I. Rights and Remedies
The law on fiduciaries is in something of a mess. This is now most obvious with proprietary remedies for disgorgement of fiduciary gains,Footnote 1 although problems also exist elsewhere.Footnote 2 Since so much private and commercial activity is now managed by fiduciaries, it is imperative that we have robust rules which indicate precisely what the fiduciary role requires and what consequences will follow from any shortfalls.
This article seeks to provide a simple path through the terrain. It revisits the fundamental doctrines associated with fiduciaries and with proprietary remedies, and advances a systematic structure for the analysis of proprietary and personal remedies for the disgorgement of fiduciary gains. In so doing, it highlights a number of dangerous pitfalls arising out of the lax use of some of our most common equitable formulae. In particular, it identifies how the equitable duty to account, the maxim that “equity treats as done that which ought to be done”, and the use of tracing to access investment gains have each, in different ways, contributed to the troubles which now beset this area.
We need rules which enable us to provide clear answers to simple questions. At the most basic level, if the director of a haulage company buys an adjacent high-rise development site on his own account, we need to know what difference it makes to the question of breach, and to the remedies for breach, that the sale was publicly advertised or offered privately to the company, or that the director used only his own resources or alternatively made use of the company's assets in the development endeavour, or that the company was looking to expand its premises, or even that it simply made business sense to acquire such a well-located site. At the moment the answers are far from clear.
The model proposed here emerges out of the foundational rules on fiduciary loyalty. On careful analysis, these rules suggest that there are only three doctrinally distinguishable categories of disloyal gain which a fiduciary might be required to disgorge:
(1) gains derived from any use of the principal's property;
(2) gains derived from opportunities which are within the scope of the fiduciary's field of endeavour on the principal's behalf;
(3) gains derived from opportunities which arise solely because of the fiduciary's role.
These three categories require further elaboration so that their content is clear, but the facts of any case can then be easily and predictably classified. These categories provide a simple analytical hierarchy. If a gain falls within categories (1) or (2), then the resulting disgorgement remedy is proprietary. If the gain is outside those categories, but within category (3), then the disgorgement remedy is personal. If the gain is outside all three categories, then the fiduciary has not behaved disloyally and the gain need not be disgorged at all.
The assertion that remedies are proprietary in categories (1) and (2) requires careful argument. The conclusion cannot be built on the fiduciary's mandatory obligation to disgorge nor on property analogies in describing the gains, despite earlier efforts in that direction. What is needed once again is a detailed consideration of the role and function of the rules on fiduciary loyalty. These fiduciary rules are proscriptive not prescriptive: they insist that the fiduciary must not make disloyal gains; they do not prescribe what the fiduciary must do. This matters where remedies are concerned, and indeed it is here that lax use of equitable formulae has been especially problematic. In particular, we might consciously notice that proprietary remedies are generated by operation of law only when it can be said not only that the defendant must not have the property, but also that the claimant must have it. This is a far tougher test, but one that is implicitly adhered to in all cases of constructive trust outside the context of fiduciary gains. Consistency demands its application here too. It follows that the proscriptive fiduciary disgorgement rules cannot of themselves provide the necessary underpinning for proprietary remedies. But there is a twist. Given the purpose and function of the fiduciary relationship, choices actually made by the fiduciary have consequences. Then the principal can sometimes make out the additional requirement for a proprietary claim. As it turns out, that is possible with category (1) and (2) gains, but not with category (3) gains.
In short, this article has two objectives: one specific, which attempts to articulate a workable approach to proprietary remedies for a fiduciary's breach of the duty of loyalty, an approach which is inherently applicable to all proprietary remedies; and one wide-ranging, which questions the modern and often inappropriately mechanical use of some of our more familiar equitable formulae.
In delivering these ends, the first section sets out the status quo. The second revisits favoured explanations of fiduciary loyalty. The goal is to extract a more compelling classification of the paradigm fact patterns of fiduciary breach which will deliver either proprietary or personal remedies. The next section looks at particularly contentious equitable formulae, and proposes a more thoughtful and careful use of their powerful mechanisms. The final section summarises the revised rules which might, if adopted, deliver predictable and defensible answers to the perennial question of when the remedy for fiduciary disloyalty is proprietary.
II. The Current State of Play
For almost two decades, the remedies for fiduciary disloyalty seemed well-settled although perhaps not well-liked.Footnote 3 But the English Court of Appeal in Sinclair v Versailles Footnote 4 (the facts are footnoted) upset complacencies by delivering a carefully considered judgment which reverted to earlier orthodoxies, insisting that its stance was not only required by precedent, but was amply justified on the grounds of both principle and policy.Footnote 5
Predictably, the decision reignited old debates surrounding the protections accorded to parties who leave their affairs in the hands of fiduciaries.Footnote 6 All agree that the fiduciary cannot keep the disloyal profits; they must be paid over to the principal.Footnote 7 The fiduciary must “account in equity”. The Privy Council in A.G. for Hong Kong v Reid Footnote 8 had suggested that it then followed, from the very nature of things, that such a remedy would be proprietary if the gain was identifiable, since “equity treats as done that which ought to be done”.Footnote 9 This had been the dominant view for decades, both in England and in many commonwealth jurisdictions. It was a view which had explicitly rejected an earlier Court of Appeal decision in Lister & Co. v Stubbs Footnote 10 which held that proprietary remedies would lead to such unacceptable consequences for third parties that they could not possibly represent the law. In short, at least in relation to bribes, Reid took one firm view of what ought to be done, and Lister another; commentators were divided.Footnote 11
The debate needed firm resolution, and in Sinclair v Versailles,Footnote 12 the Court of Appeal refused to follow Reid, affirmed Lister v Stubbs, and limited the circumstances in which a constructive trust could be imposed over fiduciary gains to cases where the gain was derived either from the disloyal fiduciary's use of the principal's assets (category 1) or from opportunities or rights which were “beneficially”Footnote 13 or “properly [those] of”Footnote 14 the principal (category 2). The property analogies are plain.Footnote 15 By contrast, Reid had focused on obligation, and insisted the remedy was proprietary, and inevitably so, by virtue of the mandatory disgorgement obligation owed by the fiduciary.Footnote 16 Dramatically different outcomes followed: in relation to bribes, Sinclair and Lister insisted the remedy was personal; Reid insisted it was proprietary.
The difference matters because all sides are agreed that if the principal's remedy is proprietary then it carries with it a number of significant advantages. Most obviously, it gives the principal insolvency protection as against the fiduciary's creditors.Footnote 17 It also entitles the principal to trace into any identifiable exchange products and to assert a proprietary interest in those too.Footnote 18 And, finally, it entitles the principal to follow the bribe or its traceable proceeds into the hands of any third party recipients who are not bona fide purchasers for value without notice of the principal's interest, and to assert the principal's proprietary interest as against those third parties.Footnote 19 All this significantly privileges the principal, and all these benefits are contingent on the initial claim to the disloyal profits being proprietary.Footnote 20
The clash between Sinclair and Reid has been further fuelled by the latest Court of Appeal decision on this issue. In FHR European Ventures LLP v Mankarious,Footnote 21 the Court purported to follow Sinclair, as it must, but concluded, on facts which appear materially indistinguishable from Lister, that the remedy was proprietary, and deservedly so as a matter of both precedent and policy. Given this stand-off, proponents of one camp need to do a lot more work to persuade proponents of the other. The issue is thus ripe for Supreme Court analysis.Footnote 22
The right answer cannot be gleaned simply by recourse to precedentFootnote 23 or to the eminence of academic support:Footnote 24 both sides are impressively well-matched. Both sides can also call into play compelling (and often common) policy concerns in advancing their conflicting causes.Footnote 25 Nor can the right answer be gleaned from international practice. Much might be made of the fact that the Court of Appeal appears to have set its face against the rest of the common law world,Footnote 26 but here appearances belie the facts. These comparator countries typically regard the constructive trust as “remedial”,Footnote 27 and just when proprietary consequences really matter those courts may well decide that a proprietary remedy should be denied.Footnote 28 On insolvency, but also more generally, this discretionary approach to proprietary entitlements has little to recommend it. In short, these international comparisons make it plain that what is really in issue is not the outcome in these cases, but the rationale for delivering it.
