary, and thus cannot be exercised for personal benefit. In addition, however, and as noted earlier, all discretionary powers must also be exercised in good faith (a subjective test)Footnote 68 and for proper purposes (an objective test).Footnote 69 These good faith and proper purposes constraints on the exercise of all powers (whether by fiduciaries or by others) are proscriptive, not prescriptive: the court's task is “an essentially negative enquiry”;Footnote 70 it is not to say which acts are for proper purposes, merely which acts are not.Footnote 71 Breach of these good faith and proper purposes restrictions is a breach of duty by a fiduciary, but is not a breach of some distinctively different fiduciary duty.Footnote 72
What the fiduciary context adds to this general law on judicial review of powers is the special context of “fiduciary loyalty” and the requirement that the fiduciary act in the interests of the principal and not in his own. This is significant. It makes one aspect of the court's task of judicial review easier, in that the fiduciary context and the no-conflict/no-profit rules identify certain ends (i.e. self-serving ends) which, if sought by the fiduciary, would indicate improper purposes.Footnote 73 This may be useful if the purpose of the enquiry is to impugn the exercise of power rather than simply pursue the fiduciary for disgorgement of the unauthorised gains.
But this does not help if the exercise of power is not self-serving. Then it is far harder to decide whether the fiduciary has exercised the power for improper purposes.Footnote 74 Simply noting that the power must be exercised “in the interests of the principal” (or for the purposes of advancing the interests of the principal) is not especially helpful. It is likely that all manner of ends might be properly pursued, but much harder to say which ends would be improperly pursued, and especially which ends other than those which are self-serving would be improper. At least in the trusts context there is the helpful guidance that powers must be exercised for the purpose of advancing the financial interests of the beneficiaries and not otherwise.Footnote 75 But there are exceptions to that bar, and further complications as to which ends are proper if the financial interests of the beneficiaries are not aligned (as when some beneficiaries have life interests and others have interests in remainder). If even this scenario is difficult, then the landscape outside the world of trusts is considerably more difficult. Sealy was well ahead of his time in considering the problems inherent in any exhortation to directors to “act in the interests of the company” when exercising their powers.Footnote 76 He suggested that the then current law which equated “the interests of the company” with the economic interests of its shareholders was ripe for review, since it put directors in the impossible position of being expected as a matter of business to consider the claims of the many competing stakeholder interests, while being legally answerable to only one.Footnote 77 Thanks to statutory intervention,Footnote 78 we now have the legal breadth he desired, but whether this helps is unclear. With such a broad spectrum of interests which directors must now consider, and which it might be “proper” to support, it will rarely be possible to show that directors have exercised their management discretions for improper purposes.Footnote 79 The same is true of the powers exercised by shareholders.Footnote 80 Instead, the principal illustrations of directors’ improper purposes typically concern exercises of power which affect some constitutional balance or shareholder governance role, not general management of the company's business.Footnote 81 In short, although there are legal constraints on the exercise of discretions, they are not aggressively interventionist; moreover, they address process only – good faith and proper purposes – not the merits of the decision.Footnote 82
The crucial lesson in all of this is that it is essential to distinguish between situations where the defaulting fiduciary's self-interested gain is in the sightlines and the remedy sought is disgorgement,Footnote 83 and situations where improper use of discretionary powers is in the sightlines.Footnote 84 When the focus is the latter, on abuse of power and not fiduciary gains, the goal is typically to set aside the exercise of power, and, if necessary, either recover from the third party any assets that had been improperly transferred or, more likely, seek compensation from the power-holder for their unauthorised loss.Footnote 85 These remedies apply not only where powers are exercised in bad faith or for improper purposes, but also where the power is exercised beyond its scope (i.e. where the power-holder has no authority to exercise the power, rather than merely acts within authority but improperly).Footnote 86
