SSRN Id2559974

FIDUCIARY RELATIONSHIPS: ENSURING THE LOYAL
EXERCISE OF JUDGEMENT ON BEHALF OF ANOTHER
Lionel Smith
Sir William C. Macdonald Professor of Law, McGill University; Professor
of Private Law, King’s College Dickson Poon School of Law
I. Introduction
In this article, I present a theory of fiduciary relationships. This is a field
characterised, in the law reports and in the law reviews, by disagreement,
uncertainty and controversy. My argument will seek to address both the justification
and the content of fiduciary duties. It will also address the question of remedies,
which sheds important and neglected light on the question why this part of the law
has the shape that it does. All three aspects—the reasons we impose these duties,
what these duties require, and the remedies associated with them—are linked to
one another in a conceptual unity that reveals the interlocking aspects of private
law’s concern with relationships in which one person is empowered to exercise
decision-making authority on behalf of another.
My account aims to identify the features that are common to all fiduciary
relationships, and to understand why the law reacts as it does to the presence of
those features, by the imposition of certain rules and duties according to articulable
legal principles.1 The argument in this article is restricted to fiduciary obligations
in the strict sense, as they are found in private law; my account, however, is one
that resonates beyond private law and across a range of legal fields. This is because
it focuses on fiduciaries as people who are required to exercise their judgement in
an unselfish way; and this is something that we see in many contexts, including
public law contexts.2
Apart from the Introduction and the Conclusion, the article is in three parts.
The first and longest is about the requirement of loyalty, which in my view is at
the heart of this part of the law. I will describe and defend a position as to what
loyalty means in fiduciary law; when the law imposes a requirement of loyalty;
and what are the consequences of a failure to fulfil this requirement. The second
part is about the no-conflict rules, which, I will argue, exist to support and protect
the requirement of loyalty. The third part is about the no-profit rule. Contrary to
many others, I will contend that this rule has a justification that is distinct from
that of the no-conflict rules. Properly understood, the no-profit rule is one of the
law’s extrapolations of the requirement of loyal conduct on behalf of another. It
does not provide a remedy for wrongful conduct; rather, it creates primary rights
in the beneficiary, thus ensuring that all benefits arising in the sphere of fiduciary
management are allocated to the beneficiary.
1
I disagree with those who take the view that it is impossible to find a unifying principle for this field of law. See
for example J. Glover, Commercial Equity—Fiduciary Relationships (Sydney: Butterworths, 1995), at pp.41–43; L.
Rotman, Fiduciary Law (Toronto: Carswell, 2005), at pp.283–286.
2
See E. Fox-Decent, Sovereignty’s Promise: The State as Fiduciary (Oxford: Oxford University Press, 2011),
especially at pp.159–174; T. Rave, “Politicians as Fiduciaries” (2013) 126 Harv. L. Rev. 671.
608 (2014) 130 L.Q.R. October © 2014 Thomson Reuters (Professional) UK Limited and Contributors
Electronic copy available at: https://ssrn.com/abstract=2559974

October 2014] Fiduciary Relationships 609
II. The Requirement of Loyalty
1. Content
Although they may disagree about many things in relation to fiduciary obligations,
courts and commentators agree that the law of fiduciary obligations is about
ensuring loyalty. Loyalty means allegiance or dedication.3 Perhaps as a matter of
logic one could talk about being loyal to oneself—“to thine own self be true”, said
Polonius to his son Laertes4—but as a matter of usage, that is exactly what loyalty
is not; it is defined in opposition to self-interest.5
To say that a person has an obligation of loyalty, or a duty of loyalty, would
be to say that that person is obliged to act with such an other-regarding disposition.
Many pronouncements of the courts suggest that an obligation of loyalty is the
distinctive and defining feature of fiduciary relationships. In Bristol & West
Building Society v Mothew, Millett L.J. said that “the distinguishing obligation of
a fiduciary is the obligation of loyalty.”6 Similarly, in Item Software (UK) Ltd v
Fassihi, Arden L.J. said that the duty of loyalty is “the fundamental duty to which
a director is subject.”7 And in Hilton v Barker Booth & Eastwood,8 Lord Walker
(with whom the other judges agreed) stated that “the solicitor’s duty of
single-minded loyalty to his client’s interest” is the reason for the rule against
conflicts of duty and duty.
These dicta suggest that a requirement of loyalty is found in all fiduciary
relationships, and is essential to their categorisation as such. A moment’s reflection
shows that this must be true. A person who held the powers of a director over a
company, but who was free to use those powers in their own interests, would not
be legally categorised as a director. In the same way, if we think of a person who
held the legal powers that go with any of the traditional fiduciary categories—a
trustee, an agent, a partner—and we imagine that that person was free to use those
powers exactly as they wished, in their own interests, then it would be impossible
to say that they were a fiduciary.
And yet, it is more difficult than one might think to describe what a duty of
loyalty would require of one who owed it. It is common to formulate the
requirement of loyalty as a duty to act in the best interests of the beneficiary.9 But
this immediately raises serious difficulties. An open-ended duty to act in furtherance
of the interests of another could not be a legal duty; it would be impossible to say
that it had been fulfilled, because a person could always do more to further the
interests of that other person. Faced with this difficulty, one commentator has
3
J. Royce, The Philosophy of Loyalty (New York: Macmillan, 1908), at pp.16–17, formulates a preliminary
definition of loyalty as “[t]he willing and practical and thoroughgoing devotion of a person to a cause.”
4
Hamlet, Act 1, sc.iii.
5
J. Royce, The Philosophy of Loyalty (1908), at p.19.
6
[1998] Ch. 1 CA at 18.
7
[2004] EWCA Civ 1244; [2005] 2 B.C.L.C. 91 at [41]. The Delaware Court of Chancery also adopted a description
of the duty of loyalty of directors as “fundamental” in Guttman v Huang (2003) 823 A.2d 492 at 506 n.34, and this
was adopted by the Delaware Supreme Court in Stone v Ritter (2006) 911 A.2d 362 at 370.
8
[2005] UKHL 8; [2005] 1 W.L.R. 567 at [31].
9
R. Sitkoff, “The Economic Structure of Fiduciary Law” (2011) 91 B.U.L. Rev. 1039 at 1043; BCE Inc v 1976
Debentureholders 2008 SCC 69; [2008] 3 S.C.R. 560 at [37]. Note however that in another case, the Supreme Court
of Canada held that a duty to act in the best interests of the beneficiary “… does not provide a workable basis for
assigning legal liability…” and instead formulated loyalty as requiring that the fiduciary not put his own or others’
interests ahead of those of the beneficiary: KLB v British Columbia [2003] 2 S.C.R. 403; 230 D.L.R. (4th) 513 at
[46] and [49].
(2014) 130 L.Q.R. October © 2014 Thomson Reuters (Professional) UK Limited and Contributors

610 Law Quarterly Review [Vol.130
suggested that while the fiduciary duty to act in another’s best interests is
“foundational”, it is at the same time an “imprecise notion” which embraces, but
is not exhausted by, other duties.10 Another has concluded that there is no duty of
loyalty as such; loyalty “is best understood as the summation of the various
doctrines that are applied peculiarly to fiduciaries, rather than as a legal duty that
is directly enforceable in its own right.”11
If the idea of loyalty is fundamental to fiduciary law, but at the same time there
is no agreement as to what it means in law, it is not surprising that the field is
characterised by controversy and disagreement. In order to clarify what loyalty
requires, it is important to remember what is unique, in juridical terms, about
fiduciary relationships; this will help us to make sense of the law’s understanding
of loyalty. Fiduciary relationships are characterised by the holding of discretionary
power by the fiduciary. A requirement of loyalty is not relevant in situations where
the fiduciary is required to do some objectively defined thing, like paying £100.12
It is not relevant in this sense: if there is an obligation to pay £100, there may be
a question whether or not the obligation was performed, but there is no room for
discussion as to whether or not the obligation was performed loyally.
By contrast, a requirement of loyalty is juridically relevant where there is
authority for some choice to be made, among a range of authorised options. It is
a requirement, therefore, that governs the exercise of judgement. Of a person who
makes a choice among a range of authorised options, we can rightly ask whether
they acted loyally or disloyally in making that choice. This gives us another reason
why it is inaccurate to say that a fiduciary has a duty to act in the best interests of
the beneficiary. The existence of a duty to act would be inconsistent with the
fundamentally discretionary nature of fiduciary decision-making, which leaves
the decision whether and how to act to the fiduciary. When A owes to B a duty,
in the strict sense, this means that B holds an entitlement that A act, or not act, in
a particular way. In relation to the discretionary powers that characterise fiduciary
relationships, this is not the case. In relation to those discretionary powers, there
is no one who holds an entitlement that the fiduciary act, or not act, in a particular
way.13 It would be a contradiction in terms to say that a person had a duty to exercise
a discretionary power.
At the same time, there are a number of legal constraints on the fiduciary’s
freedom of choice, of which the requirement of loyalty is one. If this requirement
is not complied with, there are significant juridical consequences, as we will see.
Thus, although it is not a duty in the strict sense, the requirement of loyalty
describes a juridical relationship, not merely a moral or aspirational one. In this
respect, it is similar to the “duty to mitigate”, which is a juridical relationship but
10
G. Thomas, “The Duty of Trustees to Act in the ‘Best Interests’ of Their Beneficiaries” (2008) 2 J. of Equity
177 at 202–203.
11
M. Conaglen, Fiduciary Loyalty: Protecting the Due Performance of Non-Fiduciary Duties (Oxford: Hart
Publishing, 2010), at p.269.
12
Varity Corp v Howe 516 U.S. 489 (1996) at 504: “… the primary function of the fiduciary duty is to constrain
the exercise of discretionary powers which are controlled by no other specific duty imposed by the trust instrument
or the legal regime. If the fiduciary duty applied to nothing more than activities already controlled by other specific
legal duties, it would serve no purpose” (emphasis in original). See, to the same effect, E. Weinrib, “The Fiduciary
Obligation” (1975) 25 U.T.L.J. 1 at 7.
13
For a full argument that the requirement of loyalty is not a duty, see L. Smith, “Can We Be Obliged to be
Selfless?” in A. Gold and P. Miller (eds), Philosophical Foundations of Fiduciary Law (Oxford: Oxford University
Press, forthcoming).

