Implications of a Fiduciary Relationship in Pakistan

What is a Fiduciary?

The term ‘fiduciary’ is derived from Roman Law. As a noun, it means a person holding the character of a trustee, or a character analogous to that of a trustee, in respect of the trust or confidence involved in such a relationship, and the good faith and honesty which the relationship requires. As an adjective, it means the nature of the trust or of a relationship analogous to a trust which is related to or founded upon trust or confidence.[1]

In the words of Lord Millett, 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”.[2]

Walker provides a more detailed definition of a fiduciary as follows:

A ‘fiduciary’ is a person in a position of trust, or occupying a position of power and confidence with respect to another such that he is obliged by various rules of law to act solely in the interest of the other, whose rights he has to protect. He may not make any profit or advantage from the relationship without full disclosure. The category includes trustees, company promoters and directors, guardians, solicitors and clients and others similarly placed.[3]

What is a Fiduciary Relationship?

A fiduciary relationship has been said to arise where one party reposes confidence in another who is expected to act in the interests of the first party rather than in his own interests. Whenever two persons stand in such a situation that confidence or trust is placed by one upon the other, there arises a presumption that a fiduciary relationship exists between them. Such a confidential situation may arise from a contract or by some gratuitous understanding, or it may be upon previous request or undertaken without any authority.[4]

Duties of a Fiduciary

Lord Millet listed the duties of a fiduciary in his judgment in Bristol and West Building Society v Mothew[5]: 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; and he must not act for his own benefit or for the benefit of a third person without the informed consent of his principal.

Fiduciary duties are negative in nature. They impose an obligation on the fiduciary not to do certain things: not to place himself in a position in which there might be a conflict between the duties owed to the principal and the fiduciary’s personal interest, and the overlapping duty not to obtain some improper benefit or gain from his position as a fiduciary. Lord Herschell explained the rationale for imposing these obligations on the fiduciary in the following terms:

It is an inflexible rule of a Court of Equity that a person in a fiduciary position, is not, unless otherwise expressly provided, entitled to make a profit; he is not allowed to put himself in a position where his interest and duty conflict. It does not appear to me that this rule is, as has been said, founded upon principles of morality. I regard it rather as based on the consideration that, human nature being what it is, there is danger, in such circumstances, of the person holding a fiduciary position being swayed by interest rather than by duty, and thus prejudicing those whom he was bound to protect.[6]

Fiduciary’s Duty to Account for Profits

The fiduciary’s duty to account for profits made was discussed in Regal Hastings (Ltd) v Gulliver[7], where the House of Lords in England held that the ex-directors of a company, Regal, were liable to the new management for profits they had made on the sale of their shares in a wholly-owned subsidiary, since they had obtained their shares by reason of their position as directors of Regal and in the course of their office as directors. Viscount Sankey stated the rule of the case in these terms:

No one who has duties of a fiduciary nature to perform is allowed to enter into engagements in which he has or can have a personal interest conflicting with the interests of those whom he is bound to protect. If he holds any property so acquired as trustee he is bound to account to his cestui que trust.

The implication of the rule laid down in Regal Hastings (Ltd) v Gulliver is that a fiduciary cannot make a profit at the expense of his beneficiary and has to account for all profits made during the performance of his fiduciary duties. This is to ensure that there is no conflict between duty and interest for the fiduciary and that he remains motivated to take decisions which are beneficial to the interests of those whose rights he protects.

Implications of a Fiduciary Relationship: Keech v Sandford

The foundational case dealing with the fiduciary duty of loyalty and the implications of a fiduciary relationship was Keech v Sandford[8], the facts of which are as follows: The lessee of the profits of an estate devised the estate to a trustee on trust for an infant. Prior to the expiration of the lease, the trustee applied to the lessor for a renewal of the lease for the benefit of the infant. The lessor refused, upon which the trustee took the lease for himself. It was held by the Exchequer Court of England that the trustee should not have obtained the lease for himself and that the lease should instead be assigned to the infant, with an account of the profits received by the trustee.