If this potted history tells is anything, it is that we have not yet articulated a truly compelling legal rule. Some commentators doubt we ever will, especially after all this time and rather unrelenting debate.Footnote 29 Rather going against that counsel of despair, and as indicated in the introduction, I suggest there is a different route through the proprietary remedy minefield. It is one that gives proprietary remedies a greater role than Sinclair admits, although not the universal role Reid envisages.
III. The Paradigm Fact Patterns in Fiduciary Disloyalty: Asking the Right Questions
In defining the proprietary incidents of a fiduciary's liability to disgorge the profits of disloyal conduct, there is an obvious need to categorise the factual situations to which solutions are needed. The simplest possible approach would be to have one category only, and see disgorgements of fiduciary gains as either always proprietary (as in Reid Footnote 30) or always personal.Footnote 31 Such simplicity has its own inherent attractions, but if the ongoing debate in this area tells us anything, it is that this will not do. As the previous section indicates, no jurisdiction has found it attractive and uncontroversial to adopt either extreme. Moreover, the doctrinal shortcomings inherent in either of these simple options emerge clearly from the analysis proposed below.
Equally, two categories will not do. It is evident from Sinclair v Versailles, and indeed from all the cases before and since, that there is no accepted opposition between cases where the fiduciary uses the principal's property (universally conceded to deliver proprietary consequencesFootnote 32) and all other instances of fiduciary disloyalty, with proprietary remedies for the former but not the latter. There is some intermediate category, not clearly defined, where the fiduciary's principal is also entitled to privileged proprietary protection.
As noted earlier, Lord Neuberger in Sinclair v Versailles defined it thus: proprietary remedies are available where the gain is derived either from the disloyal fiduciary's use of the principal's assets (category 1) or from opportunities or rights which were “beneficially”Footnote 33 or “properly [those] of”Footnote 34 the principal (category 2); otherwise the remedies are merely personal (category 3). This classification uses the language of property to define the intermediate or second category, and that implicitly justifies the further consequence that disgorgement in this category is proprietary.Footnote 35 But this classification system faces two problems. First, opportunities are not property,Footnote 36 so we need to find some alternative and independent justification for the proprietary consequences which attach to this category. And, secondly, the boundary between this second category and the third non-proprietary category is most unclear.Footnote 37 This will not do. Without clear boundaries, the classification system loses its practical value as a tool for distinguishing one class of cases from another. There are far too many fiduciary cases where it is this very question which is in issue.
Perhaps surprisingly, the classification difficulties on this scheme are apparent even in relation to bribes and secret commissions, long considered the simplest of cases to classify. In Sinclair itself, the Lister and Reid bribe cases were regarded as clearly in category 3. By contrast, in Mankarious, using the same set of categories, the secret commission was equally clearly regarded as falling within category 2.
These problems are inordinately greater in the fiduciary “opportunity” cases. The analysis in Sinclair makes it plain that category 2 is small, but which small class of opportunities falls into category 2 and which into category 3? The dividing line is too ill-defined even to be sure how the paradigm cases of Keech v Sandford,Footnote 38Cook v Deeks,Footnote 39Boardman v Phipps Footnote 40 and Regal (Hastings) Ltd. v Gulliver Footnote 41 should be classified. The difficulty is not that a given set of facts is amenable to classification under more than one head. That is readily resolved: the principal can simply pursue the most advantageous remedy. The problem is rather that it is impossible to say whether a given set of facts is or is not amenable to classification within the category at all.
Other commentators have sought to address this difficulty by tweaking this intermediate second category, and including in it only those opportunities which the principal would have obtained were they not intercepted by the fiduciary (termed deemed agency gains, and thus, it would seem, capturing Cook v Deeks,Footnote 42 but perhaps not the other paradigm cases mentioned above, and certainly holding Lister and Reid to be instances where the remedy should be personal),Footnote 43 or alternatively including in the category all those opportunities which the principal could have obtained were they not intercepted by the fiduciary (thus, it would seem, perhaps rather oddly excluding Keech v Sandford Footnote 44 – given the lessor's refusal to renew for the beneficiary – but perhaps capturing the gains in the other three paradigm cases, although that is not certain).Footnote 45 The problem with these refinements is not simply that they introduce further distinctions which are no more certain in their application to different sets of facts, but also that they leave too much control over the outcome in the hands of the defaulting fiduciary. This is precisely the problem which fiduciary rules and their remedies are designed to forestall. Disgorgement of gains is required whether or not the fiduciary acts in good faith, or honestly, and whether or not the principal could have or would have taken advantage of the opportunity in question. It would be odd, and most unsatisfactory, if the distinction between personal and proprietary disgorgement were then to turn on these quite elusive factual matters. Better that the distinction rest on other more durable and general features of the particular fiduciary role, and in particular the specific undertakings inherent in it. This is what is proposed below, with the consequence that a then redefined category (2) is dramatically larger than that proposed either in Sinclair or by the other commentators noted here.
In addition, Lord Neuberger leaves hanging the issue of what is to happen with secondary profits (typically profits generated from the successful investment of the initial disloyal fiduciary gainsFootnote 46). These too must be dealt with in a principled fashion. In Reid, their capture by proprietary means followed as a matter of course since the principal had a proprietary claim to the initial pre-investment fiduciary gain. In Lister, the diametrically opposite solution was deemed apt: a personal claim to the initial fiduciary gain did not generate a claim of any sort to its secondary or traceable investment profits. In Sinclair, the court proposed a third way. It agreed (obiter) that the fiduciary must be stripped of all the profits of the breach, but was uncertain as to how this imperative might lead to the automatic capture of secondary profits when the starting point was only a personal claim.Footnote 47 This issue must be dealt with properly. It does not require a fourth category, but it does require careful thought about the rules on fiduciary loyalty, and then a proper and limited use of the equitable tracing rules.
But return to the main problem. To work well, any classification system must not only provide more certain answers to the practical problem of classification of factual scenarios; it must also facilitate simple theoretical justifications for proprietary consequences in some categories but not in others. The scheme proposed here meets those twin needs. It also has the added advantage of clarifying the persistent problem of the disjunction between the two recognised limbs of the rules on fiduciary loyalty, the “no conflict” and “no profit” rules, a disjunction which is itself apt to confuse.