which is not a duty in the strict sense.14 An even closer parallel is found in the law
of mistake. If a person makes a gift or a contract under certain kinds of mistake,
the gift or contract will be voidable. This does not reveal a “duty not to be
mistaken”; rather, it is a reflection of what is required in order to make a perfect,
non-voidable gift or contract.
When loyalty is viewed as a required manner of exercising judgement, it is
easier to understand how it can be exacted by the law in a wide range of
circumstances, within and without private law. There are elements that are common
to all situations in which a person is bound to exercise judgement in an unselfish
way, but the law may require different kinds of loyalty in different situations. For
example, trustees of charitable trusts do not have to take account of the best interests
of any person or persons in order to act loyally; they must take account of the best
way to achieve a purpose. This is also true in the case of many dispositive powers
held in a fiduciary capacity, a point to which we will return. These examples show
that the requirement of loyalty is not always one that requires decisions to be made
in the interests of a person. A wholly general articulation of the requirement of
loyalty, capturing all situations where a person is required to exercise judgement
in an unselfish way, would therefore have to be formulated more widely.15
Courts and commentators have stressed that the requirement of loyalty is
subjective, in the sense that it requires the fiduciary to exercise judgement in what
they subjectively believe to be the best interests of the beneficiary.16 Why is this?
The fiduciary is authorised and empowered to exercise their judgement, and in so
doing, is constrained by the requirement of loyalty; but it is a universal feature of
fiduciary relationships that the power and the authority in question belong to the
fiduciary decision-maker. This is merely another aspect of the fundamental feature
that we have already noticed, that fiduciary loyalty is relevant only where some
discretion has been entrusted to the fiduciary. And this is why, when judging
whether the requirement of loyalty has been fulfilled, no one else, not even a judge,
can say that the fiduciary was disloyal because they made a decision that was
substantively wrong. A judge does not have the authority to say that the fiduciary
was wrong in relation to the question of what course of action was in the best
interests of the beneficiary. The authority to make that decision belongs to the
fiduciary. This is why the full formulation is that loyalty requires the fiduciary to
exercise the powers held as a fiduciary in what they perceive to be the best interests
of the beneficiary. Although a judge does not have authority to make a decision
that belongs to a fiduciary, a judge does have the authority to apply that formulation
14
Southcott Estates Inc v Toronto Catholic District School Board 2012 SCC 51; [2012] 2 S.C.R. 675 at [72]: “A
plaintiff is not contractually obliged to mitigate, and in this sense the term ‘duty to mitigate’ is misleading.”
15
There are two possible dimensions to the requirement: first, by what (unselfish) considerations must the
decision-maker be guided in the exercise of judgement; secondly, who can enforce the requirement so to be guided?
In the simplest case, the dimensions converge, because the requirement can be enforced by the beneficiary, and it
requires the fiduciary to exercise judgement in what he or she perceives to be the best interests of that beneficiary.
This is the core private law case. The broader formulation is outside the scope of this study.
16
P.D. Finn, Fiduciary Obligations (Law Book Company, 1977), at pp.3, 13–14, 21–23; L.E. Strine Jr. et al,
“Loyalty’s Core Demand: The Defining Role of Good Faith in Corporation Law” (2010) 98 Geo. L.J. 629 at 633. In
trust law, the subjective nature of the requirement of loyalty is best illustrated by the courts’ refusal to interfere with
trustee discretions, even when held in a fiduciary capacity, or even to give advice and directions on their exercise: J.
Mowbray et al, Lewin on Trusts, 18th edn (London: Sweet & Maxwell, 2008), at pp.1106–1107; A.W. Scott, W.F.
Fratcher and M.L. Ascher, Scott and Ascher on Trusts, 5th edn (Frederick, Maryland: Aspen Publishers, 2007), Vol.3,
at pp.1072–1073. This refusal shows that the requirement of loyalty is unlike a duty, in that it does not dictate any
objective course of action, but only demands that the fiduciary do what he or she subjectively believes to be best.

in order to decide whether the fiduciary acted loyally. An exercise of judgement

is made loyally when it is made in what the fiduciary subjectively thought were
the best interests of the beneficiary. Conversely, it is made disloyally when it is
made otherwise.
But just because it was made loyally, it does not follow that the exercise of
judgement was made lawfully. This is because there are other constraints. The
powers held by a fiduciary usually have an objective scope, and cannot be exercised
outside those limits. These objective limits may include the definition of the objects
of the power (a power to transfer property to A and B cannot be used to transfer
it to C), or of the purposes for which it can be exercised (a power to use property
for a person’s education cannot be used to cover that person’s ordinary living
expenses). Moreover, fiduciaries usually owe a duty of care, skill and diligence,
associated with an objective standard of care. Furthermore, the no-conflict rules
and the no-profit rules operate in an entirely objective fashion. The subjective
nature of the requirement of loyalty is exactly what distinguishes it from these
other standards.
The general fiduciary principle of non-delegation flows directly from the
requirement of loyalty. The general law (which has been amended in some contexts,
particularly trustee investing) is that a fiduciary must act personally. That is because
a fiduciary is required to exercise judgement in what they perceive to be the best
interests of the beneficiary. This requirement cannot be fulfilled if another person
is allowed to exercise judgement. At the same time, the general law has always
allowed delegation of “ministerial” tasks, such as the payment or collection of
money. A ministerial task is precisely a task that does not require the exercise of
judgement, which is why the requirement of loyalty is not applicable. The general
principle against the fettering of fiduciary discretion can also be seen as flowing
directly from the requirement of loyalty. Loyalty requires the fiduciary to make a
current assessment of the best interests of the beneficiary; a previously fettered
discretion impedes this.
2. Source
Where does the requirement of loyalty come from, and why? Since loyalty is at
the core of fiduciary doctrine, this is a restatement of the controversial question,
when do fiduciary obligations arise? But an answer to this question must take
notice of the consideration that the requirement of loyalty is not a duty in the strict
sense. The factors that might justify a duty are not the same as the factors that
might justify a required manner of exercising judgement. What we will see in this
section is that the requirement of loyalty is inherent in certain powers, because of
the way in which they are created. We will also see that that loyalty is required in
truly advisory relationships, because of the nature of advice.
There are some relationships in which loyalty is always required, and there are
situations which are outside of these so-called per se fiduciary relationships, but
where loyalty is required as a result of the particular interaction between the parties.
Across both types, and across jurisdictions, one could probably say that the
relationship is always one that the fiduciary enters voluntarily. This has led some

authors to conclude that fiduciary obligations arise by consent.17 On this view, both
the existence and the content of fiduciary obligations are justified by the volition
of the fiduciary himself.
This argument, however, contains a non sequitur. We can show this by the
example of another relationship, namely marriage. People get married voluntarily,
and indeed marriage is a kind of contract, requiring capacity, consent and so on.
Take the usual case of people who get married without any pre-marriage agreement.
As a result of the marriage, they come under certain obligations to one another.
We might say that they undertook these obligations, but we do not think that the
obligations are shaped by the particular undertaking that was given by a particular
party. The obligations are determined by the law; they vary from one jurisdiction
to another; some can be displaced, others cannot. The obligations arise from the
relationship, and while entering the relationship is voluntary and consensual, the
consent of those who enter the relationship is not what determines the content of
the obligations.
So it is with fiduciaries. Although they voluntarily assume the fiduciary role,
it does not follow that the requirement of loyalty, and still less the no-profit and
no-conflict rules that support and complete it, are created and shaped by the
particular undertaking given by the particular fiduciary. Continuing to concentrate
for the moment on the requirement of loyalty, my argument is that the requirement
of loyalty is necessarily imposed by law when a certain kind of role is taken on;
conversely, it is not imposed unless that kind of role is taken on.
Why is it imposed, and what is the role in which it is imposed? When one person
acquires the authority to make decisions on behalf of another person, there is a
partial transfer of autonomy. One person is now authorised to act, not just in a way
that affects another person, but rather for that other person. And it is part of the
logic of acting for another person that there is only one right way to do it: you
must do it in the way that you think is best for that other person. Take this analogy:
Albert and Belinda are playing backgammon, and Belinda is called away to the
telephone. The call takes longer than expected; Albert becomes impatient; Belinda
calls out: “Play my turn for me.” Albert rolls the dice and, like a fiduciary, is
presented with a range of possible moves. The only way to make sense of the idea
of Albert playing Belinda’s turn for her is that he must play it in the way that he
thinks is in her best interests. Of course, he might deliberately make what he thinks
is a bad move, but this would not count as playing her turn for her, in line with the
authority that she gave. Like the disloyal exercise of a fiduciary power, it would
amount to a misuse of authority.
It might be possible to view this relationship as contractual. Perhaps Albert
impliedly promised, or undertook, to play Belinda’s turn in what he believed was
the best way for Belinda. But this characterisation is not necessary; and it would
17
J. Edelman, “When Do Fiduciary Duties Arise?” (2010) 126 L.Q.R. 302. An earlier text sought to argue that
fiduciary duties are ordinary contractual duties: F.H. Easterbrook and D.R. Fischel, “Contract and Fiduciary Duty”
(1993) 36 J. of Law and Economics 425. Those authors, however, do not argue that fiduciary duties are consensual;
they presuppose that the law routinely imposes obligations in the interests of economic efficiency, and that such
obligations are rightly called “contractual”. Neither presupposition can be found in the case law. Many fiduciary
relationships cannot be seen as contractual; that between an executor and the estate beneficiaries is a clear example.
For telling criticisms of consensual and economic theories, see A.B. Laby, “The Fiduciary Obligation as the Adoption
of Ends” (2008) 56 Buff. L. Rev. 99 at 110–129; P. Miller, “Justifying Fiduciary Duties” (2013) 58 McGill L.J. 969
at 980–987.

be inappropriately limitative if applied to fiduciary law. It would be inappropriately

limitative because it would not work for situations where the fiduciary’s powers
are not acquired by consent. For example, a corporate director usually gets his
powers by a statutory grant, not by a bilateral contract. An executor never gets his
powers from a contract; they come from the general law, possibly supplemented
by statutory grant. Moreover, as we will see in the next section, the basic remedy
for the disloyal exercise of fiduciary powers cannot be understood as deriving
from the breach of a promissory obligation. Conversely, it is quite unnecessary to
find a promise by Albert, because all we need to see is that the power that he was
granted had a limit built into it, from the moment it was created. The power that
he received, by Belinda’s unilateral grant, had a requirement of loyalty attached
to it.18 Of course, Albert did not need to accept the power; he could have refused;
but we do not need to find that he made any promise or undertaking to understand
the requirement of loyalty.
This helps us to understand one of the most striking things about fiduciary
loyalty: its all-or-nothing, take-it-or-leave-it nature. If loyalty is not required, the
relationship is not fiduciary. The requirement of loyalty is inherent in the kind of
relationship with which we are concerned.19 As with Albert, a person is usually
not bound to take on a power; but if they choose to take it on, they take it on with
the limits that are built into it. This is not unusual; as we have seen, when the law
attaches features to a legal relationship, parties may have a choice as to whether
or not they enter the relationship, but they do not necessarily have the ability to
vary its features. Moreover, it is a question of legal characterisation whether they
have entered the relationship; the parties cannot avoid the mandatory or definitional
features of a legal relationship by simply calling it by another name.20
In every fiduciary relationship, the fiduciary acquires control over a part (or in
some cases, all) of another person’s autonomy. Autonomy is a person’s ability to
control what happens in his or her life. Autonomy itself cannot be transferred, in
whole or in part. But the law does contemplate the transfer of certain levers by
which autonomy is realised. That happens, for example, when the law allows one
person to make legally effective decisions (say, regarding the disposition of
property, or regarding medical care) that do not affect the decision maker, but only
affect another person. In these cases, the decision-maker holds the legal controls
of part or all of the other person’s autonomy.21 It only makes sense that the law
would impose a requirement that the levers be exercised by the first person in what
they think is the best interest of the second. If it did not, the first person could use
their powers over the other’s autonomy as if they were nothing more than pecuniary
assets, like money in the bank. But since those powers are the legal controls over
the other’s autonomy, using them as pecuniary assets would be using another
18
A version of this idea appears in J.C. Shepherd, The Law of Fiduciaries (Toronto: Carswell, 1981), especially
Ch.6, as the “transfer of encumbered power” theory.
19
See, again, Shepherd, The Law of Fiduciaries (1981), at p.48. A more detailed analysis that aligns fiduciary
obligations with fiduciary relationships appears in Miller, “Justifying Fiduciary Duties” (2013) 58 McGill L.J. 969
at 1009–1021.
20
Street v Mountford [1985] A.C. 809 HL; [1985] 2 All E.R. 289; National Westminster Bank plc v Spectrum Plus
Ltd [2005] UKHL 41; [2005] 2 A.C. 680 at [109]–[110] and [141].
21
Miller, “Justifying Fiduciary Duties” (2013) 58 McGill L.J. 969 at 1017: fiduciary power is “… a form of
authority derived from the legal capacity of another person …”