V. Remedies: Disgorgement and Equitable Compensation
Remedies define the value of rights, and in all three of his CLJ articles, Sealy devoted serious attention to the remedies available for the different breaches of duty a fiduciary might commit. He examined both proprietary and personal remedies for the disgorgement of the fiduciary's unauthorised gains, and was an early adopter – perhaps the early adopter – of the remedy of equitable compensation for any losses caused to the property under the control of Category I fiduciaries. Notice that the two remedies are directed at quite different ends, the first to breach of the fiduciary's proscriptive duties, the second to breach of the fiduciary's prescriptive duties.Footnote 87
Take disgorgement first, and the line between personal and proprietary disgorgement of a fiduciary's disloyal profits. Sealy expressly favoured the Lister v Stubbs Footnote 88 approach (a personal remedy for disgorgement of a bribe), and indicated in his later writing that he thought AG v Reid Footnote 89 (delivering a proprietary remedy in respect of a bribe) involved a wrong turning.Footnote 90 That might seem to put him out of step with the modern law and its comprehensive proprietary approach to fiduciary disgorgement as set out in FHR.Footnote 91 However, and perhaps surprisingly, this is not true. Sealy was clear right from the outset that proprietary disgorgement was the appropriate remedy if the fiduciary had generated his unauthorised profits by diverting to himself property which was under his “control” as a Category I fiduciary, and was therefore, in equity, the principal's property.Footnote 92 But he was also equally clear that it was the appropriate remedy if a Category II fiduciary had taken an opportunity which, if it was exploited at all, could in conscience only be exploited for the principal, since the fiduciary was obliged to act in the principal's interest and not in his own.Footnote 93 He was thus perfectly content with proprietary disgorgement in Cook v Deeks Footnote 94 and Boardman v Phipps,Footnote 95 and thought it should have been ordered in Regal Hastings.Footnote 96 But not in AG v Reid. Footnote 97 Some of that resistance is roundly based in his analytical work on Category II fiduciaries and his obligation-related view of the particular form of intervention that equity meted out in such circumstances: the bribes in the Crown servant cases he focused on were not “profits” taken from an opportunity which, if it was exploited at all, could only in conscience be exploited for the principal. In his view, it followed that although the bribe had to be disgorged, the principal had no claim to ownership in equity of the bribe, and the disgorgement remedy for self-interested misuse of position should thus be personal only, not proprietary.Footnote 98 In addition, some of his dislike of these Crown servant bribe cases may have been based on the potential reach of such a wide application of the proprietary rule to too many Category II fiduciaries “with a job to do”: see his later questioning of the appropriateness of applying the approach in Reid to all employees.Footnote 99 All this predated but thoroughly anticipated the reams of academic commentary written on this issue in the lead up to the Supreme Court decision in FHR.
However, Sealy's far more innovative work on remedies – at least to modern eyes – came in the form of his detailed consideration of equitable compensation.Footnote 100 Sealy was an early adopter of equitable compensation,Footnote 101 undertaking a careful analysis of Nocton v Lord Ashburton Footnote 102 and its possibilities and limits. Notice that this remedy seeks to repair loss caused because the fiduciary has not complied with his prescriptive obligations; it has nothing to say on cases where the fiduciary has breached his proscriptive obligations of self-denial.
Even at this early stage, Sealy described the remedy as compensation for loss, but loss assessed against the counterfactual of proper performance, where the detail of the particular prescriptive performance duty required of the fiduciary is therefore crucial, and the remedy is then directed at repairing the loss to the assets under the fiduciary's control; it is not common law damages directed at repairing any harm to the claimant herself and any consequential loss she may have suffered.Footnote 103 Where there are no such assets under the fiduciary's control – ie when the fiduciary is not a Category I fiduciary – the remedy of equitable compensation is not available.Footnote 104 In all of this, Sealy's thinking aligns perfectly with the approach in AIB v Redler Footnote 105 and Target Holdings,Footnote 106 and indeed his analysis perhaps uses language that might have quieted the modern detractors.