These twin fiduciary rules are described in innumerable cases and commentary. For now it is sufficient to take one much-cited illustration, from Chan v. Zacharia,Footnote 48 where Deane J. notes that the fundamental rule that obliges fiduciaries to account for disloyal gains has two separate themes,Footnote 49 commonly labelled the “no conflict rule” and the “no profit rule”:
The first is that which appropriates for the benefit of the person to whom the fiduciary duty is owed any benefit or gain obtained or received by the fiduciary in circumstances where there existed a conflict of personal interest and fiduciary duty or a significant possibility of such conflict: the objective is to preclude the fiduciary from being swayed by considerations of personal interest. The second is that which requires the fiduciary to account for any benefit or gain obtained or received by reason of or by use of his fiduciary position or of opportunity or knowledge resulting from it: the objective is to preclude the fiduciary from actually misusing his position for his personal advantage.
Although nothing turned on the particular language used here, nor was likely intended by it, it is notable that gains from the “no conflict rule” would be “appropriate[d] for the benefit of the person to whom the fiduciary duty is owed”, whereas gains from the “no profit rule” would be subject “to account”. The language is proprietary in the first instance, but personal in the second. This is the same divide identified by Newey J. in Cadogan Petroleum plc v Tolley,Footnote 50 where, re-wording and amalgamating the categories identified in Sinclair, he noted that:Footnote 51
As I see it, it is also apparent from Sinclair that a distinction is to be drawn between (a) the exploitation by a fiduciary of property or opportunities subject to fiduciary obligations and (b) other exploitation by a fiduciary of his position.
As it turns out, this distinction between “no conflicts” and “no profits” (or – more informatively – between “conflicts of duty and interest” and “misuse of position”) does indeed appear to mark the long elusive crucial divide between proprietary and non-proprietary disgorgement. It is also a distinction which can be confidently applied to different factual contexts.
With these two categories as the new markers, the three categories proposed here are as follows, elaborating slightly on the outline in the introduction:
(1) gains derived from any use of the principal's property;
(2) gains derived from opportunities which are within the scope of the fiduciary's field of endeavour on the principal's behalf (i.e. gains involving “conflicts of duty and interest”, judged with very careful regard to issues of scope for reasons explained below); and
(3) gains derived from opportunities which arise solely because of the fiduciary's role (i.e. gains typically described as arising from “misuse of position”, but with that term defined precisely, as described below).
More needs to be said about each of these categories. In particular, something more needs to be said about what counts as “property” and “use of property” in category (1), and what counts as a “conflict of duty and interest” to bring a case within category (2). Both of these issues have created problems in modern fiduciary law.
The important question for now, however, is why this division should carry the day where others have failed to persuade. The answer, unsurprisingly, takes us back to first principles in analysing fiduciary loyalty.
Fiduciaries are required to act in the best interests of their principals. Within the scope of their appointment, they must exercise their manifold discretions in their principals' interests, and not in their own. Sometimes endpoints are defined (e.g. defined investments must be pursued), but more typically the outcomes are left to the fiduciary's discretion. Legal regulation of the fiduciary's conduct cannot then follow the contractual model. It must instead pay regard not to outcomes, but to the manner in which discretions are exercised:Footnote 52 carefully, in good faith, for proper purposes, taking into account relevant considerations, and loyally. This last constraint – the requirement to act loyally – is the concern of fiduciary law. It requires the fiduciary to act selflessly, to exercise self-denial;Footnote 53 it proscribes rather than prescribes, and in doing so it denies to the fiduciary any benefits that might be obtained disloyally, and in particular it requires disgorgement of gains which involve conflicts of duty and interest or misuse of position. Equity's approach to these categories has been described as punitive, in the sense that it matters not that the fiduciary acted honestly, or in good faith, nor that the principal could not have derived the benefit itself, or was not harmed and may indeed have benefited. All such gains, derived from any self-serving use of the principal's property, any conflicts, or any misuse of position (which indeed turns out to mean any use of position) must be disgorged. The normative justifications for this general obligation to disgorge disloyal gains are not in dispute: given a fiduciary's power and discretion, even in conducting the simplest of tasks, loyalty can only be promoted by such deterrence. Any disloyal gains must be disgorged because the fiduciary must not have them, even though there is often no particular further and additional reason why the principal must have them. These gains are therefore often described as windfalls to the principal.
But these fierce proscriptive fiduciary rules are not ends in themselves. They are designed to serve the primary goal of fiduciary loyalty. That requires the fiduciary to act in the best interests of the principal in dealing with the principal's property or in pursuing investment opportunities within the defined scope of the fiduciary's appointment. This has consequences. Although the fiduciary cannot generally be sued for failure to achieve a defined endpoint, that is not the end of the matter. If the fiduciary selects a particular use of the principal's property, or selects an investment opportunity which is in the line of business which it is his obligation to pursue on behalf of the principal, and purports to select it for himself, that stands as proof positive that of all the range of possible choices the fiduciary might have made in the principal's interest either with the principal's property or within the defined line of business, this was regarded as most advantageous – indeed, so advantageous that the principal secretly elected to take the benefit personally. In those circumstances, the fiduciary himself has defined the most desirable endpoint out of the range of infinite choices otherwise available, and in those circumstances the principal can insist that this is the precise endpoint which the fiduciary ought to have achieved for the principal, and if it has in fact been achieved by the fiduciary, then the fiduciary holds that benefit for the principal.Footnote 54 The general discretionary obligation to act in the best interests of the principal has been given a defined endpoint by the fiduciary's own discretionary choice, and that is a choice which the courts will specifically enforce in favour of the principal on the principal's request.Footnote 55 The principal can adopt the fiduciary's choice. The remedy is proprietary. This proprietary conclusion requires further justification, but that can wait until later, when we turn to considering the proper remit of our various equitable formulae, and in particular the formula that “equity treats as done that which ought to be done”. That formula does not convert every equitable obligation into property, but it serves that purpose in this particular context.
By contrast, this same analysis cannot apply to gains which are derived exclusively from misuse of position.Footnote 56 To support that assertion, something more needs to be said about misuse of position. The expression has no settled meaning in fiduciary disgorgement cases,Footnote 57 nor in related statutesFootnote 58 or commentary, but must be given one here. The expression is sometimes used to describe any gain made by a fiduciary without the consent of the principal: true, all disloyalty could be described rather loosely as a misuse of position, but here we need to use the term far more precisely. Even in cases which explicitly address the divide between categories (2) and (3) (the “no conflicts” and “misuse of position” cases) the distinctions are hazy.Footnote 59 The most familiar description of “misuse of position” is that given by Lord Russell in Regal Hastings,Footnote 60 where, abridging his words, category (3) gains would be defined as those made exclusively “by reason of and in the course of” executing the position occupied by the fiduciary. But the precise remit of those words has never been properly teased out. Until now it has not been necessary to distinguish this category of disloyal gain from the categories involving use of opportunities or property. Indeed, on the facts of Regal Hastings itself, the gain made by the directors was both a misuse of positionFootnote 61 and a clear conflict of duty and interest: the directors took precisely the opportunity they had been contemplating for the company. That being the case, they could not conceivably argue that the opportunity fell outside the scope of their fiduciary endeavour. It is irrelevant that they could make the further argument that it was not practically possible to take that investment opportunity for the company.