person as if he or she were a pecuniary asset.22 The law forbids this. The law will
not allow a person who is empowered to run another person’s life to do so, except
in what they perceive to be that other person’s interest.
Thus, if you acquire powers to make choices for another person, you are bound
by the requirement of loyalty, which is imposed by law because there is no other
way to make sense of the power to make choices for another person. Obviously,
the question then becomes, when do we see one person as having the power to
make choices for another person?
There are many situations in which one person’s choices affect another person.
But usually, whether or not the first person has behaved lawfully is determined
according to obligations that have an objective content. This is the case in most
contractual relationships. If one person has contracted to repair the roof on another’s
house, the first will have the ability to make various choices: how many workers
to employ, what equipment to use and so on. But the law says nothing about that.
Those choices can be made however that person wishes; the exercise of judgement
can be performed in an entirely self-regarding way. The contract is performed, or
not, according to its objective terms as to quality, time of completion and so on.
We could fairly say that the roofer has an obligation to act in the customer’s
interests; the roofer is obliged to improve the state of repair of the customer’s
house. But the roofer’s obligations are objectively articulated, and therefore it is
not necessary to make that decision-making process justiciable. The choices are
justiciable, in a sense; if the contractual requirements are not fulfilled, there will
be liability. But those choices, those decisions, are justiciable only in relation to
the objective result achieved, not in relation to how the choices were made.
In some cases, the law may constrain the reasons for which a party can make
choices. If one party to a lending agreement has the power to change the interest
rate, it may be concluded that there is an implied term that this power may not be
used dishonestly, capriciously, unreasonably, or arbitrarily.23 Here, we might say,
the choices of the lender are justiciable as to how they are made. But again, these
are objective constraints. More importantly, within these constraints, the lender
may make choices in its own interest. We would not say that the lender’s power
to change the interest rates is a power held for, or on behalf of, the borrower. That
is why this situation does not involve a requirement of loyalty.
The requirement of loyalty is not imposed to control mere power over another
person; it is imposed to control decision-making power held for, or on behalf of,
another person.24 It is in precisely these situations that it would be unlawful for the
decision-maker to make the decision in their own interests. How do we identify
22
E. Weinrib, “The Juridical Classification of Obligations” in P. Birks (ed.), The Classification of Obligations
(Oxford: Clarendon Press, 1997), at p.46; J. Evans, “A Kantian Perspective on Fiduciary Relationships”, LL.M. thesis
(University of Toronto, 2005), online at http://www.collectionscanada.gc.ca/obj/thesescanada/vol2/002/mr02508.pdf
at pp.94–107 (there discussing the no-profit rule); Miller, “Justifying Fiduciary Duties” (2013) 58 McGill L.J. 969
at 1019–1021.
23
Paragon Finance plc v Nash [2001] EWCA Civ 1466; [2002] 1 W.L.R. 685; Paragon Finance plc v Pender
[2005] EWCA Civ 760; [2005] 1 W.L.R. 3412.
24
Canadian law was, for many years, overly focused on an imbalance of power as diagnostic of fiduciary
relationships. Although many fiduciary relationships reveal such an imbalance, it is not diagnostic, as the Supreme
Court of Canada has now clearly said: Galambos v Perez 2009 SCC 48; [2009] 3 S.C.R. 247 at [68] and [74]. The
use of brute power, as distinct from decision-making authority held on behalf of another person, is not regulated by
fiduciary obligations. It is important to notice, though it is beyond the scope of this article, that there is such a thing
as de facto authority, which may be recognised in relation to fiduciary obligations as well as in relation to other legal
consequences.

these situations? We must analyse the manner or transaction in which the

decision-maker acquired the decision-making power. The fundamental question
is whether a person holds powers in the role or capacity of a manager or an
administrator, rather than as a form of personal wealth.25 This typically demands
an exercise in interpretation of the grant of power, based on its wording if
applicable, and based on its sense and purpose. This question is irreducible; it
cannot itself be answered by other legal tests.26
The grant of power might be a voluntary grant between the parties (as in a
principal-agent relationship); it might be statutory (as it is in the case of company
directors, and some trustee powers); it might come from non-statutory law (such
as the powers held by an executor, even if none are expressly granted by the will).
If the determination is that the power is not held for the pecuniary benefit of its
holder, but is held in a managerial capacity, then the requirement of loyalty attaches
by operation of law. The result is that the holder of the power is required to exercise
the power (or not exercise it) only in what they perceive to be the best interests of
the other person.
In the classical per se fiduciary relationships, of course, this question has already
been answered, for the whole categories in question: trustee-beneficiary,
agent-principal, and so on. Their powers are always held in a managerial capacity.
The interpretive analysis becomes more relevant either when the possibility of
recognising a new per se relationship is under consideration, or when the question
is whether an ad hoc fiduciary relationship has arisen. If, for example, parties enter
into a contract, under which one of them acquires powers that will affect the other,
the question is whether the former holds those powers in a managerial capacity.
In Meinhard v Salmon,27 the parties were in a joint venture to operate a hotel. Under
their agreement, the defendant Salmon had a wide range of powers to operate the
business, including “full power to manage” it28; and he was referred to throughout
the judgment as the “manager”. Although the agreement did not mention any
fiduciary relationship, one was found to exist. The terminology of “management”
shows that Salmon held his powers on behalf of someone other than himself alone.
The exercise was one of interpretation of the contract; this is necessary in many
cases in which the relationship is a contractual one and the question arises whether
it is also fiduciary. It does not follow from this, however, that a fiduciary
relationship that so arises—including the requirement of loyalty, and the no-conflict
and no-profit rules—can be seen as created by implied contractual promises, or
by undertakings. As we have seen, the requirement of loyalty is not a duty at all,
in the strict sense. Once the exercise of interpretation leads to the conclusion that
some power was held on behalf of another, the requirement of loyalty is an integral
part of the power in question, not a separate juridical relationship. For reasons that
25
See T. Frankel, “Fiduciary Law” (1983) 71 Cal. L. Rev. 795 at 808–809; Fox-Decent, Sovereignty’s Promise:
The State as Fiduciary (2011), at pp.96–101.
26
P.D. Finn, “The Fiduciary Principle” in T. Youdan (ed.), Equity, Fiduciaries and Trusts (Toronto: Carswell,
1989), at p.38: “… a bare question of characterization about which little can be said by way of elaboration.”
27
249 N.Y. 458; 164 N.E. 545 (1928).
28
For extracts from the agreement, see Laby, “The Fiduciary Obligation as the Adoption of Ends” (2008) 56 Buff.
L. Rev. 99 at 115–116.

we will explore below, the no-conflict and no-profit rules are then generally attached
by operation of law (although defeasibly, in the sense that they may be excluded).29
Another example of this interpretative exercise, this time in relation to a trust
deed, can be seen in Mettoy Pension Trustees Ltd v Evans.30 One issue in the case
related to a power in a pension trust that allowed (but did not require) trust property
to be given to pensioners. The power was held by the employer, who was not a
trustee. If a trust deed gives a power to a trustee, the power is presumptively held
in a fiduciary capacity; by contrast, if it gives a power to someone (like a family
member) who is not a trustee, the power is presumptively not held in a fiduciary
capacity, so that the donee of the power can use it (or not) exactly as they wish.
Warner J., however, held that the correct interpretation of the deed was that the
employer held the power in a fiduciary capacity.31 The best way of making sense
of the provision, in the context of the deed as a whole, was that the power was not
held by the employer as a pecuniary asset with which it could do what it pleased,
but rather was granted and held in a managerial capacity. This conclusion brings
with it a version of the requirement of loyalty, as it applies to dispositive discretions:
such powers are not required to be exercised in what the holder considers to be
the best interests of any particular person or persons; rather, they are required to
be exercised in what the holder considers to be the best manner of fulfilling the
purpose for which the power was granted.32 In Mettoy, therefore, the conclusion
was that the power could only be rightly used in what the employer thought was
the best implementation of the purpose for which the power was created.33 It
followed that now that the employer was insolvent, the court could step in to
exercise the power; this, however, is a conclusion that would not follow for every
fiduciary relationship.34
The interpretive exercise has also come to the fore in cases that seek to determine
whether an ad hoc fiduciary relationship has arisen. That is because many courts
have adopted a test that looks to whether the fiduciary has undertaken to use such
powers as he or she holds in the sole interest of the beneficiary.35 It is tempting to
29
We will also see below that while these norms are legal rules, they (like the requirement of loyalty) are not duties
in the strict sense.
30
[1990] 1 W.L.R. 1587 (Ch) at 1613–1620.
31
Contrast the different interpretation of a different power in the pension plan in issue in Imperial Group Pension
Trust Ltd v Imperial Tobacco Ltd [1991] 1 W.L.R. 589; [1991] 2 All E.R. 597: the employer was bound to act in
good faith, but could act in a self-interested way. Conaglen, Fiduciary Loyalty: Protecting the Due Performance of
Non-Fiduciary Duties (2010), at p.43, fn.69, suggests that Imperial Group Pension Trust casts doubt on the correctness
of the holding in Mettoy Pension Trustees [1990] 1 W.L.R. 1587 (Ch). This may be right, but it underlines that the
question whether a power is held in a fiduciary capacity is answered by the interpretation of the grant of the power.
32
Vatcher v Paull [1915] A.C. 372 PC at 378; Klug v Klug [1918] 2 Ch. 67 at 71; McPhail v Doulton [1971] A.C.
424 HL at 449 and 457; Re Hay’s Settlement Trusts [1982] 1 W.L.R. 202 (Ch) at 209; Turner v Turner [1984] Ch.
100 at 109–110; Re Beatty [1990] 1 W.L.R. 1503 (Ch) at 1506; Hayim v Citibank NA [1987] A.C. 730 PC at 746.
33
Mettoy Pension Trustees Ltd v Evans [1990] 1 W.L.R. 1587 (Ch) at 1617–1618: “…in the manner best calculated
to give effect to the settlor’s or testator’s intentions.”
34
Implicit in this conclusion is that not only was the power held in a fiduciary capacity, but also in an official
capacity, so that another fiduciary (or the court) could succeed to the power’s exercise. Not every fiduciary power is
held officially. For example, the fiduciary powers of an agent are not typically transferable to a successor. This is
one reason why it is not fruitful to produce a general explanation of the requirement of loyalty by saying that the
powers in question are themselves held in trust, in the technical sense (as seemingly posited by Shepherd, The Law
of Fiduciaries (1981), at pp.110–119).
35
Examples include Hospital Products Ltd v United States Surgical Corp (1984) 156 C.L.R. 41 and Galambos v
Perez 2009 SCC 48; [2009] 3 S.C.R. 247. The latter case established that ad hoc fiduciary relationships require that
the fiduciary have a discretionary power to affect the beneficiary’s legal or practical interests, and, in the absence of
a statutory grant of power, that the fiduciary have undertaken to use that power in what he perceives to be the best
interests of the beneficiary. For an earlier example of a similar approach, see Tate v Williamson (1866) 2 Ch. App.
55 LC.

