Boardman and another v Phipps
[1966] 3 All ER 721[1967] 2 AC 46
(Decision by: Lord Guest)
Boardman and another
vPhipps
Judges:
Viscount Dilhorne
Lord Cohen
Lord Hodson
Lord GuestLord Upjohn
Judgment date: 3 November 1966
UK
Decision by:
Lord Guest
My Lords, the first appellant is a solicitor and the second appellant is a beneficiary under a will made by his father who died in 1944. The will directed the trustees to pay an annuity to the widow and the residue was to be divided among his children in these proportions: five-eighteenths were to go to the second appellant; five-eighteenths to the estate of a deceased son; five-eighteenths to the respondent and three-eighteenths to a daughter, Mrs Noble. The trustees under the will were the widow, Mrs Noble and a Mr Fox, a chartered accountant.
The respondent obtained an order from Wilberforce J declaring that the appellants held five-eighteenths of 21,986 shares of £1 each in a company, Lester & Harris Ltd as constructive trustees for the respondent and ordered an account of the profits made by the appellants to be taken and a declaration of a proper sum to be allowed to the appellants for their work and skill in obtaining the shares and profits. The Court of Appeal unanimously affirmed the decision of Wilberforce J.
Among the trust assets was a controlling interest in the family business of Phipps & Son Ltd textile manufacturers, and also eight thousand out of thirty thousand shares of £1 each in a private company, Lester & Harris Ltd which also manufactured textile and had factories at Coventry and Nuneaton and also in Australia.
In 1956 Mr Boardman as solicitor to the trust decided that the recent accounts of Lester & Harris Ltd were very unsatisfactory and that something should be done to improve the position and with this in view the appellants attended the annual general meeting of the company held in December, 1956, having obtained proxies from Mrs Noble and Mr Fox. They were not satisfied with the answers given at the meeting regarding the state of the company's affairs. They then decided that the only way to improve the position was to endeavour to obtain control of the company, and with this in view to make an offer for all the outstanding shares in Lester & Harris Ltd. This was the first phase of a series of three in the negotiations which culminated in their purchasing all the outstanding shares in May, 1959. Their avowed object was thereby to improve the value of the trust holding in Lester & Harris Ltd Mr Fox was informed of their intentions and, although he gave no formal consent, he raised no objection, as he thought that to have the Lester & Harris Ltd shares in friendly hands could not but work to the advantage of the trust. Mrs Noble was also informed and she raised no objection. The widow was not informed. She was at this time eighty-three and suffering from senile dementia and unable to attend to trust affairs. There was never any question at this time of the trustees buying the shares, which in fact they had no power to do; but there is no doubt that at this time Mr Boardman, in his relations with Mr Fox and Mrs Noble, was acting as solicitor to the trust. When he attended the annual general meeting he acted as agent for the trustees, and in his relations with Lester & Harris Ltd prior to and including the formal offer for the shares he was purporting to act for the trustees and in their interests. In this first phase Mr Boardman obtained information from the company as to the prices at which shares had recently changed hands; and on 24 January 1957, after informing the directors of their intentions, the appellants made an offer of 2 5s per share to the members of Lester & Harris Ltd which was conditional on acceptance by the holders of not less than fifteen thousand five hundred shares. This offer was subsequently increased on 25 February 1957, to £3 per share. This offer received acceptance only in respect of 2,925 shares. Thus ended phase 1 of the negotiations.
The opening of phase 2 was a letter, dated 26 April 1957, from Mr Boardman to Mr Smith, chairman of the board of Lester & Harris Ltd in which the suggestion was made that the assets of the company should be divided between the Harris family and the trustees, one suggestion being that the Harris family should be the sole owners of the Australian venture of the company and the trustees should own and control the English side of the business. During this phase Mr Boardman obtained from the company extensive and valuable information as to the value of the company's assets. This information is fully detailed in the judgment of Wilberforce J ([1964] 2 All ER at p 205). In obtaining this information Mr Boardman was avowedly acting on behalf of the trustees; in fact the operation suggested could only have been achieved by the trustees after a successful application to the court buying shares in Lester & Harris Ltd and by a reorganisation of that company. Between April, 1957, and October, 1958, voluminous correspondence took place between Mr Boardman and Mr Smith, during which Mr Boardman suggested that, if agreement could not be reached, legal proceedings might have to be taken to protect their minority interests. These negotiations proved abortive.