Lord Russell's words nonetheless capture the spirit of category (3), and with a little more elaboration they will suffice to define a category of gain which is distinct from categories (1) or (2), but is a gain which must be disgorged by the disloyal fiduciary. The precise ambit of this category emerges most clearly by illustration.
The words “by reason of and in the course of” (to abbreviate Lord Russell's test) are often assumed to indicate a “but for” test. They have that tenor: “but for” the fiduciary's role, the gain could not have been made. But that test will not do; it is far too wide. A short pause for thought makes that clear. Fiduciaries are often presented with opportunities which meet this test: “but for” the role, the fiduciary would not be rich enough, or skilled enough, or qualified enough, or knowledgeable enough to take up the opportunity. Examples abound of fiduciaries finding out about opportunities at business cocktail parties, or using their enhanced knowledge and skills to write booksFootnote 62 or make lucrative investments.Footnote 63 Of course, if these private gains fall into categories (1) or (2), then disgorgement is required, and proprietary disgorgement at that. But otherwise the mere fact of the “but for” test being met is not enough.
Take a concrete example. Suppose an auction house invites all the FTSE 100 directors to an exclusive art sale. These directors have the opportunity to invest only because they are FTSE 100 directors. Of course, if they use corporate assets to buy art, or if their company is in the business of acquiring art, then the director's acquisition on his own account will have to be disgorged under categories (1) or (2). But, absent those facts, the director's acquisition on his own account will not fall within category (3); it will not constitute a disloyal gain from “misuse of position”. To fall within that category, the invitation would need to be to the directors to attend the auction on their company's account to purchase for their company.Footnote 64 It is only then that the director's personal gain is disloyal, acquired “by reason of and in the course of” executing the fiduciary role; the additional words are not mere surplusage. It is only then, in those limited circumstances, that there are any normative reasons for requiring the fiduciary to disgorge the gain as being one obtained disloyally.
Similarly, returning to the illustration of the haulage company used in the introduction, it is easy to see when the director's acquisition of the adjacent development might constitute a category (1) or (2) disloyal gain. But, absent those concerns, the acquisition at a public sale would not fall within category (3). It would not matter that the director's knowledge and experience made him better equipped to assess the commercial potential. By contrast, though, if the site were offered directly to the company for private sale – typically an offer received by the potentially disloyal director – and the director took the investment on his own account, then the director's acquisition would constitute a category (3) gain, and would do so even though the acquisition was quite outside the scope of the corporate endeavour and involved no use of the company's property.
Category (3) is thus tightly circumscribed. It captures gains derived from opportunities which arise solely because of the fiduciary's role, being opportunities presented to the fiduciary as fiduciary. Only then is the shorthand apt that the fiduciary made the gain “by reason of and in the course of” executing the fiduciary role.Footnote 65 It is then immaterial that the gain involved no use of the principal's property and was not within the scope of the fiduciary's endeavour.
A little reflection reveals that cases which fall only into category (3) are exceptionally rare. Most fiduciary disloyalty falls into categories (1) or (2). But A.G. for Hong Kong v Reid is just such a category (3) case. The Hong Kong prosecutor did not use the Crown's property; he did not take an opportunity which was within the scope of his fiduciary endeavour; what he did was accept bribes which were offered to him only as fiduciary, “by reason of and in the course of” his fiduciary role.
More is said about all these category (3) cases in the final section, but for now their remit is sufficiently well described to allow for some preliminary comments on the nature of their remedy. The contrasting illustrations of the FTSE 100 directors and of Reid illustrate the operation of this category whether the fiduciary has broad or narrow discretions. The fiduciary's disloyalty is in taking a personal benefit from exercise of the fiduciary role, even though it is one that involves no use of the principal's property nor pursuit of an opportunity within the scope of the role. It follows that in these category (3) cases, although it is clear that the disloyal fiduciary must not have the disloyal gain – and must disgorge it – it cannot be said that the principal must have it, as by contrast it could in category (1) and (2) cases. In category (3), the principal cannot assert that the fiduciary has done on his own account what his discretion requires him to do for the benefit of the principal, either in managing the principal's property or in pursuing opportunities within the scope of the fiduciary's endeavour; he cannot therefore adopt his fiduciary's exercise of discretion. The remedy is thus personal only. This non-proprietary conclusion requires further justification of course, but that will emerge later from the discussion of our various equitable formulae.
For now, in concluding this section, two points are important. First, on this analysis there are three simple categories of fiduciary gain, each sufficiently clearly defined to ensure that any given set of facts can be confidently assigned to the appropriate category. Taken together, these three categories identify the full spectrum of conduct constituting disloyalty in carrying out the fiduciary role. All these disloyal gains must be disgorged. Secondly, the conclusion that disgorgement remedies are proprietary in two of these categories but not in the third is justified by a robust analysis of the fiduciary rules which these remedies exist to support, not simply by reliance on the mechanical application of various equitable formulae. It is to such problematic mechanical applications that we now turn.
IV. Failing Equitable Formulae
Various familiar equitable formulae are routinely called into play to serve one side or the other in debates on proprietary disgorgement. In truth, these formulae rarely deliver the firepower claimed for them. This is true of the fiduciary's “duty to account”, of the maxim that “equity treats as done that which ought to be done”, and of the equitable tracing rules in delivering up secondary profits. Each might therefore be termed “failing equitable formulae”, although their failings arise only by virtue of common misuse. Each serves a perfectly proper and necessary function if used carefully. Each is considered below.
A. The fiduciary must “account in equity”
In bribe cases, the defaulting fiduciary'sFootnote 66 obligation to “account in equity” is taken by some to indicate that the disgorgement obligation is personal only (Lister v Stubbs, Sinclair v Versailles)Footnote 67 and by others to indicate that it is inherently proprietary (Reid). In truth, the expression tells us nothing about the nature of the remedial obligation.Footnote 68 It simply makes the far more limited point that the fiduciary is required to provide the principal with an account of the conduct of his role.Footnote 69 If done properly, this will help identify shortcomings and potential legal remedies. But the duty to account does not indicate the nature of any remedies (in particular whether they are for disgorgement or for compensation,Footnote 70 or are personal or proprietary) and nor does it deliver those remedies.
More dangerously, the language of account masks some important practical issues. It is typically said that the fiduciary will be treated as having acted properly (notwithstanding the reality), and the accounts will be falsified or surcharged so as to record that presumed proper activity. This is the “good man” theory, with its proprietary consequences, so favoured in Reid.Footnote 71 For example, if the fiduciary puts his hand in the till, takes £1000, and spends it on a skiing trip, the principal can “falsify” the accounts, disallowing the disbursement, and insisting that the accounts still show that £1000 is there in the principal's fund.Footnote 72 Alternatively, faced with a negligent fiduciary, the principal could “surcharge” the accounts to show what should have been there if the fiduciary had behaved with due diligence. This suggests that the written record of the fiduciary's management of the principal's property will then show that all is fine. But the records do not match reality until the fiduciary actually corrects the errors (or the remedy, being proprietary, achieves that end by operation of law). And if the fiduciary is insolvent, the principal cannot simply insist that the insolvency distributions reflect the corrected paperwork. Even if the fiduciary has £1,000 in his personal reserves, insisting the accounts are put in order will not of itself replace the £1000 that should have been in the principal's fund.