view such an undertaking as a kind of promise, that itself creates and constitutes
an obligation; and indeed, such a promise could be given as part of the contractual
relationship between the parties. But it is striking that when analysing the fiduciary
dimension of the relationship, the courts use the language of undertaking and not
the language of promise. Moreover, the courts emphasise that the fiduciary
relationship, if it exists, is juridically distinct from any contract between the parties,
albeit the two relationships interact.36 Most obviously, they must interact if the
contract is the source of the powers that are held in a fiduciary capacity; and the
contract may vary the operation of the no-conflict and no-profit rules, although
these can also be varied non-contractually. The undertaking, however, does not
directly create or shape the requirement of loyalty; as we have seen, that
requirement is not an obligation, promissory or otherwise. This will become even
clearer in the next section, where it is shown that the basic remedy for the disloyal
exercise of fiduciary powers cannot be understood as deriving from the breach of
an obligation. Rather, the undertaking is relevant because it informs the
interpretation of the powers that were acquired by the fiduciary. Just as in Meinhard
v Salmon,37 albeit by a different interpretive route, the undertaking assists the court
in concluding that the powers in question were acquired by the fiduciary not as
pecuniary assets, to be used in any way at all, but rather in a managerial role; the
law therefore requires them to be so exercised. It subjects the exercise of the powers
to the requirement of loyalty.
In many of the ad hoc cases, and even sometimes in the per se cases, the
fiduciary does not have what might be called legal or Hohfeldian powers over the
beneficiary.38 Many of these relationships are purely advisory. This is true in the
case of many solicitor-client relationships, which are per se fiduciary relationships,
and also in many financial advisory relationships, which may be ad hoc fiduciary
relationships. In an advisory relationship, the fiduciary cannot make decisions that
directly affect the legal situation of the beneficiary. But here too, one can see the
relationship as one in which there has been a partial transfer of autonomy. The
reason is that advice is an exercise of judgement aimed at helping a person to make
choices. If, therefore, the nature of the relationship is such that the advisor has
effective power over the advisee’s decision-making process, there is a partial
transfer of autonomy just as in the case of Hohfeldian powers.
Although the line may be a difficult one to draw in some situations, advice is
not information. The giving of advice is a process that involves judgement, just
as does the decision whether and how to use a legal or Hohfeldian power. Moreover,
it is a doubly subjective process, responding not only to the position of the advisee
but also to that of the particular advisor. Advice must, obviously, be tailored to
the situation of the advisee; but on the other side, different advisors might properly
36
See, for example, Hospital Products Ltd v United States Surgical Corp (1984) 156 C.L.R. 41 and Strother v
3464920 Canada Inc 2007 SCC 24; 281 D.L.R. (4th) 640.
37
249 N.Y. 458; 164 N.E. 545 (1928).
38
By “Hohfeldian power”, I mean a power to alter existing legal relationships: W.N. Hohfeld, Fundamental Legal
Conceptions as Applied in Judicial Reasoning, 3rd edn with new foreword by A.L. Corbin (New Haven: Yale
University Press, 1964). This concept can usefully be confined to powers that are particular to the holder, and so do
not simply reflect the general legal capacities that everyone has; see F.H. Lawson, “Rights and Other Relations In
Rem” in E. von Caemmerer, W. Hallstein, F.A. Mann, and L. Raiser (eds), Festschrift für Martin Wolff (Tübingen:
J.C. Mohr, 1952), at pp.106–107; cf. L. Smith, The Law of Tracing (Oxford: Clarendon Press, 1997), at pp.52–54.

give different advice to the same advisee, each of them advising in what he or she
considered to be the best interests of the advisee.
Could we make sense of the idea of advice that was given, not in what the
advisor thought was the best interests of the advisee, but rather in the advisor’s
own interests? We would surely hesitate even to call that advice, and might instead
label it as attempted manipulation. This is why a truly advisory situation attracts
a requirement of loyalty in the same way as a situation where legal powers are
held in a managerial capacity. In both situations, the requirement of loyalty is
inherent in the nature of the relationship.
Deciding whether a relationship is truly advisory obviously requires an
examination of the relationship; the court may look for an undertaking to advise
solely in the other’s interests, or alternatively for “a mutual understanding that one
party has relinquished its own self-interest and agreed to act solely on behalf of
the other party.”39 The court will also inquire whether the advisor has effective
power over the advisee’s decision-making:
“the cases suggest that the distinguishing characteristic between advice
simpliciter and advice giving rise to a fiduciary duty is the ceding by one
party of effective power to the other. It is this mutual conferring and
acceptance of power to the knowledge of both parties that creates the special
and onerous trust obligation.”40
These issues may also be expressed through the language of undertaking, but in
the end the inquiry is the same: whether there has been a partial transfer of
autonomy. In these cases, this requires a factual decision-making power held by
the advisor, and a true advisory relationship, which is another way of saying that
the factual power is held for and on behalf of the advisee.
The argument in this section has been that the requirement of loyalty is present
in all fiduciary relationships, as a matter of the proper interpretation of the powers
held by the fiduciary. These powers may be legal or factual; they can come from
any source, whether it be a contractual grant, or a grant by statute or by the common
law. If the proper interpretation of the power is that the holder can use it as they
wish, then they are not a fiduciary. If the proper interpretation is that they hold it
for and on behalf of another, then they are a fiduciary and are subject to the
requirement of loyalty in the exercise of the power.
3. Remedies
The final matter to be addressed is remedies. This study sheds a great deal of light
on the law’s understanding of loyalty.
(a) The primary remedy: rescission

When a legal power, held in a fiduciary capacity, is exercised by the fiduciary in
breach of the requirement of loyalty—generally, that is to say, otherwise than in
what the fiduciary believes to be the best interests of the beneficiary—that exercise
39
Hodgkinson v Simms [1994] 3 S.C.R. 377 at 409–410 (La Forest J., L’Heureux-Dubé J. and Gonthier J.).
40
Hodgkinson v Simms [1994] 3 S.C.R. 377 at 466 (Sopinka J. and McLachlin J., dissenting but not on this point;
see 411–413).

is subject to being retroactively set aside by the beneficiary. The unanimous decision
of a seven-judge panel of the UK Supreme Court in Pitt v Holt41 is only the latest
affirmation of this principle, and it underlines that this remedy, though it is also
available where there is a conflict, is not confined to that situation.42
The principle allows the beneficiary to avoid contracts, but also other legal acts
of the fiduciary, such as the issue of shares by a company, or the exercise of a
dispositive discretion by a trustee. The legal act is voidable by the beneficiary,
even if the beneficiary is not a party to it, inasmuch as it is an act between the
fiduciary and a third party, that the fiduciary entered into in the exercise of fiduciary
powers.43 The importance of this remedy has been underestimated. For one thing,
it is inconsistent with any purely contractual or consent-based explanation of the
fiduciary relationship; the retroactive avoidance of otherwise valid contracts, made
by one contracting party with a third party, is not a remedy offered by the law of
contracts for breach of a contractual term.44 We see avoidance, rather, where there
is a defect in the formation of a contract, as where a person makes a contract under
a mistake induced by misrepresentation, or under illegitimate pressure. The law’s
stance is that these factors undermine consent, but do not wholly negate it; this is
why they lead to voidability, but not voidness. These factors represent flawed
exercises of the power to make a contract. That power has requirements, which
are not entirely fulfilled in the presence of mistake or illegitimate pressure.
The fiduciary who enters into a contract in breach of the requirement of loyalty
is neither mistaken nor compelled; but the law views the situation in an analogous
way. The exercise of judgement, in relation to the power held on behalf of the
beneficiary, is flawed, because not all of the requirements of the power have been
complied with. At the same time, as in mistake and pressure, it is not wholly
ineffective. Its result—the contract, or other legal act—is therefore subject to
avoidance in principle. But, again in parallel to cases of mistake or duress, innocent
third parties who are not aware of this defect may be able to take the benefit of a
contract that they have made with the fiduciary.45
The primary remedy of rescission for violation of the requirement of loyalty
underlines that this requirement is not a duty in the strict sense. The breach of a
duty, as such, does not lead to rescission, and the defects of consent that allow
rescission are not breaches of duty. A person who is mistaken or compelled in
entering into a legal act does not need to rely on a breach of duty to rescind it. It
is true that there might be a breach of duty in the story: the mistake might arise
from a deliberate misrepresentation, and illegitimate pressure might well amount
to tortious conduct. But in order to isolate the breach of duty from the impairment
of consent, as two separate juridical effects, we only have to consider the case in
which Albert is tricked or pressured by Belinda into making a gift to Charles.
Albert can avoid the gift, on the basis of mistake or illegitimate pressure, and
recover the property from Charles, even though Charles has breached no duty. But
41
[2013] UKSC 26; [2013] 2 A.C. 108 at [70]–[73] and [93].
42
For a discussion of other cases from trust and corporate law, see L. Smith, “The Motive, Not the Deed” in J.
Getzler (ed.), Rationalizing Property, Equity and Trusts: Essays in Honour of Edward Burn (Oxford: Oxford University
Press, 2003), at pp.68–73.
43
Legal acts, such as contracts, to which the beneficiary is a party may also be set aside. In these cases, however,
it may be the beneficiary’s consent to the transaction that is vitiated. We will return to this later in the analysis.
44
I use the term “avoidance” as synonymous with “rescission”.
45
P. Watts, “Authority and Mismotivation” (2005) 121 L.Q.R. 4.

exactly because he has breached no duty, Charles is not liable to Albert for any
consequential loss that Albert might have suffered as a result of the transaction.
Conversely, in relation to Belinda, Albert has no claim to rescission because there
is nothing to rescind between them; at the same time, Belinda’s breach of duty
could ground a claim by Albert for loss caused by this breach.
The Hohfeldian powers that people hold are juridical constructs, but they are
not duties. In Hart’s terms, they are rules; in particular, power-conferring rules.46
All such rules have boundaries. They may be subject to requirements of form. A
power may also be objectively limited as to how it can be used. An agent’s powers
to bind the principal to contracts, whether via actual or ostensible authority, have
objective limits. A trustee’s power to advance income to any or all of the settlor’s
children does not allow an advancement to the settlor’s nephew. In such cases,
attempted exercises of the power outside its scope will fail; they will be void.
The limits related to mistake and illegitimate pressure are different, because,
as we have seen, they do not lead to voidness. They are not, like many of the limits
mentioned in the previous paragraph, the creation of private actors. They are the
law’s nuanced elaboration of how impairments to consent affect legal acts that
depend, for their validity, on consent.47 The requirement of loyalty that applies to
powers held in a fiduciary capacity is similar. It is the law’s nuanced elaboration
of how a failure to act loyally affects legal acts that depend, for their validity, on
being exercised in a loyal way.
(b) Monetary remedies

Some authors speak in terms of compensation for breach of fiduciary obligation.48
How does this fit with my argument that the requirement of loyalty is not a duty
in the strict sense? I have argued that since the requirement of loyalty is instead
an inherent feature of fiduciary powers, a failure to satisfy it leads naturally to the
conclusion, not that a person is liable to make compensation, but rather to the
conclusion that the exercise of the power is voidable.
First, although the requirement of loyalty is not a duty in the strict sense,
fiduciaries do owe duties in the strict sense. They presumptively owe a duty of
care, skill and diligence, and a breach of this duty can lead to an order for
compensation for loss caused by the breach. Fiduciaries also owe a duty of good
faith. There is some controversy over whether this stands apart from the requirement
of loyalty.49 The understanding of loyalty as a requirement, and not as a duty, would
suggest an independent role for a duty of good faith, a breach of which would
trigger liability to compensate for any resulting loss. Fiduciaries may also be liable
for breaching other duties, such as the duty to abide by the terms of a trust, the
46
H.L.A. Hart, The Concept of Law, 3rd edn (Oxford: Oxford University Press, 2012), at pp.26–42.
47
The many decisions on the so-called “proper purposes doctrine”, when properly understood, include examples
of both objective limits on powers, discussed in the previous paragraph, and of disloyal exercises of powers, that lead
to voidability and not voidness; see C. Mitchell, “Stewardship of Property and Liability to Account” (2014) 78 Conv.
215 at 218–219, especially fnn.13–14. Mitchell argues that “proper purposes” refers to objective limits, but the cases
he cites reveal the ambiguity in the doctrine’s label.
48
Scott, Fratcher and Ascher, Scott and Ascher on Trusts (2007), Vol.4, at §24.10; C. Mitchell, “Equitable
Compensation for Breach of Fiduciary Duty” [2013] C.L.P. 307.
49
Strine Jr. et al, “Loyalty’s Core Demand: The Defining Role of Good Faith in Corporation Law” (2010) 98 Geo.
L.J. 629; R. Nolan and M. Conaglen, “Good Faith: What Does it Mean for Fiduciaries and What Does it Tell Us
About Them?” in E. Bant and M. Harding (eds), Exploring Private Law (Cambridge: Cambridge University Press,
2010).

