The test of time
13 March 2006
Bribe and prejudice — Supreme Court decision on bribes or secret commissions received by fiduciaries
24 July 2014
21 February 2014
19 November 2013
1 October 2013
28 February 2014
One of the great joys of commercial chancery law is to witness, and be part of, the process of the continuing evolution of principles of equity. The exploitation of corporate opportunities is a case in point. The rule preventing trustees from making unauthorised profits and from getting into positions of conflict were well established by 1896, when the House of Lords explained that their purpose was not to punish immoral behaviour, but to keep fiduciaries up to the mark and prevent them from succumbing to the risk of temptation (Bray v Ford (1896)).
The rule has always been a strict one and in some cases it might be thought to go further than is necessary to do justice. In Boardman v Phipps (1967), trustees had a shareholding in a company. The trustees' solicitor used information obtained through the trust to acquire control of the company and made a large profit out of this opportunity. A bare majority of the House of Lords held that the solicitor was liable to account for the profit which he had made out of his fiduciary position. However, because he had acted honestly and openly, he would be entitled to a 'liberal allowance' for his time and trouble. Later decisions have extended this liberal allowance to situations where the fiduciary has been more deserving of criticism, as long as there has been no actual dishonesty.
Today the no-profit rule and the no-conflict rule apply in a wide variety of contexts, including for company directors, trustees and professionals with fiduciary obligations. The common feature of all these cases is that the defendant owes a duty of loyalty to the claimant, so that there is not a level playing field.
The latest word on the subject is the decision of Mr Justice Lewison in Ultraframe (UK) v Fielding (2005), a 487-page judgment which was given within two months of a 95-day hearing. The case arose out of Ultraframe's allegations that Fielding had effectively stolen its business in the field of conservatory roof design and Fielding's allegations that Ultraframe had sought to destroy his business. The judgment clarifies and develops the no-profit and no-conflict rules in a number of important respects:
Lewison J's masterly judgment has shown how principles developed in the 19th century remain effective tools that can be moulded to fit 21st century situations. The decision answers many questions but also throws up many more. It is likely that future cases will focus particularly on the factors which equity will take into account in exercising its discretion to order an account of profits, including the causal link which needs to be proved. Decisions of Lord Hoffmann over the past decade have done much to clarify the legal analysis of causation in the context of the law of negligence; what is now needed is something equivalent in the field of equitable compensation.
David Halpern is a barrister at 4 New Square