This is all rather negative. Surely the obligation “to account in equity” has some more useful purpose? It does, but its principal practical advantage seems to be universally ignored. One of the oddities of trusts is that when the principal sues the fiduciary for breach, the remedy which is awarded is not necessarily one which ought to be paid directly to the litigating principal; typically the remedy should go to augment the funds held for the principal, and should be held or distributed according to the terms of the original engagement. The accounts serve to record the division between the fiduciary's personal patrimony and the principal's patrimony. They will – when the remedy is satisfied – once again match reality, and without any transfer of assets to the principal.
Of course – and this is the important point of debate in these bribe cases – if the principal's remedy is proprietary, then, in equity, the disputed assets are already held by the fiduciary on trust for the principal, and are held in that way even before the accounts are falsified, so in that rare case the principal will have insolvency protection, because the transfer to the “principal's patrimony” has occurred by operation of law, in advance of either the allegations or the paperwork to falsify the accounts.
The short point, however, is that it is not possible to transit from “accounting in equity” to any practical conclusion without pause for thought. And in particular, the mechanism of “account” cannot simply be asserted so as to convert a claim against the fiduciary into a proprietary claim, and nothing of that nature is achieved simply by “adjusting” the accounts between the fiduciary and principal. The proprietary nature of the remedial claim must itself be proven; it does not arise because the fiduciary must “account in equity”.
B. “Equity treats as done that which ought to be done”
The maxim that “Equity treats as done that which ought to be done” was used to explain the proprietary remedy in Reid. The expression does hold a kernel of truth,Footnote 73 but its critics are right that it begs the very question in issue,Footnote 74 or at least it does if not underpinned by some prior analysis of the context. All turns on the perception of what “ought to be done”, and, as Lister, Reid and Sinclair indicate, the answer is controversial.
It will not do simply to dismiss this formula. It underpins the analysis pursued, explicitly or implicitly, in all the familiar non-fiduciary contexts where the court finds that defendants hold assets on constructive trust for claimants. This is true whether the constructive trust arises in response to specifically enforceable contracts of sale, or failed gifts found to be effective in equity, or claims based on proprietary estoppel.Footnote 75 In all these categories, the courts find – for one reason or another – that there is an identifiable asset which the defendant can no longer retain as his personal property, and which must be transferred to the claimant: “treating as done that which ought to be done”, the asset is considered as transferred in equity from the time the relevant circumstances arise, with the result that the defendant no longer holds the asset beneficially for himself, but holds it on constructive trust for the claimant.
Natural justice does not demand that our legal system be so protective. When one person is under a personal obligation to transfer an asset to another, it is a matter of choice for the legal system whether that obligation merits proprietary protection.Footnote 76 Some jurisdictions provide no such protection. By contrast, although all the detail cannot be explored here,Footnote 77 it is clear that the English jurisdiction has chosen to provide proprietary protection to obligations to transfer where the asset is special (e.g. land),Footnote 78 or where the relationship between transferor and transferee is special (e.g. fiduciary/principal).Footnote 79
This is familiar territory, but it is easy to see how the formulation just advanced can lead to an assertion that a fiduciary who is subject to a personal obligation to disgorge disloyal gains to his principal should, by that very fact, hold those gains on constructive trust for the principal. This is the argument in Reid. It is not answered by saying the outcome is unfair. Our law respects property rights, both on insolvency and as against third parties. If the principal has a property right, then certain consequences follow, and they are very likely to seem unfair in some circumstances to some parties. That is not peculiar to proprietary interests in fiduciary contexts.
But does the principal have a property right in these circumstances? This requires careful examination of the issues if we are not to fall into the trap of relying on equitable formulae in inappropriate contexts. First, it might be noticed that the obligation to disgorge disloyal gains is quite different from the positive or prescriptive obligations which typically generate constructive trusts. In these latter cases the purpose of the obligation is to deliver a particular asset to the claimant, and, where a constructive trust is recognised, that is simply shorthand for the assertion that equity recognises that the claimant must have the asset in question, and can insist on having it not only as against the defendant but also as against any stranger to that relationship. This is what it means to have a proprietary interest in an asset. By contrast, in the fiduciary disgorgement cases the same assertion cannot be made. The purpose of the disgorgement obligation is not to transfer to the principal an asset to which he is entitled; it is, instead, to remove from the fiduciary an asset to which he is not entitled. Put another way, although we can say here that the fiduciary must not have the asset, we cannot say, as we could above, that the principal must have the asset. Although the defaulting fiduciary is under an obligation to transfer the disloyal gain, there is no particular reason to give the principal special advance proprietary protection to secure his interest in the gain. There is, in short, no reason as there was in earlier cases to treat the principal as already owning the asset in equity. This is not “what ought to be done”; this is not the function of the disgorgement obligation. If the principal wishes to make a successful claim to a proprietary interest in the disloyal gains, the principal must assert some different claim, a claim that explains why the principal, and no-one else, must have the asset in issue, not simply why the fiduciary must not have it.
As noted earlier, it is just this alternative claim which the principal can advance where the fiduciary has used the principal's property for personal advantage, or has selected for his own advantage an investment opportunity which is in the line of business which it is his obligation to pursue on behalf of the principal. In these circumstances the principal need not rely simply on the proscriptive aspects of the rules on fiduciary loyalty, but can instead turn to their positive underpinnings. Those positive underpinnings oblige the fiduciary to act in the best interests of the principal in dealing with the principal's property or in pursuing investment opportunities within the defined scope of the fiduciary's appointment. Within this realm of fiduciary activity, the principal can adopt the fiduciary's choices, and insist that their benefits are delivered to the principal and not held by the fiduciary. This positive duty will be specifically enforced in equity, not because the subject matter of the obligation is special, but because the relationship between the parties is special,Footnote 80 and the fiduciary's discretion is to be used selflessly to deliver the best possible advantages from use of the principal's property or pursuit of investment opportunities within the scope of the fiduciary's defined endeavour. As explained earlier, the same cannot be said of the disgorgement gains generates exclusively by misuse of position (category (3)), but it can be said of the disgorgement gains generated in categories (1) and (2).
These three categories of fiduciary gain are considered in more detail below. For now, the point to note is that the maxim “equity treats as done that which ought to be done” must be applied carefully. It does not justify constructive trusts when all that can be said is that the fiduciary must not have the asset, and that what ought to be done is simply to remove disloyal gains from a defaulting fiduciary. This is all that the proscriptive duties of loyalty demand. On the other hand, the maxim can be used where the principal must have the asset in question. This positive assertion can only be made when, given the scope of the fiduciary's endeavour, the principal is entitled to adopt the fiduciary's own selected choices in managing the fiduciary's property or pursuing investment gains within the scope of the fiduciary endeavour, and can insist that those choices are held for the advantage of the principal, not simply not for the advantage of the fiduciary.
C. Tracing and secondary profits
Finally, we can say something about secondary profits. A disloyal fiduciary must disgorge the gains so derived. But if these disloyal gains are then used to generate further profits, must they too be disgorged? The issue was material in Lister, Reid and Sinclair. Two strong lines of argument emerge from the cases. Each merits pause for thought.
First, if the principal has a proprietary interest in the initial fiduciary gain, then, according to Foskett v McKeown,Footnote 81 the principal will invariably have a proprietary interest in any traceable proceeds; according to the House of Lords, that follows automatically as a matter of English property law. The earlier case of Reid Footnote 82 relied on just such proprietary tracing assumptions to enable the capture from third party volunteers of the real estate investment gains which Lord Templeman thought the defaulting fiduciary needed to give up.