contractual duties that may apply to an agent, or the statutory duties that may apply
to corporate directors and officers.50
Secondly, in understanding monetary remedies against fiduciaries, it is important
to understand that not every monetary remedy aims to compensate for a loss caused
by a breach of duty. Some remedies take away a fiduciary’s gains, without regard
to any loss of the beneficiary. We will return to this below, in the section on the
no-profit rule. In some jurisdictions, fiduciaries may be subject to punitive
damages.51
Even leaving aside those non-compensatory money orders, fiduciaries are often
subject to money orders that do not aim at compensation for a loss caused by the
breach of a duty. In contract law, the courts will often enforce a party’s primary
duty, being the duty to perform that was created by the contract.52 When a claimant
obtains “damages in lieu of specific performance,” they obtain a money award
that aims to put them in the position that they would be in if performance had been
made. This may lead to a money award much greater than a compensatory order.53
Such an award does not aim to compensate for a loss caused by a breach. It is the
substitutionary, monetary version of the non-monetary primary obligation.
Such substitutionary awards also exist in relation to fiduciaries.54 A fiduciary
who holds property may be ordered to perform the primary duties with respect to
that property. If the fiduciary no longer has the property, there are two possibilities.
One is that they have been discharged, as where they have lawfully transferred the
property away. The other is that they have not been discharged. This may be
because the court does not believe them55; or, because the transaction by which
the fiduciary disposed of the property has been rescinded.56 In these cases, the
courts will again enforce the primary duty, which has never been discharged. If it
is no longer enforceable in specie, it will be enforced by a substitutionary order,
to pay the value of the property that should still be held.57 Such an order does not
aim to compensate for a loss caused by the breach of a duty, and it does not depend
on proof of a loss that was caused by a breach.58
There are, however, other cases in which orders are made against fiduciaries
that definitely are compensatory orders based on a breach of duty. These are
typically cases in which the beneficiary suffers a loss, and then discovers that the
50
Whether the breach of any of the duties described in this paragraph can properly be described as disloyalty, or
as a breach of fiduciary duty, is a question that may have practical importance but is beyond the scope of this article.
In elaborating the requirement of loyalty as a juridical requirement that is not properly called a duty, I do not here
argue that this requirement is all that there is to fiduciary loyalty.
51
The availability of punitive or exemplary damages in this sphere has been a matter of debate. Such damages are
available in the United States (D.B. Dobbs, Law of Remedies, 2nd edn (St.Paul, Minnesota: West Publishing Co,
1993), at p.320), Canada (Whiten v Pilot Insurance Co [2002] 1 S.C.R. 595; 209 D.L.R. (4th) 257 at [67]) and New
Zealand (Aquaculture Corp v New Zealand Green Mussel Co [1990] 3 N.Z.L.R. 299), but not in New South Wales
(Harris v Digital Pulse Pty Ltd (2003) 56 N.S.W.L.R. 298 NSWCA).
52
Primary obligations arise without wrongdoing, while secondary obligations (such as obligations to compensate
for loss caused) arise in response to breaches of primary obligations.
53
Semelhago v Paramadevan [1996] 2 S.C.R. 415; 136 D.L.R. (4th) 1.
54
They also exist in tort law: R. Stevens, Torts and Rights (Oxford: Oxford University Press, 2007), Ch.4.
55
Campbell v Hogg [1930] 3 D.L.R. 673 PC; the form of the order is revealing as to its nature.
56
Estate of Rothko 372 N.E.2d 291 (N.Y. 1977), discussed in Scott, Fratcher and Ascher, Scott and Ascher on
Trusts (2007), Vol.4, at pp.1709–1711.
57
For more detail, see L. Smith, “The Measurement of Compensation Claims Against Trustees and Fiduciaries”
in E. Bant and M. Harding (eds), Exploring Private Law (2010); C. Mitchell, “Stewardship of Property and Liability
to Account” (2014) 78 Conv. 215.
58
This is why it is said that the order is in the nature of a debt, not damages: Ex p. Adamson (1878) 8 Ch. D. 807
CA at 819.

fiduciary—usually an advisor—was in a conflict. The loss suffered by the

beneficiary may be recoverable. Nocton v Lord Ashburton59 is the locus classicus,
but such cases have arisen more frequently in recent decades. If these are indeed
cases of compensation for “breach of fiduciary duty”, how does this fit with my
claim that the core requirement of loyalty is not a duty in the strict sense? In a later
section of this article, I will argue that liability in such cases is based on the breach
of a duty to disclose.
III. The No-conflict Rules

Fiduciaries are not supposed to act when they are in certain kinds of conflicts:
conflicts of self-interest and duty, and conflicts of duty and duty.60 This section
examines the nature of these rules, when they are activated, and the effect of
infringing them. My argument is that the no-conflict rules are directly related to
the requirement of loyalty.
1. Nature
The first step is to define the conflicts with which these rules are concerned. A
conflict arises where a fiduciary is bound by the requirement of loyalty with respect
to the exercise of judgement, and that exercise of judgement is liable to be affected
by something that the requirement of loyalty requires the fiduciary not to consider:
either the fiduciary’s own self-interest, or the interests of some third person.61
Under this definition, only those who are bound by a requirement of loyalty
can be in a conflict to which the rules apply.62 This is how lawyers and non-lawyers
alike use the concept of a conflict. Of course, when it is used in a non-legal context,
it is not in relation to the legal rule under discussion here; but the animating concern
is exactly the same. Putting the matter more generally, to cover the colloquial idea
of a conflict, we say that a conflict of interest arises when a person is required to
exercise judgement in an unselfish way, but is in a position in which that judgement
is liable to be affected by self-regarding or otherwise conflicting considerations.63
This is why we speak of conflicts of interest even in situations where there is no
legally enforceable requirement of loyalty, nor any legal norm forbidding conflicts.
59
[1914] A.C. 932 HL; [1914–15] All E.R. Rep. 45.
60
I agree with Conaglen that the norm of trust law that is traditionally called the “self-dealing rule”, that makes
voidable a trustee’s personal purchase of trust property, is merely an example of the general principles regarding
conflicts that apply to all fiduciaries: Conaglen, Fiduciary Loyalty: Protecting the Due Performance of Non-Fiduciary
Duties (2010), at pp.125–128. This is not so clear for the “fair-dealing” rule, which applies to a purchase by the trustee
(in his personal capacity) of the beneficiary’s right or interest. In this context, the trustee is not exercising a fiduciary
power, but their own personal contractual capacity; the challenge to the transaction does not impugn the fiduciary’s
exercise of a fiduciary power, but rather impugns the beneficiary’s consent. We will return to this later in the analysis.
61
This definition, and indeed this part of the argument, owe a great deal to the work of Dr Remus Valsan and his
doctoral thesis, “Understanding fiduciary duties: conflict of interest and proper exercise of judgment in private law”
(McGill University, 2012), online at http://www.collectionscanada.gc.ca/obj/thesescanada/vol2/QMM/TC-QMM
-110522.pdf.
62
Here my account differs substantially from that of Conaglen, Fiduciary Loyalty: Protecting the Due Performance
of Non-Fiduciary Duties (2010). He views the no-conflict rules as forbidding action if there is any conflict between
self-interest and any duty owed by the fiduciary to the beneficiary. This would suggest that any fiduciary who acts
gratuitously is always in a conflict; the duties of positive action (such as the duty of care, skill and diligence; the
trustee’s duty to perform the trust; and so on) require exertion in various ways, which (since the fiduciary is acting
gratuitously) is opposed to their financial self-interest. This understanding of conflicts is far too wide; it would mean
that gratuitous fiduciaries could not act at all, and yet historically such fiduciaries were the norm.
63
See for example the influential analysis of an ethicist: M. Davis, “Conflict of Interest” (1982) 1 Business and
Professional Ethics J. 17.

To take some examples from the academic world, we aim to avoid conflicts of
interest in respect of members of prize or scholarship committees, or doctoral
juries. These are not fiduciary relationships, but they are situations where
disinterested, unselfish judgement is required. We would expect colleagues to
recuse themselves where a candidate was a family member, a friend, or indeed a
sworn enemy.
The definition that I offer helps us to understand the reason why the no-conflict
rules exist. They exist because the law has an insight into the way the human mind
works when it is exercising judgement. When a person exercises judgement in a
conflict situation, it is impossible for that person to be certain that they have
excluded extraneous considerations.64 A professor would not wish to grade an
examination written by his own child; the professor could never be sure whether
love for the child was leading towards a too-high grade, or whether the effort to
exclude this was leading to overcompensation and a too-low grade.65 And if the
professor, in perfectly good faith, cannot be certain, then of course no one can.
The problem cannot be solved by any amount of evidence.
The no-conflict rules exist to address exactly the same concern, in the context
of the legal requirement of loyalty. Where the fiduciary’s self-interest is in play,
they should not consider it, but they cannot be sure of excluding it. That is a conflict
of self-interest and duty. Where the fiduciary is bound by requirements of loyalty
owed to two persons, then in relation to each they should not consider the interests
of the other, but they cannot be sure of excluding them. That is a conflict of duty
and duty.
The no-conflict rules apply only where there is a requirement of loyalty, because
that requirement is a juridical constraint, perhaps the only one, which controls the
manner in which judgement is exercised. Normally, the question whether a person
has acted lawfully or not is determined purely objectively. This is why there is no
rule against conflicts between self-interest and non-fiduciary duties. Such a rule
is not needed, because we can tell objectively whether the non-fiduciary duty was
fulfilled.66 This also explains why the good faith of the fiduciary is irrelevant in a
conflict situation; even people in perfectly good faith cannot know whether or not
they have successfully excluded some consideration of self-interest, or another’s
interest, when they exercise their judgement. It also explains why the question
whether the principal suffered a loss is also irrelevant. The rules do not aim at the
prevention of loss, but at the sound exercise of judgement.
“Conflict destroys an essential ingredient without which a fiduciary relation
cannot function—disinterested judgment.”67 This is the sense in which the
no-conflict rules are prophylactic, which means that they aim to avoid a problem,
rather than to cure it or rectify it. They aim to avoid the exercise of fiduciary powers
64
For an empirical study demonstrating this, see D.A. Moore, L. Tanlu and M.H. Bazerman, “Conflict of Interest
and the Intrusion of Bias” (2010) 5 Judgment and Decision Making 37. See also D.A. Moore and G. Leowenstein,
“Self-Interest, Automaticity, and the Psychology of Conflict of Interest” (2004) 17 Social Justice Research 189,
concluding (at 199) that “…violations of professionalism induced by conflicts of interest often occur automatically
and without conscious awareness.” For an analysis in terms of the danger of self-deception, see I. Samet, “Guarding
the Fiduciary’s Conscience—A Justification of a Stringent Profit-stripping Rule” (2008) 28 O.J.L.S. 763 at 772–781.
65
M. Davis, “Introduction” in M. Davis and A. Stark (eds), Conflict of Interest in the Professions (Oxford: Oxford
University Press, 2001), at p.16, gives the example of refereeing one’s child’s football game.
66
See above, fn.12 and text.
67
E.R. Hoover, “Basic Principles Underlying Duty of Loyalty” (1956) 5 Clev-Marshall L. Rev. 7 at 10.

for improper reasons. They do this by forbidding the exercise of such powers in
conflict situations.
2. Remedies
This view of the no-conflict rules is supported by considering the law’s response
when they are breached. It is sometimes said that a breach of the no-conflict rules
leads to a liability to disgorge any profits. In my view, this is the domain of the
no-profit rule, to which we will return below. Surely it is significant that a breach
of the no-conflict rules leads to exactly the same result as a breach of the
requirement of loyalty: namely, that contracts, and other legal acts, that are made
in violation of the no-conflict rules are voidable by the beneficiary. As with the
core requirement of loyalty, this retroactive recourse shows that the no-conflict
rules cannot be seen as contractual duties, or as created by an undertaking. The
no-conflict rules tell a fiduciary when judgement cannot safely be exercised in
relation to a fiduciary power.68 If it is exercised, the law treats the resulting contract,
or other legal act, just as it would treat an act made in breach of the requirement
of loyalty: it is voidable by the beneficiary.69
The no-conflict rules exist to support and protect the requirement of loyalty.
They apply where a fiduciary is bound by the requirement of loyalty with respect
to the exercise of their judgement, and that exercise of judgement has the potential
to be affected either by self-interest, or by a requirement of loyalty in relation to
a third person. In that situation, unless all beneficiaries give fully informed consent,
any exercise of a fiduciary power is liable to be set aside, just as if it were made
in breach of the requirement of loyalty.70 In a conflict, it is not necessary to establish
a breach of the requirement of loyalty; no one, not even the fiduciary, can be certain
that it has been complied with.
IV. The No-profit Rule
1. Distinctness from the no-conflict rules