Lord King laid down the principle in Keech v Sandford that the trustee was the only person of all mankind who might not have obtained the lease. Even though there was no fraud in the case, the trustee should have let the lease run out instead of obtaining it for himself.

The rule laid down by Lord King is required to be followed in order to ensure that there arises no conflict between duty and interest for a fiduciary. Considering an ex ante perspective, if trustees were allowed to obtain leases for themselves on a refusal to renew in favour of beneficiaries by lessors, it would lead to the actions of trustees being motivated by their own personal interests rather than those of the beneficiaries whose rights they are bound to protect.

Further, a relaxation of the rule laid down in Keech v Sandford would offer a fiduciary an incentive to act in his own interest and would defeat the entire purpose of a fiduciary relationship. In order to prevent trustees from exploiting trust properties for their own uses, a strict rule has to be laid down so that trustees hold properties in trust for their beneficiaries and align their own interests with those of their beneficiaries. A justification for having this strict rule can also be found in the analysis provided by Lord Herschell in Bray v Ford cited above.

Implications of a Fiduciary Relationship: Position in Pakistan

Section 88 of the Trusts Act, 1882 provides the following:

Where a trustee, executor, partner, agent, director of a company, legal advisor, or other person bound in a fiduciary character to protect the interests of another person, by availing himself of his character, gains for himself any pecuniary advantage, or where any person so bound enters into any dealings under circumstances in which his own interests are, or may be, adverse to those of such other person and thereby gains for himself a pecuniary advantage, he must hold for the benefit of such other person the advantage so gained.

An application of Section 88 is to be found in Attorney General for Hong Kong v Reid[9], where the Judicial Committee of the Privy Council held that when a bribe is accepted by a fiduciary in breach of his duty, then he holds that bribe in trust for the person to whom the duty was owed. Further, if the property representing the bribe decreases in value, the fiduciary must pay the difference between that value and the initial amount of the bribe, since he should not have accepted the bribe or incurred the risk of loss in the first instance. Conversely, if the property increases in value, the fiduciary is not entitled to any surplus in excess of the initial value of the bribe, since he is not allowed by any means to make a profit out of a breach of duty.

A similar rule was laid down in Boardman v Phipps[10], where it was held by the House of Lords that confidential information gained by trustees by virtue of their fiduciary position could not be used by them to their own advantage without the informed consent of the beneficiaries. This rule is designed to uphold the trust or confidence placed in the fiduciary and helps to protect the rights and interests of the beneficiary with respect to the fiduciary and third parties.

The courts in Pakistan have also interpreted the provisions of Section 88 to lay down principles regarding fiduciary relationships. In Bejoyranjan Kanungo and Others v. Khalilur Rahman[11], the Supreme Court of Pakistan upheld a decision of the High Court of West Pakistan which decided that a constructive trust had been created in favour of a landlord when his house, leased out to a tenant, had been sold in lieu of municipal taxes and dues, and had been purchased by the tenant himself without informing the landlord about the sale.

More recently, in Nadir Akmal Khan Leghari v. Asim Arshid[12], the Sindh High Court interpreted Section 88 to conclude that a constructive trust arises out of all dealings entered into by a fiduciary. The Court held that a director of a company is in a fiduciary relationship with the company, and hence cannot enter into any engagements or negotiations on behalf of the company in which he does or can have a personal interest conflicting with the interest of the company.

[1] Gandhi B.M., Equity, Trusts and Specific Relief (Eastern Book Company 2015) 359.

[2] Bristol and West Building Society v Mothew [1996] EWCA Civ 533.

[3] Walker David M., The Oxford Companion to the Law (OUP 1980) 469.

[4] Gandhi B.M., Equity, Trusts and Specific Relief (Eastern Book Company 2015) 361.

[5] [1996] EWCA Civ 533.

[6] Bray v Ford [1896] AC 44.

[7] [1967] 2 AC 134.

[8] Keech v Sandford [1726] EWHC Ch J76.

[9] [1993] UKPC 36.

[10] [1967] 2 AC 46.

[11] [1968] PLD SC 342.

[12] [2012] CLD 1588.