By contrast, if the principal has no proprietary interest in the initial fiduciary gain, there are equally strong suggestions that the principal can then have no claim at all to their traceable proceeds: see Reid, Lister, and Westdeutsche.Footnote 83 As against this, however, Sinclair Footnote 84 suggests, by way of dicta, that even in these circumstances the prophylactic rationale of fiduciary law makes it imperative that the defaulting fiduciary be stripped of all gains acquired by virtue of the breach, notwithstanding earlier cases militating against this conclusion.Footnote 85 That logic is surely compelling.
But what these assertions risk confusing is the proper remit of tracing and of the prophylactic rationale. They are directed at different ends. Tracing is another of our equitable formulae that can so easily trip us up. The technique of tracing is used to identify what has happened to the principal's property, and then – if an appropriate claim can be advanced – the principal may be able to assert a proprietary interest in identifiable traceable proceeds. Where the original asset being traced is held by a fiduciary for the benefit of his principal, the principal is invariably entitled to adopt successful investments and insist that the fiduciary holds those too for the principal. This is justified because it is precisely what the fiduciary role demands: the fiduciary must selflessly use the principal's property solely for the benefit of the principal. If the fiduciary purports to use it for his own benefit, the principal can insist that the investment is held for him. As argued elsewhere,Footnote 86 this explanation of the consequences of tracing in a fiduciary context seems preferable to the assertion that the outcome follows as a matter of English property law. Where the defendant is a fiduciary, the difference is one of analysis, not outcome; but, as emerges in the paragraphs below, the difference matters when the defendant is not a fiduciary.
This analysis has important consequences in the context of fiduciary disgorgement. Any disloyal gains falling into categories (1) or (2) are held by the fiduciary on constructive trust for the principal: those gains belong to the principal in equity. It follows that their traceable investment proceeds can also be adopted by the principal, and they too will belong in equity to the principal as further category (1) gains. The only necessary link between the initial disloyal fiduciary gain and the investment proceeds claimed at the end of the tracing trail is the requirement for tracing, or the provable substitution of one asset for another down the investment chain. It is irrelevant that the disloyal fiduciary was acting honestly and in good faith, or that he could have used his own funds to make the lucrative investment. No matter how fortuitous the windfall for the principal, the very fact of traceable investment proceeds is enough to give the principal a proprietary claim.
By contrast, the prophylactic goal is directed at stripping the fiduciary of any profits he would not hold but for his disloyalty. This does not depend on tracing at all. It depends upon proof of causal links. To take a simple illustration, suppose the fiduciary's disloyal gain is £100,000, and it is exclusively a category (3) gain to which the principal therefore has only a personal claim. If the fiduciary uses £10 from this fund to buy a winning lottery ticket, it will count for nothing that the lottery millions are the traceable proceeds of the disloyal gain, since the principal has no proprietary interest in the original disloyal gain.Footnote 87 The goal of prophylaxis demands that the lottery millions be disgorged only if they could not have been generated but for the fiduciary's disloyalty. Given that the winning investment cost £10, the “but for” test is unlikely to be met, and so the principal will be unable to insist on disgorgement. In short, there is no necessary link between traceable assets and assets which meet the “but for” test required for prophylaxis.
It might then be thought that a fiduciary such as the prosecutor in Reid can, with impunity, use his category (3) gains to generate secondary profits which will not be recoverable. But that would be incorrect. It is unlikely that Reid could have purchased his real estate investments “but for” his use of the bribes he had taken. These too are category (3) gains. Their remedy is personal, not proprietary, since the gain is not derived from use of the principal's property nor from pursuit of conflicting opportunities. The motivation for disgorgement is to strip the fiduciary; it is not to transfer to the principal an asset to which the principal is entitled ahead of anyone else.Footnote 88
Finally, and for the sake of completeness, recall that one of the advantages of a proprietary claim is that the principal can assert the claim against any third parties who are not bona fide purchasers for value without notice of the principal's claim. It follows that if the disloyal fiduciary transfers a category (1) or (2) gainFootnote 89 to an innocent donee, the principal can recover her property if she can follow the original asset into the donee's hands. This outcome rests on the priority of competing property interests. But if the donee uses this initial receipt to generate further profitable traceable proceeds, can the principal claim those too? The issue was not material in Foskett, but that case suggests a positive answer on the basis that, as a matter of English property law, the principal is entitled to all the traceable proceeds derived from her property. As noted earlier, that is doubted.Footnote 90 If the donee owes the principal no fiduciary obligations in relation to the asset, then the principal's claim against the donee is surely restricted to return of the original receipt, or if it is no longer in the donee's hands, then to its value protected by a lien against the traceable investment proceeds.Footnote 91 This scenario, too, illustrates the potential difficulties with overly mechanical use of the tracing rules.
V. Using the Proposed Classification Scheme
Now we are at the stage where it is possible to make some final remarks about categories (1)–(3). A number of important points emerge.
A. Category (1) – gains from use of the principal's property
The first point to note is that category (1) includes all gains derived from use of the principal's property, regardless of whether those gains are within or outside the scope of the fiduciary endeavour. A fiduciary who takes the principal's funds and invests them illegitimately in railways rather than legitimately in canals, or bets them on the horses rather than dutifully buying shares, will nonetheless hold those investment gains on constructive trust for the principal. The question of scope is irrelevant. The reason is simple. The fiduciary is required to use the principal's property only in the best interests of the principal. The terms of the fiduciary engagement will usually specify the scope or range of appropriate investments. If the fiduciary invests outside that range, the principal can of course insist on compensation for the resulting loss,Footnote 92 but can, alternatively, simply adopt the unauthorised investment and demand that the fiduciary hold it for the principal.Footnote 93 This was discussed earlier. In short, to claim the benefit of a constructive trust over category (1) gains, all the principal needs to do is identify the gain and prove that it was derived from the principal's property.
Secondly, category (1) clearly embraces gains the fiduciary makes from trading with the principal's property on his own account. But it also includes gains made from using the principal's property. It is irrelevant that the principal's assets remain intact in the fiduciary's hands, and the principal seems to have lost nothing. Fiduciary disgorgement is not concerned with the principal's loss, but with the fiduciary's disloyal gain. Suppose the fiduciary generates a personal gain by using the principal's vehicle as a taxi, or by selling licences to access the principal's intellectual property. It is uncontroversial that the fiduciary will then be required to disgorge the proceeds of such use, and will hold those proceeds, if they can be identified,Footnote 94 on constructive trust for the principal.Footnote 95 To repeat, it is immaterial that the principal's original assets remain intact in the fiduciary's hands. But, if this is true, then this same analysis ought surely to apply to the facts of Sinclair v Versailles.Footnote 96 There the disloyal fiduciary did not exchange the principal's investment funds for substitute assets; instead, he circulated those funds around his own companies, creating the appearance of hectic trading, and thereby fraudulently inflated the market value of his own companies, which gain he then realised by selling his shares at their grossly inflated price. It is hard to describe this gain in any way other than a gain derived from the “use” of the principal's assets. It ought to follow, therefore, that the fiduciary's profits are held on constructive trust for the principal. This argument was not before the court, since both sides conceded the applicability of the bribe analogy, and argument therefore centred on which of the competing analyses in Lister and Reid was preferable. In retrospect, perhaps that approach left much to be desired.