There is debate about whether the no-profit rule is truly separate from the
no-conflict rules.71 On a wide definition of conflicts, any profit-making reveals a
kind of conflict. In this section, I aim to show that there are very good reasons for
keeping the rules separate. We have already seen that a carefully restricted definition
of conflicts allows us to better understand the no-conflict rules: it attaches those
rules to the exercise of fiduciary powers, for a clearly articulable reason, namely
the goal of securing the proper exercise of the fiduciary’s judgement in respect of
68
Some authors have described the no-conflict rules as “disabilities”. This is potentially misleading because a legal
act made in breach of the no-conflict rules is only voidable, not void. But such a label has the virtue that it indicates
that the rule is not a duty in the strict sense.
69
As with voidability arising from the requirement of loyalty itself, the law will protect third parties in good faith;
Conaglen, Fiduciary Loyalty: Protecting the Due Performance of Non-Fiduciary Duties (2010), at pp.77 and 159–160.
70
The no-conflict rules can be excluded by fully informed consent of the beneficiaries, since they exist solely for
the protection of those beneficiaries. Informed consent is implemented in different ways in different fiduciary contexts.
The no-conflict rules can also modified by the law or by a constituting instrument. Any modification or exclusion of
the no-conflict rules does not touch the requirement of loyalty as such; it is inherent in the fiduciary relationship.
71
A.J. McClean, “The Theoretical Basis of the Trustee’s Duty of Loyalty” (1969) 7 Alberta L. Rev. 218; Conaglen,
Fiduciary Loyalty: Protecting the Due Performance of Non-Fiduciary Duties (2010), at pp.113–125.

those powers. As we will see, this focused understanding of conflicts also reveals
a wholly independent, and crucial, role for the no-profit rule.
Take the foundational case of Keech v Sandford.72 The trustee, Sandford, held
a lease on trust. When the lease ended, he sought a renewal for the benefit of the
beneficiary. This was denied by the landlord, and Sandford instead renewed the
lease for himself. Subsequently, the court held that the profits that Sandford had
acquired from the new lease were held on trust for the beneficiary. This can easily
be seen as an application of the no-profit rule. Was there also a conflict? Of course,
one could say that in taking the renewal for himself, Sandford was in a conflict.
But we have seen that care is needed in defining conflicts. I have argued that the
no-conflict rules apply to exercises of judgement by the fiduciary, when that
judgement has to be exercised in what the fiduciary perceives to be the best interests
of the beneficiary. In Keech, Sandford’s taking of the lease for himself was clearly
caught by the no-profit rule; but the lease was not acquired via the exercise of a
fiduciary power. The only exercise of duty-bound judgement that might have been
affected by a conflict was at the moment when Sandford decided to cease to try
to get the lease for the beneficiary. But that is not something that could be set aside.
Keech did not want to set aside any legal act that resulted from a potentially tainted
exercise of judgement. He certainly did not want to set aside the lease that Sandford
had obtained for himself; Keech wanted to take away the profits of that lease, not
rescind it.
In order to see the case as an example of the rules against conflicts, one must
first take a very wide view of what is a conflict, so that it encompasses all
profit-making. One must then say that the rules against conflicts, when they are
breached, not only allow the exercise of fiduciary powers to be retroactively set
aside; they also allow the recovery of profits. Such a wide understanding necessarily
swallows up the no-profit rule. But it is hardly necessary to say that the rules
against conflicts also allow the recovery of profits, given that this is clearly the
business of the no-profit rule. Moreover, viewing them as separate norms means
that it is not necessary to identify any conflict in order for the no-profit rule to be
activated. This makes sense of the wide range and scope of the no-profit rule that
is revealed by the cases.
Keech is therefore better seen as a simple application of the no-profit rule. The
separate remedies for the two rules—avoidance of legal acts, for the no-conflict
rules, and profit-stripping for the no-profit rule—help us to see that there are indeed
two separate norms. This is reinforced when we notice that there are a number of
other situations which, like Keech, can and do activate the no-profit rule even
though there is no conflict in relation to the exercise of fiduciary powers. One
example is the case in which a profit was acquired after resignation from the
fiduciary office, but was nonetheless derived from it.73 As in Keech, it may not be
possible to find a conflict in relation to the exercise of fiduciary powers, but it is
not necessary because the beneficiary does not want to set aside a legal act that
was potentially tainted by a disloyal exercise of judgement. The no-profit rule can
72
(1726) Sel. Cas. Ch. 61; 25 E.R. 223; 2 Eq. Cas. Abr. 741; 22 E.R. 629; J. Getzler, “Rumford Market and the
Genesis of Fiduciary Obligations” in A. Burrows and Lord Rodger of Earlsferry (eds), Mapping the Law: Essays in
Memory of Peter Birks (Oxford: Oxford University Press, 2006), at p.577.
73
Industrial Development Consultants Ltd v Cooley [1972] 1 W.L.R. 443; Canadian Aero Services Ltd v O’Malley
[1974] S.C.R. 592; 40 D.L.R. (3d) 371.

solve the case on its own, because the claim is merely that the profit must be
surrendered. An even stronger example is that in which the interests of the fiduciary
are aligned with those of the beneficiary, but an unauthorised profit results
nonetheless.74 It is easy to fit such cases within the no-profit norm, but it may be
impossible to identify a conflict between self-interest and duty-bound judgement.75
The clear separation of the two rules assists us in understanding the law. The
no-conflict rules are about potentially tainted exercises of judgement, and they
allow legal acts made in such situations to be set aside. The no-profit rule allows
the recovery of profits, regardless of whether there is any legal act that is subject
to being set aside. However, this understanding means that the no-profit rule needs
its own justification, one that is not directly related to ensuring the sound exercise
of judgement.
2. Inadequacy of deterrent theories

It has often been suggested that the no-profit rule operates as a deterrent. Indeed,
for those authors who do not treat the no-profit rule as separate from the no-conflict
rules, all of these rules together are said to operate as deterrents. What do they
deter? Depending on the author, it may be harm to the beneficiary76;
misappropriation77; or the breach of any non-fiduciary duty at all.78
There are two separate reasons why this explanation is unpersuasive.79 First,
taking away the profit that a person makes from a transaction is not a logical way
to deter them from making such profitable transactions. A properly designed
deterrent has to go beyond that. You would not try to deter fraud by a rule that
said that all fraudsters must surrender the profits of their frauds, but no more than
that. Deterrence is effected by such things as fines, imprisonment, or punitive
damages. The no-profit rule takes only the profit that the fiduciary acquired.
Secondly, the deterrent explanation supposes that the law is unjust. The reason
is that the no-profit rule (and the no-conflict rules) operate without regard to
whether any of the things have happened that are supposedly being deterred. They
operate without regard to whether there has been harm to the beneficiary,
misappropriation, or the breach of any non-fiduciary duty. When it operates, the
no-profit rule reallocates the benefit of rights acquired by the fiduciary to the
beneficiary. If we were to accept that the law does this as a deterrent, we would
be saying that the law imposes sanctions on people, to deter unlawful conduct, but
without regard to whether the people on whom the sanctions are imposed have
themselves done anything that we wish to deter. For these reasons, deterrence
accounts are unsuccessful.
74
For example, Regal (Hastings) Ltd v Gulliver [1967] 2 A.C. 134 HL; [1942] 1 All E.R. 378; Boardman v Phipps
[1967] 2 A.C. 46 HL.
75
E. Ferran, Company Law and Corporate Finance (Oxford: Oxford University Press, 1999), at p.190.
76
P. Birks, An Introduction to the Law of Restitution, rev edn (Oxford: Clarendon Press, 1989), at pp.338–343.
See however the different argument in P. Birks, “The Content of the Fiduciary Obligation” (2000) 34 Israel L.R. 3,
which is concerned with content and structure, and does not address justification.
77
R. Cooter and B.J. Freedman, “The Fiduciary Relationship: Its Economic Character and Legal Consequences”
(1991) 66 N.Y.U. L. Rev. 1045 at 1048–1053; R. Flannigan, “The Boundaries of Fiduciary Accountability” (2004)
83 Can. Bar Rev. 35 at 40; R. Sitkoff, “The Economic Structure of Fiduciary Law” (2011) 91 B.U.L. Rev. 1039 at
1043.
78
Conaglen, Fiduciary Loyalty: Protecting the Due Performance of Non-Fiduciary Duties (2010), at pp.61–76.
79
A full argument is in L. Smith, “Deterrence, Prophylaxis and Punishment in Fiduciary Obligations” (2013) 7 J.
Eq. 87.

3. A rule of primary attribution

I propose an understanding of the no-profit rule as a rule of primary attribution.
By this, I mean that when a profit is acquired in the relevant circumstances, the
fiduciary immediately comes under a primary duty to render the profit to the
beneficiary. This understanding is different from that which appears in almost all
of the literature, because the near-universal assumption is that the rule creates a
secondary obligation; disgorgement of profits is a remedy that arises in response
to wrongdoing.80 My argument is that the beneficiary’s right to the profit in question
is primary: it arises out of the nature of the fiduciary relationship, not out of
wrongful conduct.81 Even though the fiduciary might have breached a duty, the
beneficiary’s right to the profit does not depend on the proof of any such breach.
On this approach, while it is necessary to explain why the profit rightly belongs
to the beneficiary at the moment it is acquired by the fiduciary, it is not necessary
to provide an explanation that is couched in terms of a remedy for a wrongful act.82
How can this approach be justified? My understanding of the no-conflict rules
is based directly on the need to ensure that the fiduciary exercises judgement
loyally. The no-conflict rules forbid the fiduciary from exercising judgement that
is subject to a requirement of loyalty, where a conflicting motivational pressure
would render it impossible for the fiduciary to be sure of complying with the
requirement of loyalty. I would propose a quite different justification for the
no-profit rule. The fiduciary relationship is characterised by the acquisition by the
fiduciary of part of the autonomy—part of the choice-making ability—of the
beneficiary. Our autonomy belongs to us, in a non-legal sense. The law seeks, so
far as it can, to give effect to this. Thus, when the fiduciary, through the use of the
levers of control that he holds over the beneficiary’s autonomy, is able to extract
some wealth or value, the law ascribes it to the beneficiary as a matter of primary
right.83 Expressed as a legal test, and as one that makes no reference to conflicts,
80
Like the no-conflict rules, the no-profit rule can be excluded by fully informed consent of the beneficiaries, since
it exists solely for the protection of those beneficiaries. One type of partial exclusion is that which may allow an agent
to operate on a running account in relation to the receipt of the proceeds of the principal’s assets, just as in an unusual
trust, the trustee may be authorised to borrow the trust property (Space Investments Ltd v Canadian Imperial Bank
of Commerce Trust Co (Bahamas) Ltd [1986] 1 W.L.R. 1072 PC). The no-profit rule can also be modified by the
law or by a constituting instrument. In all of these cases, such exclusion or modification does not touch the requirement
of loyalty as such; it is inherent in the fiduciary relationship and cannot be excluded without turning it into a
non-fiduciary relationship.
81
A very similar view is proposed by Lord Millett, “Bribes and Secret Commissions Again” [2012] C.L.J. 583,
who has made this argument for many years (e.g. P. Millett, “Bribes and Secret Commissions” [1993] R.L.R. 7 at
20). Lord Millett says that the fiduciary is not allowed to plead their own wrongdoing, and this view has sometimes
been challenged as resting on a fiction. I put the point differently: the beneficiary’s right is a primary right, and so
any wrongdoing can be ignored as juridically irrelevant. Also, I disagree with Lord Millett when he says that fiduciary
law has a deterrent function or is driven by public policy; in my view, it reflects the normative structure of the fiduciary
relationship, not any wider instrumental agenda. My account is also similar to the sophisticated theory presented in
P. Miller, “Justifying Fiduciary Remedies” (2013) 63 U.T.L.J. 570, although differently from Miller, I do not rely
on disloyalty, or any other wrongdoing, to explain the beneficiary’s entitlement.
82
It is of course the case that the rule prevents a fiduciary from acquiring any profit through disloyal conduct; but
it does this by preventing fiduciaries from acquiring any unauthorised profit from their position. To use a contractual
analogy, we would not say that primary contractual rights—that is, rights to contract performance—exist as remedies
for breach of contract.
83
Lord Millett, “Bribes and Secret Commissions Again” [2012] C.L.J. 583 at 585: “The principal’s beneficial
interest in the profit is thus inherent in the very concept of a fiduciary relationship. It is an incident of the relationship
that any advantage or profit which the fiduciary may obtain by virtue of the relationship is in the eyes of equity
obtained for the benefit of his principal and belongs beneficially to him.” See also Furs Ltd v Tomkies (1936) 54
C.L.R. 583 at 592: “An undisclosed profit which a director so derives from the execution of his fiduciary duties
belongs in equity to the company” and FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC
45; [2014] 3 W.L.R. 535 at [33]: “The agent owes a duty of undivided loyalty to the principal … The principal is

