RECONCEPTUALISING FIDUCIARY REGULATION IN ACTUAL CONFLICTS.

• Date: 01 August 2021
• Author: Yip, Man

CONTENTS I Introduction II A Paucity of Substantive Content A The Duty to Avoid Potential Conflicts Operates Differently from the Duty to Avoid Actual Conflicts B Remedial Advantage of Claiming for Breach of the Fiduciary Duty to Avoid Actual Conflicts? III Unpacking Four Core Aspects of the No Conflict Rule A How Do Actual Conflicts Arise? B Position of Conflict versus Pursuit of Conflict? C Resignation: Conflict Avoidance versus Conflict Management D The Role of Informed Consent IV Reconceptualising Fiduciary Regulation in Actual Conflicts V Conclusion I INTRODUCTION

It is well known that a fiduciary is under a duty to: (i) avoid conflicts between their interest and their duty; and (ii) avoid conflicts between duties owed to two or more different principals. (1) Both duties are regarded as capable of operating at two different levels. First, as a matter of practicality, a fiduciary is duty-bound to avoid both types of conflicts even if the conflicts are merely real or substantial potentialities (ie potential conflicts). (2) Although such a prophylactic duty is typically considered, as a matter of theory, to be the practical implication of difficulties in proving actual conflicts, (3) as a matter of practice, the duty to avoid potential conflicts is more often invoked precisely because of its significantly lower evidentiary burden. This aspect of fiduciary duty operates in a prophylactic fashion and was classically considered to be imposed by the law rather than voluntarily undertaken by fiduciaries. (4) As a result of the manner in which it operates (ie prophylactically), it was often considered that a principal's remedies were limited to rescission or an account of profits. (5) A compensatory award was considered inappropriate for 'breach' of the prophylactic duties. (6) So regarded, the 'duties' might possibly be better regarded as disabilities, though modern developments are arguably incompatible with such a view. (7) Secondly, again as a matter of practicality, a fiduciary is also duty-bound to avoid conflicts of duties and conflicts of duty and interest as an actuality (ie actual conflicts). (8)

This article examines the fiduciary duty to avoid actual conflicts, which has been relatively understudied for a number of reasons. Cases involving a breach of the duty to avoid actual conflicts are few and far between. Early detection of the existence of potential conflicts and litigation pursued on such basis forestalls the ripening of some conflicts. Where the duty to avoid potential conflicts has not been waived following informed consent, it suffices to plead and prove potential conflict to access equity's full remedial armoury so that proof of an actual conflict is superfluous. Furthermore, cases involving either potential or actual conflicts may also have been dealt with as concerning breaches of other duties. Most commonly, where it could be proved that the fiduciary has made unauthorised profits, such cases could be resolved more straightforwardly by simply invoking the no profit rule, obviating the need to show that there was a conflict or engage in a debate on the proper test to determine if a conflict had arisen. (9) In other cases, principals may have straightforwardly pleaded breach by the fiduciary of the primary duty actually undertaken (eg to exercise care in giving impartial advice), (10) instead of invoking the actualised aspect of the no conflict rule. Finally, in still other cases of actual conflicts, principals may have decided not to pursue litigation because there were neither profits for which an account could be sought, nor provable losses for which compensation could be obtained, nor tainted transactions to be rescinded.

Importantly, the scarce pool of case law and literature on actual conflicts coupled with a rich array of material on potential conflicts has tempted us to believe mistakenly that the fiduciary duty operates in the same way in the two contexts. This article seeks to pierce this superficial veil of (mis)understanding regarding the duty to avoid actual conflicts. In the main, it argues that the duty to avoid actual conflicts adds limited substantive value to fiduciary accountability. Its present form has also contributed to widespread misconception of what should be expected of an unfortunate fiduciary who finds themselves in such a position. In this respect, we propose that many of the modern scenarios involving actual conflicts of duties or conflicts of duties and interests are better analysed not in terms of conflict avoidance but in terms of conflict management. The clarification in language and concept is crucial as fiduciary law is a key component of commercial and corporate arrangements--areas in which certainty and forward planning are paramount. (11) Our analysis also paves the way for thoughtfully working out what the fiduciaries' duties are in cases of actual conflict.