B. Category (2) – gains from opportunities within the scope of the fiduciary's endeavour (i.e. involving a conflict of duty and interest)
The third important point concerns category (2). By contrast with category (1), in category (2) the issue of scope is all important. Category (2) catches only those gains which are within the scope of the fiduciary's endeavour. This is because, as discussed earlier, it is only then that the principal is entitled to say that if the fiduciary acquired the opportunity, then it ought to have been acquired for the principal, being an opportunity which, on the fiduciary's own choice of options, was selected as being the most advantageous within the defined line of business or scope of the fiduciary's endeavour. In all three disgorgement categories it is irrelevant that the fiduciary acted in good faith, or that the principal was not harmed; and in category (2) it matters not that the principal could not or would not have taken up the opportunity if offered. That decision is one for the principal alone, and cannot be anticipated by the fiduciary.
For example, in Keech v Sandford,Footnote 97 it was within the remit of the fiduciary role for the fiduciary to acquire a renewal of the lease for the benefit of the infant beneficiary, and if the fiduciary managed to do that, and found it to be so advantageous that he was motivated to take the benefit for himself, then the renewal is a category (2) gain which must be held on constructive trust for the beneficiary.Footnote 98 It is irrelevant that the lessor had declined to renew in favour of the infant beneficiary; if the fiduciary wanted to take the benefit personally, then the beneficiary must first consent.Footnote 99
Similarly, Boardman and Regal are also in this category.Footnote 100 It is no answer that the opportunity could not, or would not, in fact have been obtained by the principal, either for legal or for practical reasons. If that was indeed the truth of the matter, then the fiduciary should have no difficulty persuading the principal to consent to the fiduciary's personal acquisition of the benefit. Absent that consent, the fiduciary's duty is to pursue to the best of his endeavours his own selection of the best opportunities that will benefit the principal in the defined line of business. In both these cases, the opportunity taken personally by the fiduciary fell within that class. The principal therefore had a proprietary claim. Of course, if the fiduciary is solvent, it can be a matter of practical indifference to the principal whether the recoveries are rendered by way of recognition of a personal or proprietary claim.
Finally, and undoubtedly more controversially, Lister v Stubbs Footnote 101 is also in this category (the facts were noted earlier). This is not because the opportunity to take the bribe was one that ought to have been taken for the principal, or any other such similar formulation which has so dogged Reid. It is because the essence of the fiduciary endeavour was one that required the fiduciary to negotiate the purchase of dye-stuffs at the best possible price for the principal. The fiduciary's receipt of a bribe from the seller is proof positive that the seller was willing to receive less for the sale than the price charged to the principal. The fiduciary has therefore taken for his own account an opportunity which it was his duty to pursue for his principal. The analysis adopted in FHR v Mankarious Footnote 102 to reach the same conclusion is compelling. Most bribe cases in commercial contexts follow this model. They should all be classed as category (2) cases. As noted earlier, the non-commercial case of Reid is the exception; there the bribe did not involve a conflict of duty and interest, only a misuse of position.
So the question of scope is vital. It delineates the crucial boundary of category (2) cases. This means that any uncertainty in defining the scope of the fiduciary's endeavour is problematic. The issue has generated a line of cases focused on determining whether an opportunity is a “corporate opportunity” (i.e. an opportunity which, given the specific ambit of the director's fiduciary duty, might legitimately be pursued for the benefit of the company),Footnote 103 or, similarly, a “partnership opportunity”.Footnote 104 There is good reason to suppose that modern courts are drawing this line in the wrong place,Footnote 105 and that deeper thought about the precise import of the general rule against conflicts of duty and interest would see wider adoption of the approach taken in the partnership case of Aas v Benham.Footnote 106 It must surely be true that even fiduciaries have a private sphere of operation,Footnote 107 despite some assertions to the contrary,Footnote 108 and that not every successful profit-making endeavour can be captured by the principal.Footnote 109
For example, most modern companies have unrestricted objects. This cannot mean that directors have a duty to present to the company for its approval every personal investment they propose to make, or otherwise run the risk that the company will be able to claim the gain as a disloyal profit made in breach of the conflict rule on the basis that every opportunity is a potential corporate opportunity. Yet, taken at face value, that is just the proposition advanced in Bhullar v Bhullar,Footnote 110 where the court held that the director had one capacity only, and that was as a fiduciary. In that case, the directors had purchased on their own account a block of land adjacent to one already owned by the company. The court held that this had been acquired in breach of their fiduciary obligations, and was therefore held on constructive trust for the company. Since the company was in the business of buying property for investment, that conclusion might not seem unreasonable. On those bald facts, the acquisition was certainly one within the scope of the fiduciary endeavour and thus a category (2) gain. This would be true whether or not the company had the funds to make the investment, or would, if given the choice, have decided to do so. All those matters are for the principal to determine, not for the fiduciary to presume. But in this particular case the company was a family-owned company, and on the breakdown of the family relationship the other side of the family had insisted that no further property investments be made. That was taken by the court as going merely to the issue of the principal's choice, in the way just noted. But on another reading, the assertion goes instead to the issue of scope. If, as a result of the bar on future investment, the company is no longer a company interested in property investment (notwithstanding that its corporate capacity was not so limited), then the defendant fiduciaries' acquisition would not involve a conflict; indeed, it would not be disloyal in any way. The court, however, refused to accept that scope could be limiting in this way. True, the facts surrounding the agreed bar on future investments in this case can be interpreted in different ways, especially in the context of family breakdown, but one of those interpretations does go to scope, and the question is crucial doctrinally in assessing the existence and nature of the remedies for fiduciary disloyalty.
But, for present purposes, what is important is that there is a dividing line. Here that line is applied rigorously, and the “conflict of duty and interest” category embraces only those cases where the opportunity taken personally by the defaulting fiduciary is one which, given the specific ambit or scope of the fiduciary's duty to act for the benefit of the principal, might legitimately have been pursued for the principal.
C. Category (3) gains from opportunities which arise solely because of the fiduciary's role (i.e. misuse of position cases)
The fourth important point concerns category (3). Taken at face value, this may seem the most difficult category to define, but this is simply because we are not used to applying rigorously the prescription adopted here that the gain must be one made “by reason of and in the course of” the fiduciary's role: the opportunity must have been offered to the fiduciary as fiduciary. This category does not capture gains simply because the fiduciary's role has equipped him to access or evaluate them more effectively; nor does it capture gains just because they could not have been made “but for” the fiduciary role. All this was discussed earlier. As a result of this restrictive approach, very few cases will be classed exclusively in this category. And this is the only category where the disgorgement remedy is personal. Empirically, therefore, most cases of fiduciary disgorgement will be proprietary – perhaps as the proponents of that view have said all along.