the question is simply whether the profit in question was acquired “by use of a
fiduciary position”.84 If it was, then “[t]he liability arises from the mere fact of a
profit having been made”.85 The asset in question may have been acquired by the
fiduciary; but as between the fiduciary and the beneficiary, the law attributes the
asset to the beneficiary, from the moment it is acquired.86 In other words, the effect
of the no-profit rule is not, as is generally supposed, “if you wrongfully profit, a
remedy of disgorgement will be imposed”. Rather, it is “you cannot profit from
this relationship, because anything you try to extract from it will not belong to
you”.87
This formulation does several things. First, it strengthens the independence of
the no-profit rule from the no-conflict rule. I argued above that a focused
understanding of the no-conflict rules reveals an independent role for the no-profit
rule. This argument is strengthened when each rule has a separate justification,
and each has a remedy that is directly tied to its own justification. This explains
why the spheres of their operation, although they overlap, do not coincide. The
no-profit rule can rightly operate even where there is no conflict in relation to any
act of judgement on the part of the fiduciary. One example is the situation in which
the interests of the fiduciary are perfectly aligned with (and not opposed to) those
of the beneficiary.88 Another is that the no-profit rule can apply even where the
fiduciary no longer holds any fiduciary powers.89 If the profits were obtained with
information acquired from the fiduciary position, the no-profit rule is activated,
even if the no-conflict rules do not apply because the fiduciary no longer holds
powers that are governed by the requirement of loyalty.90
Secondly, this formulation helps us to understand many features of the fiduciary
landscape that are otherwise puzzling. It is clear that it is completely irrelevant
thus entitled to the entire benefit of the agent’s acts in the course of his agency. This principle is wholly unaffected
by the fact that the agent may have exceeded his authority.” The court endorsed this view at [46].
84
Regal (Hastings) Ltd v Gulliver (1942) [1967] 2 A.C. 134 HL at 144.
85
Regal (Hastings) Ltd v Gulliver (1942) [1967] 2 A.C. 134 HL at 145.
86
The profit may belong to the principal “at law”; the attribution comes from equitable principles, which underpin
all of fiduciary law. In my view, this also means that the profit is held in trust, and here again I agree with Lord
Millett, “Bribes and Secret Commissions Again” [2012] C.L.J. 583; see L. Smith, “Constructive Trusts and the
No-Profit Rule” [2013] C.L.J. 260; FHR European Ventures LLP v Cedar Capital Partners LLC [2014] 3 W.L.R.
535. A trust arises when one person holds rights but that person is obliged to hold the benefit of those rights for
another. Therefore, whenever a fiduciary acquires rights to which the no-profit rule applies, a trust arises. This point,
however, is not essential to the present argument.
87
This helps explain why, as with the no-conflict rules (see above, fn.68), the no-profit rule is sometimes described
as a “disability”. As in that context, the label has the advantage of indicating that we are dealing with a rule that is
not a duty in the strict sense; infringing the rule leads to a liability, but not one that depends on wrongdoing. However,
as a label it could be misleading. The no-profit rule is activated whether or not the fiduciary was authorised to acquire
the asset in question, although if not authorised, the beneficiary has a choice whether to take the asset, against
reimbursement of the fiduciary’s outlay. Because of this, one might think that the word “disability”, which suggests
a kind of incapacity, is inaccurate. The no-profit rule was described as a “rule” throughout the judgment in FHR
European Ventures LLP v Cedar Capital Partners LLC [2014] 3 W.L.R. 535.
88
See above, text at fn.74.
89
See above, text at fn.73.
90
It is not possible in this paper to explore the outer limits of the no-profit rule. One of these is illustrated by the
rule’s application even where the fiduciary learns of an opportunity quite apart from his fiduciary role; for example,
Bhullar v Bhullar [2003] EWCA Civ 424; [2003] 2 B.C.L.C. 241. Given the wide range of fiduciary roles, many of
which are part-time, it cannot be the case that every fiduciary has a positive obligation to share with his beneficiary
every piece of information, however acquired, that might be of interest to the beneficiary (as shown by Howard v
Commissioner of Taxation [2014] HCA 21). The simple example of fiduciaries with multiple beneficiaries (a director
of more than one company, a trustee of more than one trust, or an estate agent) shows that such a rule would be wholly
unworkable. This extended version of the no-profit rule, therefore, must depend on the existence of additional, positive
duties (usually contractual in origin) owed to the beneficiary.

whether the beneficiary has suffered any loss.91 As we have seen, if the rule was
aimed at protecting the beneficiary against loss or harm, then it would not be
possible to make sense of the law’s treatment of loss and harm as irrelevant. But
when the rule is seen as one of primary attribution, it makes perfect sense. Further,
it has long been established that the fiduciary cannot retain a profit by showing
that, in any event, the profit could not have been secured by or for the beneficiary.92
If the rule were about attaching a sanction to wrongdoing, then this would be a
good defence, because the defendant would be showing that the wrongdoing was
not causally related to the gain. It is not a good defence, because the rule is not
one that attaches a sanction to wrongdoing; it simply attributes the gain as a matter
of primary right to the beneficiary. In the same way, it is not a good defence for
a defendant to say that, although a gain caught by the no-profit rule was acquired,
it, or part of it, could have been acquired in a different way that would not have
been caught by the rule.93 If the rule were about taking away wrongful gains, a
defendant could rightly reduce the liability by showing that some of the gain could
have been acquired non-wrongfully.94 But because the rule attributes the gain as
a matter of primary right to the beneficiary, the counterfactual defence that the
gain could have been made in a different way is irrelevant. An analogy from
contract law, which also creates primary rights, illustrates this. Assume that Albert
and Belinda have an agreement that they will share equally the profits extracted
by Albert from some undertaking to which Belinda has contributed. Albert extracts
£100 and Belinda claims her £50. There is clearly no room for Albert to argue that
Belinda’s claim should fail because there was some alternative way in which Albert
could have lawfully acquired the whole profit for himself. Belinda has a primary
right to her share; counterfactuals are irrelevant.
Thirdly, this understanding of the no-profit rule fits with other established
features of fiduciary relationships. For example, we might draw a link between
the no-profit rule and the fiduciary’s presumptive entitlement to recover expenses.
These can be seen as two sides of the same coin: just as the beneficiary bears the
costs of the fiduciary’s management, so too they take all the benefits that come
out of it. No one ever suggested that the beneficiary must do something wrongful
in order for the fiduciary to be able to recover the expenses of fiduciary
management; in the same way, wrongdoing is not necessary for the beneficiary to
be able to take the benefits acquired through fiduciary management. Indeed, if we
push a little further, we see that the no-profit rule does not even require a profit.
In Soulos v Korkontzilas,95 the principal wanted to buy a particular estate in land.
The agent deliberately failed to communicate an offer to the principal, and bought
the estate himself. The principal successfully claimed a constructive trust. One
defence was that the land was now worth less than when the agent had bought it;
there was no profit, in the economic sense, nor was there harm to the principal.
91
The classic statement is in Parker v McKenna (1874) L.R. 10 Ch. App. 96 DC at 124–125; see also Furs Ltd v
Tomkies (1936) 54 C.L.R. 583.
92
Keech v Sandford (1726) Sel. Cas. t. King 61; 25 E.R. 223; 2 Eq. Cas. Abr. 741; 22 E.R. 629; Regal (Hastings)
Ltd v Gulliver [1967] 2 A.C. 134 HL; [1942] 1 All E.R. 378; Boardman v Phipps [1967] 2 A.C. 46 HL.
93
Murad v Al-Saraj [2005] EWCA Civ 959.
94
In Monsanto Canada Inc. v Schmeiser 2004 SCC 34; [2004] 1 S.C.R. 902 the defendant infringed the claimant’s
copyright and the claimant sought an accounting of profits. The majority held that the infringement was proven, but
nonetheless no part of the defendant’s profits could be attributed to the infringement, and so no award was made on
the accounting.
95
[1997] 2 S.C.R. 217; 146 D.L.R. (4th) 214.

Still the principal could have the estate, against reimbursement of the price paid
by the agent.
4. Acting on behalf of another: duties to disclose

This point can be expanded to help us understand the extensive obligations of
fiduciaries regarding information. Every property-holding fiduciary has to render
an account of their management activities; that is a primary duty, which does not
depend on an allegation or proof of disloyalty, or of any breach of duty.96 The
fiduciary has management authority over a sphere of activity that belongs, in a
non-legal sense, to the beneficiary. Information as such is not a right and so is not
property, but as between the fiduciary manager and the one whose affairs are being
managed, it seems obvious that the beneficiary is entitled to all and any relevant
information. The law implements this through the requirement of accounting.
More generally, for the same reason that the beneficiary is entitled to profits,
the beneficiary is entitled to know about the state of affairs from time to time. This
can explain all of the rights to information held by beneficiaries of fiduciary
relationships.97 Some of these rights may be more extensive than is often realised.
In Item Software (UK) Ltd v Fassihi,98 the Court of Appeal held that a fiduciary
has an obligation to disclose commission of an unlawful act. This was important
because the non-disclosure was found to have caused a loss, while the initial
unlawful act had not. Some people have been puzzled by this fiduciary duty to
disclose breaches of duty.99 But if the beneficiary has the right to know, at all times,
the state of affairs in relation to the sphere of fiduciary management, then it makes
perfect sense to view this non-disclosure as a wrongful act. It was the breach of
duty, in the strict sense: of a primary duty to disclose relevant information. The
Court of Appeal was of the view that the obligation of disclosure was inherent in
the fiduciary relationship.100 This is exactly the case that I wish to make: the
beneficiary is legally entitled to everything arising from the sphere of fiduciary
management. In the case of profits acquired, this creates an obligation to hold
those profits for the beneficiary; in the case of information acquired, this creates
an obligation of disclosure. These are obligations in the strict sense, and breach
of them is a wrongful act.
96
Attorney-General v Cocke [1988] Ch. 414 at 420–421; D. Hayton, P. Matthews, and C. Mitchell, Underhill and
Hayton: Law Relating to Trusts and Trustees, 18th edn (London: Butterworths, 2010), at pp.871–873.
97
In Schmidt v Rosewood Trust Ltd [2003] UKPC 26; [2003] 2 A.C. 709, it was held that objects of a discretionary
dispositive power in a trust may, in the discretion of the court, have access to information about the trust. We have
already noticed (above, text at fn.32) that objects of a power of this kind do not benefit from a full fiduciary relationship;
they are not entitled to require that the trustees act in what they consider to be the objects’ best interests. It is therefore
not surprising that they may not hold the same rights to information. To the extent that Schmidt suggests, in obiter
dicta, that no trust beneficiary has a right to information, not everyone would agree. See L. Ho, “Trustees’ Duties to
Provide Information” in E. Bant and M. Harding (eds), Exploring Private Law (2010).
98
[2005] 2 B.C.L.C. 91.
99
R. Nolan and M. Conaglen, “Good Faith: What Does it Mean for Fiduciaries and What Does it Tell Us About
Them?” in Bant and Harding (eds), Exploring Private Law (2010), at pp.325–327.
100
Item Software (UK) Ltd v Fassihi [2005] 2 B.C.L.C. 91 at [38]–[41], where the court noted that duties of
disclosure of relevant information were recognised in Industrial Development Consultants Ltd v Cooley [1972] 1
W.L.R. 443; [1972] 2 All E.R. 162 and Bhullar v Bhullar [2003] 2 B.C.L.C. 241, and duties to disclose breaches of
duty were recognised in Tesco Stores Ltd v Pook [2003] EWHC 823; [2004] IRLR 618 and Crown Dilmun v Sutton
[2004] EWHC 52; [2004] 1 B.C.L.C. 468. The Court of Appeal referred (at [16]) to a passage in the reasons for
judgment of the trial judge ([2003] 2 B.C.L.C. 1 at [54]), who linked the no-profit rule to the duty to disclose: “…it
is difficult to see how a director who was making a profit by appropriating the company’s contract for his own benefit
would not be under a duty to disclose what he had done, not least as part of his duty to account for the profit.”