As it is, ever since Target Holdings, and perhaps even more so since AIB v Redler, the remedy of equitable compensation has been controversial.Footnote 107 For modern purposes, the first issue – the easier one – is the counterfactual of proper performance in assessing what losses the principal has suffered.Footnote 108 The cases indicate that the loss is assessed by examining, at the date of trial, the actual state of the “managed fund” under the control of the fiduciaryFootnote 109 and comparing it with the state the fund ought to have been in if the fiduciary had performed his duties to the letter. This is exactly the counterfactual used in all the modern cases. In AIB v Redler and in Target Holdings this counterfactual indicated that, had all gone well and had the solicitors done exactly what their duty required them to do, the principal would still have owned property that would have suffered the slump in the property market. Similarly, the counterfactual of perfect proper performance was applied in Main v Giambrone & Law,Footnote 110 but there the required “perfect performance” was that the fiduciary should hold the principal's deposits until a third party had provided compliant guarantees, which never happened: this meant that the fiduciary should still have had the deposits in hand, and was required to pay compensation when he did not.Footnote 111 Finally, in Auden McKenzie v Patel,Footnote 112 and unlike the previous cases, the fiduciary had no specific performance obligation, merely a discretion to exercise in managing the property under his control, and in these circumstances – although the judgment is more ambivalent – surely a court would not allow the defaulting fiduciary to insist that he might lawfully have exercised the discretion so as to deliver to himself, lawfully, exactly what he had unlawfully taken, and thus, on this view of “perfect performance”, he should escape any obligation to pay compensation.
The second issue is more difficult. Charles Mitchell is one of the more articulate critics of the approach taken in AIB v Redler and Target Holdings.Footnote 113 He suggests that these cases focused on the prescriptive duties of fiduciaries and ignored the remedies that might have been delivered in response to their proscriptive duties:Footnote 114 in particular, these cases ignored 19th century learning that regarded fiduciaries as “incapable” of entering into legally binding self-dealing contracts with their principals, holding that they could not do so because they were subject to an “equitable disability”. This disability means that fiduciary relationships are governed by a set of proscriptive rules that disable fiduciaries from acting in certain ways, rather than (or as well as) a set of prescriptive rules requiring them to perform certain duties, breaches of which trigger secondary obligations to pay compensation. On this analysis, the alternative remedy that should have been available to the claimant principals in Target Holdings and AIB was simply that the fiduciary was disabled from paying out the relevant funds in an unauthorised fashion, and so must replace them. But those five closing words may indicate the flaw in the logic. Of course we can describe fiduciaries as “disabled” from acting in a way that is unauthorised or self-interested,Footnote 115 but the truth is that that the fiduciary is all too able to act in these ways. This is precisely why the law imposes duties on the fiduciary not to act in those ways, and then affords remedies for breach. By contrast, describing someone as “disabled” from doing something is more naturally appropriate, and certainly analytically only appropriate, when the claimant is immune from the defendant's powers to so act. For example, we might properly say that a defendant is disabled from imposing contractual obligations on a non-contracting party. If the defendant attempts to do that, the claimant need do nothing in response; she is simply unaffected by the defendant's acts. By contrast, when a fiduciary acts in ways that he should not, a real change is effected: the funds are physically depleted, and the principal must actively enforce her rights to remedy the situation. Moreover, when the claimant asserts her rights, we come full circle to asking what the performance duties of the fiduciary were, and what shortfall to the claimant's assets has been caused by the fiduciary's shortcomings in performance.
In short, in his discussions of both proprietary disgorgement and equitable compensation, Sealy's careful analysis of the cases led him to conclusions that anticipated by some decades the position we now find ourselves in.
VI. Conclusion
My conclusions can be brief. Some lessons from Sealy's 1960s pieces are vital lessons of substance. I need not repeat those here – they are summarised in my introduction. Some lessons are lessons in method: rigorous analysis set out in a clear, simple and intelligent fashion always provides an opportunity for serious learning; to that end, it is crucial to read carefully and ask “Why?” and “So what?” at every step. Some lessons are lessons in our own discipline: the law must work in practice, and deliver ends we want to live with. And, finally, all these are lessons that require our constant attention: the law is not fixed; it has to move with the times. Sealy ended his 1995 reflections on his own early work with the lines:Footnote 116
Neither the ossification of principle endemic in the English [judicial] approach nor the seeming abandonment of principle seen in the rulings of the courts elsewhere appears to be an ideal starting point for the development that the twenty-first century will need.
That seems as good a place as any to end. It captures beautifully Sealy's own scholarly characteristics of using robust and principled doctrinal analysis to serve modern needs. It also tells us to get on with the job. The task is not done.