D. Assigning different scenarios to appropriate categories
The fifth and final point to be made is about category overlaps. Notice that the facts of a particular fiduciary breach may admit of classification quite uncontroversially under more than one of the categories described above.Footnote 111 For example, it is often possible to characterise disloyal gains as category (1) uses of property or alternatively as a category (2) conflicts of duty and interest, and so on.Footnote 112 In these circumstances, the fiduciary can simply pursue the claim which delivers the most advantageous remedy. But on any given set of facts it will be clear whether the gain falls within each of the nominated categories or not. And each category contains cases which do not fit within any of the other categories. This, then, is the fewest possible doctrinally distinct categories which can be mooted. On the analysis proposed here, all this is dealt with in one step by treating the categories as creating an analytical hierarchy and testing, first, whether the given facts fall within category (1), and, failing that, within category (2), and, finally, failing that, within category (3). This simplifies the factual analysis and deals in one step with the most appropriate remedies.
By way of closing this section, it is pertinent to notice that, if accepted, this proposed analysis would support the ultimate findings of most of the cases cited in Sinclair, Lister and Reid. However, it would not, as it turns out, support the ultimate findings in those three cases themselves. As indicated at various points in the preceding discussion, those cases would be assigned to categories (1), (2) and (3) respectively: the remedies in the first two cases would therefore be proprietary, not personal; and in the last would be personal, not proprietary. That reversal, in each case, seems amply justified as a matter of doctrine; it is also supported by a substantial weight of precedent in each case.Footnote 113 But this difference in identified and preferred outcomes also reinforces the point that these three cases each illustrate different and particularly unusual contexts for the remedying of fiduciary disloyalty, and therefore require especially careful analysis. These three cases have each ignited wide debate. They certainly cannot all be right. Indeed, it is, at the very least, difficult to see how the outcome in Lister v Stubbs can now be defended, even on the analysis proposed by Lord Neuberger in Sinclair.Footnote 114
VI. Insolvency and Third Party Creditors – Normative Concerns
Finally we should say something about insolvency. The clear and explicit policy line running through all the cases which have rejected the notion that the principal's remedy is proprietary is the idea that otherwise the fiduciary's creditors would be unduly and unfairly penalised.Footnote 115
In truth, the disloyal fiduciary has by definition acquired the assets in question by doing wrong. He should not have them, and – unless an alternative argument can be run, as to which see below – then none of his creditors nor his principal should have them either. They are gains which should not be in the insolvency pot. But the fact of the matter is that they are there. It then becomes a matter of policy to decide who, as between all the innocent claimants on the pot, is most entitled to the unexpected advantage of the fiduciary's wrongdoing. Since the ordinary creditors at least have a positive claim, while the disloyal fiduciary's principal only has a negative claim (i.e. that the fiduciary should not have the gains), then it seems tolerably clear that the principal should not rank ahead of the general creditors. Indeed, it might seem obvious, when the problem is put this way, that the principal should rank behind the general creditors.Footnote 116 But that would require a change to the statutory insolvency regime. Until then, we might at least be thankful that the analysis proposed here gives doctrinal support to an outcome which does not automatically compound the problem by awarding the principal priority in the recovery of fiduciary disgorgement gains.
But, and this is a big “but”, this argument about relative ranking applies only to gains made by the fiduciary which the fiduciary must not have; it does not apply to gains which the principal must have. Then, by contrast, those gains can and should go in priority to the principal.Footnote 117 And as it turns out, on the analysis proposed here, most disloyal gains fall into that category, being category (1) and (2) gains.
All this is not unfair to the insolvent fiduciary's creditors: such creditors take their fiduciary as they find him, with all pre-insolvency proprietary interests respected on insolvency, and for good practical reasons. Here those proprietary interests arise specifically to give appropriate support and recognition to the valuable and rather complicated institution constituted by the fiduciary relationship.
VII. Conclusion
The arguments presented here can be summarised very simply.
First, we can draw no conclusions about proprietary consequences from the assertion that a fiduciary must “account in equity”.
Secondly, the maxim that “equity treats as done that which ought to be done” does not convert every obligation relating to identifiable property into a proprietary remedy by way of constructive trust, not even when the obligation to transfer is owed by a fiduciary. The fiduciary's proscriptive obligation to disgorge is not enough; it simply explains why the fiduciary must not have the property. To explain why the principal must have the property, and have it by way of constructive trust, requires something more. That emerges not from the proscriptive fiduciary rules, but from the positive underpinnings of the fiduciary relationship which oblige the fiduciary to act in the best interests of the principal in dealing with the principal's property or in pursuing investment opportunities within the defined scope of the fiduciary's appointment. The scope question is thus crucial, and has not so far been given the careful attention it deserves. Within this limited realm of fiduciary activity, the principal can adopt the fiduciary's choices, including his disloyal choices, and insist that their benefits are specifically delivered to the principal and not held personally by the fiduciary.
Thirdly, the disgorgement of secondary profits deserves careful attention. The prophylactic goal in fiduciary law is directed at stripping the fiduciary of any profits he would not hold but for his disloyalty. This does not depend on tracing at all. It depends upon proof of causal links. By contrast, if the fiduciary uses the principal's property to make further investments, then the traceable proceeds of those investments will, ipso facto, be held on constructive trust for the principal. Whatever the explanation for these tracing consequences (and the leading authority is doubted here), it is at least clear that the notions of traceable and “but for” secondary profits must be kept quite separate.
These three propositions are advanced in order to correct certain assumptions that have infected consideration of the equitable duty to account, the maxim that “equity treats as done that which ought to be done”, and the use of tracing to access investment gains, and have, in different ways, contributed to the difficulties in analysing proprietary remedies for disgorgement.
By contrast, used rigorously, in combination with a careful analysis of the foundational rules on fiduciary loyalty, it is clear that there are only three doctrinally distinguishable categories of disloyal gain which a fiduciary might be required to disgorge:
(1) gains derived from use of the principal's property (regardless of the nature of the use);
(2) gains derived from opportunities which are within the scope of the fiduciary's endeavour (i.e. gains involving “conflicts of duty and interest”, judged with very careful regard to issues of scope, but with it then being irrelevant that none of the principal's property was used in acquiring the gain);
(3) gains derived from opportunities which arise solely because of the fiduciary's role (often termed gains from “misuse of position”, but restricted here to gains from opportunities presented to the fiduciary as fiduciary, acquired “by reason of and in the course of” the fiduciary role, but with it then being irrelevant that the gain was not within the scope of the fiduciary endeavour and did not involve use of the principal's property).
These categories provide a simple analytical hierarchy. If a gain falls within category (1) or, failing that, within category (2), then the resulting disgorgement remedy is proprietary. If the gain falls into neither of those categories, but falls into category (3), then the disgorgement remedy is personal. As indicated above, this simple remedial hierarchy is derived from a detailed consideration of the positive elements of the rules on fiduciary loyalty.
This proposed analysis is eminently simple. It provides both a ready classificatory scheme and a doctrinal justification for proprietary or personal outcomes within the different categories. If it is accepted, and if it really is so simple, then the question might be asked, how have we managed to tie ourselves in knots for so long over the issue of disgorgement of fiduciary gains? One answer is suggested. Much of our private law is built on ideas of property and obligation, including our explanations of remedies. But these concepts can sometimes trip us up. In the area of fiduciary disgorgement remedies, we have perhaps hung too much on the obligation to disgorge, giving it a positive impetus its doctrinal roots do not support. Equally we have hung too much on notions of property, presuming too much where analogies are seductive but not secure. But a return to the fundamental principles of fiduciary loyalty, as proposed here, appears to provide a simple route out of these troubles and will, it is hoped, assist in resolving these important questions concerning fiduciary disgorgement remedies.