The consideration that fiduciary management creates obligations to disclose

information helps us to understand the compensation cases that were mentioned
earlier.101 Such compensation is not about any breach of the no-profit rule; the
cases do not depend on profit-making, and the role of the rule is not to make
compensation but to allocate profits, rights and opportunities. Nor is it about any
breach of the requirement of loyalty or the no-conflict rules; their role is to make
contracts and other legal acts voidable. Even if the no-conflict rule were a duty in
the strict sense, it is not clear how a breach of this duty could be causally linked
to a loss. It is very difficult to see how a beneficiary could show a causal link
between their loss and the mere presence of a conflict. That would require the
beneficiary to show that the loss would not have been suffered in the absence of
the conflict, but with all other facts unchanged.
But all of these cases make sense when understood as based on the breach of
a duty to disclose. If a fiduciary is in a conflict situation, it is perfectly rational to
say that they come under a primary obligation to inform the beneficiary; as we
have seen, the sphere of activity under fiduciary management belongs to the
beneficiary, who is entitled to know the state of affairs from time to time. Failure
to disclose is a breach of a duty in the strict sense, and if a loss is caused by that
breach, then it should be recoverable as a loss caused by wrongdoing. Indeed, all
of those loss cases contain language describing the claimant’s cause of action in
terms of wrongful non-disclosure.102
Finally, the fiduciary’s duties of disclosure also help us to understand the setting
aside of transactions that may occur between the fiduciary and the beneficiary,
where the fiduciary is acting in a personal capacity.103 In a case of the disloyal or
conflicted exercise of a fiduciary power, as we have seen, a beneficiary can attack
the fiduciary’s exercise of the power. But in these cases, the fiduciary is exercising
a personal capacity to contract; it is the beneficiary’s consent to the transaction
that can be impugned. The fiduciary’s duties of disclosure are primary duties, and
extend to a duty to disclose all relevant information that relates to the sphere of
fiduciary management. This may include information about the valuation of the
subject matter104; information about the fiduciary’s own interest in the transaction105;
or anything else that could reasonably be considered germane. A person’s consent
to a contract can be vitiated by misrepresentation, but generally speaking, not by
101
Above, text at fn.59.
102
Examples include Nocton v Lord Ashburton [1914] A.C. 932 HL at 965 (“… the duty of making a full and not
a misleading disclosure of facts known to him when advising his client”); London Loan & Savings Co v Brickenden
[1934] 3 D.L.R. 465 PC at 468 (“… the appellant’s non-disclosure of these two mortgages was a breach of his duty
as solicitor to the Loan Company, particularly in view of his personal interest in them …”); Canson Enterprises Ltd
v Boughton & Co [1991] 3 S.C.R. 534; 85 D.L.R. (4th) 129 (the claimant’s case, as summarised by both majority
and minority, was for compensation for loss caused by non-disclosure of a conflict of duty and duty); Hodgkinson v
Simms [1994] 3 S.C.R. 377 (the claimant’s case, as summarised by both majority and dissent, was for compensation
for loss caused by non-disclosure of a conflict of self-interest and duty); Item Software (UK) Ltd v Fassihi [2005] 2
B.C.L.C. 91 (liability for loss caused by non-disclosure of breach of contract and of the no-profit rule). Brickenden
is controversial for having applied an irrebuttable presumption of causation; this was not followed in Swindle v
Harrison [1997] 4 All E.R. 705 CA, in which causation was not established, but in which the relevant breach was
described (e.g. at 718, 720 and 732–733) as the breach of a duty of disclosure.
103
Examples include Tate v Williamson (1866) 2 Ch. App. 55 LC and Maguire v Makaronis (1997) 188 C.L.R.
449. Other examples are cases within the rule of trust law that is traditionally called the “fair-dealing rule”, but not
those within the “self-dealing rule”; see above, fn.60. My analysis here supports the traditional position: transactions
within the self-dealing rule (being cases of conflicts in the strict sense, that is, in the exercise of fiduciary powers)
are automatically voidable, while those within the fair-dealing rule are not.
104
Tate v Williamson (1866) 2 Ch. App. 55 LC.
105
Maguire v Makaronis (1997) 188 C.L.R. 449.

non-disclosure. However, where there is a duty to disclose on the other side,

unlawful non-disclosure has the same effect as misrepresentation.106 The effect is
that the beneficiary can avoid the transaction, not because it was a faulty exercise
of the fiduciary’s powers, but because the beneficiary’s own consent to the
transaction was vitiated.
V. Conclusion
The realm of “fiduciary obligations” involves more than merely obligations. It
involves a suite of juridical relationships. All of them, however, arise out of a
single and unifying idea. They give legal effect to different aspects of the fiduciary
relationship. In this way, the law aims to ensure the loyal exercise of judgement
on behalf of another.
Fiduciary relationships arise when a person holds power, but not for his or her
own benefit. Such power is held on behalf of another, or sometimes for an
impersonal purpose. This is a feature of fiduciary powers that exists from the
moment the powers are granted, whether by agreement, by statute, or by common
law. It is this feature of fiduciary powers that constitutes the relationship as a
fiduciary relationship. In private law, fiduciary relationships are characterised by
three elements: the requirement of loyalty, the no-conflict rules, and the no-profit
rule. They form a unified system for ensuring the loyal exercise of judgement on
behalf of another, and indeed they help us to understand other aspects of fiduciary
relationships, such as obligations of disclosure.
That power is held by fiduciaries for other-regarding ends is what leads the law
to impose a requirement on the exercise of the power: the requirement of loyalty.
If the power is held on behalf of a person, the law requires that the power be
exercised in what the holder of the power perceives to the best interests of that
person. If the power is held for an impersonal purpose, the law requires that it be
exercised in what the holder believes to be the best execution of that purpose. If
the power is exercised otherwise, the exercise is voidable.
The rules about conflicts apply in the same situations: when a person holds
power, but not for his or her own benefit, so that the requirement of loyalty applies
to that power. A person in that situation is expected to assess all of the reasons
and factors that bear on the decision whether and how to use the power, in line
with the requirement of loyalty. But the law is aware that no one is capable of
being certain of excluding certain factors from his or her decision-making processes,
even though the requirement of loyalty demands that they be excluded. One of
these is self-interest; the other is a conflicting fiduciary relationship. Both of these
are capable of colouring a fiduciary’s decision in unknowable ways. These
competing interests, whether selfish or unselfish, tend to disable the fiduciary from
focusing solely on the interests of the beneficiary. This is why the law states that
fiduciary powers may not be exercised unimpeachably in conflict situations. If
they are so exercised, the exercise is voidable by the beneficiary, just as if it were
positively proven that it was exercised contrary to the requirement of loyalty. The
conflicts rules, therefore, support and protect the requirement of the loyal exercise
of judgement on behalf of another.
106
E. Peel, Treitel: The Law of Contract, 13th edn (London: Sweet & Maxwell, 2011), at pp.434 and 436–438.

The no-profit rule, for its part, aims to ensure that in fulfilling his fiduciary
role, the fiduciary is indeed constrained to act on behalf of another. It does this by
its allocation of resources as between the fiduciary’s private sphere, and the sphere
of unselfish decision-making on behalf of the beneficiary. It operates simply by
stating that the beneficiary is entitled to everything arising from the sphere of
fiduciary management, whether it be a profit, or even an unprofitable purchase. It
catches any right acquired by the fiduciary, whether or not he or she acted lawfully
in acquiring it. The same idea of allocating resources extends further, to reach
information. In this way it underpins fiduciaries’ duties to account and to provide
information more generally. This explains the positive duties of disclosure that
fall on fiduciaries, not only in relation to their lawful conduct, but also in relation
to unlawful conduct. Whether it be an infringement of some other norm of fiduciary
law, a breach of contract, or information relevant to a transaction between the
fiduciary and the beneficiary, the fiduciary is obliged to disclose it. If he or she
does not, he or she is liable to compensate for any loss that is caused by the
non-disclosure, and that non-disclosure allows the beneficiary to avoid any contract
or other legal act that depends for its validity on the consent of the beneficiary.
This paper does not touch on all of the limits of the principles that it explores.
Some of these would come to light were we to consider the range of people who
have powers over others’ autonomy: parents over their children, and physicians
over their patients, to name only those. While these relationships might not be
subjected to exactly the same norms that private law imposes in classical fiduciary
relationships, it is not surprising that fiduciary analogies have been invoked in
these cases. Then there are those who exercise judgement, not in the interests of
another, but in the public interest: politicians, judges, and prosecutors, for example.
In all of those situations, people are authorised to exercise their judgement in
relation to their powers, but they are expected to do so in an other-regarding way.
Many of the concerns that animate fiduciary law will also arise, even if they do
not attract precisely the same legal regulation. It is no coincidence that concerns
about conflicts of interest, and about the extraction of wealth or other advantages,
can be present in all of these situations. As in the private law fiduciary relationship,
these are situations in which a person is required by law to exercise discretionary
powers loyally and unselfishly.
Breach of fiduciary duty; Conflict of interest; Fidelity; Fiduciary relationship; Remedies

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FIDUCIARY RELATIONSHIPS: ENSURING THE LOYAL

EXERCISE OF JUDGEMENT ON BEHALF OF ANOTHER

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II. The Requirement of Loyalty

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in order to decide whether the fiduciary acted loyally. An exercise of judgement

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be inappropriately limitative if applied to fiduciary law. It would be inappropriately

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these situations? We must analyse the manner or transaction in which the

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(a) The primary remedy: rescission

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(b) Monetary remedies

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fiduciary—usually an advisor—was in a conflict. The loss suffered by the

III. The No-conflict Rules

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IV. The No-profit Rule

1. Distinctness from the no-conflict rules

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2. Inadequacy of deterrent theories

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3. A rule of primary attribution

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4. Acting on behalf of another: duties to disclose

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The consideration that fiduciary management creates obligations to disclose

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non-disclosure. However, where there is a duty to disclose on the other side,

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Breach of fiduciary duty; Conflict of interest; Fidelity; Fiduciary relationship; Remedies

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