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Case Study: Fiduciary Duty -- The English Court of Appeal judgment that clarifies the boundaries

Over the years, the concept and definition of fiduciary duty have been repeatedly tested in the courts and as a result has been broadened to the point where lawyers are increasingly wary of where their fiduciary duty to their clients begins and ends.

In a recent judgment, the English Court of Appeal carefully reviewed Commonwealth jurisprudence on fiduciary duty, and concluded that not every breach of duty by a solicitor is a breach of fiduciary duty. This leading judgment in Bristol and West Building Society v. Mothew [1996] 4 All E.R. 698 (C.A.), provides a useful counterweight to attempts by plaintiffs to characterize any error committed by a solicitor representing two parties in a transaction as a breach of fiduciary duty, and will be of great help in defending solicitors in these types of situations.

The Case:
The defendant solicitors acted for the purchasers of a property as well as for the plaintiff mortgagee, which provided the purchase financing. The purchase price was 73,000, and the mortgagee agreed to provide a 59,000 first mortgage, on the condition that the purchasers provide the balance of the purchase price from their own resources with no further borrowing. There was to be no loan or second mortgage in connection with the transaction.

The solicitors were required by the plaintiff to submit a written report, prior to the advance of the mortgage funds, confirming to the best of their knowledge and belief that the balance of the purchase price was being provided by the purchaser personally and without further borrowing.

The purchasers owed money to a bank secured by a second charge on their existing property. The bank allowed a small part of that debt (3,350) to remain outstanding after the sale of the property, and to be secured by a second charge on the new property. The solicitors were aware of this arrangement. Through inadvertence, they failed to mention this arrangement in their report to the plaintiff; they in fact represented that the balance of the purchase funds were being supplied by the purchasers personally. There was no allegation that the solicitors intentionally withheld the information.

The transaction closed. The purchasers defaulted; the plaintiff sold the property for less than 53,000 and sued the solicitors for the entire mortgage loss. The trial judge gave the plaintiff judgment for this amount on the basis that the solicitors were liable for a breach of trust.

The Court of Appeal Judgment
The Court of Appeal allowed the solicitors' appeal. It held that there was no breach of trust or breach of fiduciary duty. The action was remitted to the trial judge for an assessment of damages, if any, arising from the solicitors' breach of their duty of care.

The Court also cited with approval the observation of Southin, J. in Girardet v. Crease & Co. [1987] 11 BCLR (2d) 361 (B.C.S.C.):

"The term 'fiduciary' is flung around now as if it applied to all breaches of duty by solicitors, directors of companies and so forth. . . That a lawyer can commit a breach of the special duty [of a fiduciary] . . . by entering into a contract with the client without full disclosure . . . and so forth is clear. But to say that simple carelessness in giving advice in such a breach is perversion of words."

The Court of Appeal reasoned that the existence of a fiduciary relationship does not mean that every duty owed by a fiduciary to the beneficiary is a fiduciary duty. In particular, a trustee's duty to exercise reasonable care, although equitable, is not specifically a fiduciary duty. "Breach of fiduciary duty" connotes disloyalty or infidelity. Mere incompetence is not enough. A servant who loyally does his incompetent best for his master is not unfaithful and is not guilty of breach of fiduciary duty. Where a failure to disclose by a fiduciary is to the advantage of one party, the court will jealously scrutinize the facts to ensure that there has been nothing more than inadvertence, but there can be no justification for treating an unconscious failure as demonstrating a want of fidelity.

 

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