The discussion comprises three main parts. Part II explains that the duty to avoid actual conflicts does not perform the same function as the duty to avoid potential conflicts, which performs the function of transforming otherwise permissible acts into impermissible acts to ensure the fiduciary's single-minded loyalty to their principal. Practically, the identification of a breach of the duty to avoid actual conflicts does not, as a matter of course, yield significantly more advantageous remedies for the principal than what they may receive in pursuit of the breach of the primary duty. Part III goes on to dispel the confusion and misconception perpetuated by the conventional narrative surrounding the duty to avoid actual conflicts by unpacking four core elements of the no conflict rule: (i) how actual conflicts arise; (ii) the 'position of conflict' and 'pursuit of conflict' debate; (iii) resignation as a response to actual conflicts; and (iv) the role of informed consent. Building on the insights obtained from the preceding parts, the final part (Part IV) proposes that we should reconceptualise fiduciary regulation beyond the traditional narrative of conflict avoidance at all costs. A proscriptive rule cast in the language of the duty to avoid potential and actual conflicts misses the value of tolerating certain kinds of conflicts in the modern society. It also does not pay sufficient regard to the principal's right to self-determination.

II A PAUCITY OF SUBSTANTIVE CONTENT

It is trite law that the prophylactic fiduciary duties exist as subsidiary duties to promote the likelihood of compliance with a higher, primary duty, being the duty actually undertaken (eg to exercise care in giving impartial advice). (12) Whether this primary duty ought to be regarded as nominate-general or fiduciary- non-fiduciary, (13) the subsidiary role of the prophylactic fiduciary duties is clear, as is the manner of their operation. The implication of prophylactic fiduciary duties is necessary in fiduciary relationships because of the principal's reliance on the fiduciary's exercise of discretion that affects the former's interests. (14) In the absence of discretion, an obligor cannot possibly be a fiduciary. Fiduciary duties are thus never found in absolute duties to achieve specific outcomes such as the promise to pay a sum of money by a particular date. (15) This is not to say that the discretion cannot be limited, (16) or that other aspects of a fiduciary's duty may involve no discretion at all.

A The Duty to Avoid Potential Conflicts Operates Differently from the Duty to Avoid Actual Conflicts

Notably, discretion, especially the sort of wide discretion that fiduciaries wield, carries with it the temptation of abuse. Hence, the prophylactic fiduciary duties essentially transform a primary duty, voluntarily undertaken, to act in the best interests of another into one where the fiduciary must act in the sole interests of that other. (17) In other words, acts undertaken by a fiduciary which might be regarded as permitted by the primary duty (if viewed alone) might be prohibited by the prophylactic fiduciary duties. The classic case of the duty to avoid potential conflicts, Boardman v Phipps, (18) is illustrative of this transformation, even though it is a more complex case than commonly presented. (19) Boardman, as the solicitor of a family trust whose assets included a minority holding in a private company, considered that the trust beneficiaries' interests would be better served if the trust could acquire control of the company via a majority shareholding. (20) When the trustees declined to do so on account of the investment prohibitions in the trust instrument and the lack of funding, (21) Boardman and one of the beneficiaries of the trust, Tom Phipps, purchased the necessary shares themselves. (22) Their actions proved most beneficial to their 'principals', the trustees and the beneficiaries of the trust. (23) Crucially, in representing themselves as acting for the trust in their negotiations with the directors of the company regarding the purchase of the shares, Boardman and Phipps had effectively implicated themselves as agents de son tort. (24) Although there is, in the majority's opinions, another dimension to the case involving information as property, (25) this aspect of their reasoning has largely been condemned, (26) so that their reasoning on the basis of conflict of interest and duty as agents de son tort must be taken seriously.

Fiduciary duties were thus imposed on Boardman and Phipps by reason of their intermeddling as purported agents of the trust. (27) In the circumstances, it is difficult to see how their actions could be considered a breach of any primary duties imposed upon them as agents de son tort. The primary duties imposed through intermeddling could not be more substantial than the duties imposed on an agent appointed pursuant to the assent of the principal in the same circumstances. Given that the trustees were opposed to purchasing additional shares in the company, (28)...