Phase 3 began in October, 1958. The widow died on 19 November 1958. On 7 October 1958, Mr Smith informed Mr Boardman that he was prepared to sell his shares and to recommend his associates to sell their shares to the appellants at £5 each. A conditional agreement for the sale of these shares was made on 10 March 1959. Subsequently on 26 May 1959, the appellants gave notices making unconditional agreements to buy 14,567 shares held by Mr Smith and his associates at the price of £4 10s per share. This, in addition to the earlier agreements to purchase 2,925 at £3 each and the purchase of a further 4,494 shares at £4 10s each made the appellants holders in all of 21,986 shares.
The 21,986 shares in Lester & Harris Ltd are the shares of which the courts below have held the appellants to be constructive trustees, and in respect of which as to five-eighteenths the appellants are accountable to the respondent for the profits arising from such purchase. The question, and the only question before this House, is whether the appellants are constructive trustees of these shares. I make no distinction between the two appellants. They have never asked to be dealt with separately and they must be treated as co-adventurers.
Mr Boardman set the ball rolling in his capacity as solicitor to the trustees and, in my view, he continued to act in this capacity throughout the negotiations. The three phases of the negotiations were continuous and designed to the same end, namely, the purchase of the controlling interest in Lester & Harris, Ltd. This is stated explicitly by the appellants in their defence "3. The [first appellant] at all material times acted as solicitor to the [second appellant] as well as to the trustees". This admission was repeated in the appellants' printed case and could scarcely have been withheld having regard to the terms of the correspondence. Mr Boardman would never have been able to obtain all the information which was obtained in phase 2 unless he had been acting for the trustees. This information enabled him to put forward the offer of £4 10s per share which was fully acceptable to Mr Smith. I take the view Boardman would never have been able to that from first to last Mr Boardman was acting in a fiduciary capacity to the trustees. This fiduciary capacity arose in phase 1 and continued into phase 2, which glided into phase 3. In saying this I do not for one moment suggest that there was anything dishonest or underhand in what Mr Boardman did. He has obtained a clean certificate below and I do not wish to sully it; but the law has a strict regard for principle in ensuring that a person in a fiduciary capacity is not allowed to benefit from any transactions into which he has entered with trust property. If Mr Boardman was acting on behalf of the trust, then all the information that he obtained in phase 2 became trust property. The weapon which he used to obtain this information was the trust holding; and I see no reason why information and knowledge cannot be trust property. In Hamilton v Wright Lord Brougham said ((1842), 9 Cl & Fin at p 124):
"The knowledge which he acquires as trustee is of itself sufficient ground of disqualification, and of requiring that such knowledge shall not be capable of being used for his own benefit to injure the trust; the ground of disqualification is not merely because such knowledge may enable him actually to obtain an undue advantage over others."
In Regal (Hastings) Ltd v Gulliver Viscount Sankey said ([1942] 1 All ER at p 382, letter d):
"Imperial Hydropathic Hotel Co., Blackpool v. Hampson makes no exception to the general rule that a solicitor or director, if acting in a fiduciary capacity, is liable to account for the profits made by him from knowledge acquired when so acting."
Aas v Benham is another case where the use of information by a person in a fiduciary capacity was challenged.
The position of a person in a fiduciary capacity is referred to in Regal (Hastings) Ltd v Gulliver by Lord Russell of Killowen where he said ([1942] 1 All ER at p 386, letter a):
"My lords, with all respect I think there is a misapprehension here. The rule of equity which insists on those, who by use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud, or absence of bona fides; or upon such questions or considerations as whether the profit would or should otherwise have gone to the plaintiff, or whether the profiteer was under a duty to obtain the source of the profit for the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or benefited by his action. The liability arises from the mere fact of a profit having, in the stated circumstances, been made. The profiteer, however honest and well-intentioned, cannot escape the risk of being called upon to account."
Again Lord Russell quotes with approval from the judgment of the Lord Ordinary in Huntington Copper Co v Henderson ((1877), 4 R (Ct of Sess) 294 at p 308) the following passage ([1942] 1 All ER at p 389, letter b):
"Whenever it can be shown that the trustee has so arranged matters as to obtain an advantage whether in money or money's worth to himself personally through the execution of his trust, he will not be permitted to retain, but be compelled to make it over to his constituent."
Lord Wright in the same case said ([1942] 1 All ER at p 392, letter c):
"That question can be briefly stated to be whether an agent, a director, a trustee or other person in an analogous fiduciary position, when a demand is made upon him by the person to whom he stands in the fiduciary relationship to account for profits acquired by him by reason of his fiduciary position, and by reason of the opportunity and the knowledge, or either, resulting from it, is entitled to defeat the claim upon any ground save that he made profits with the knowledge and assent of the other person."
Again Lord Wright said ([1942] 1 All ER at p 392, letter e):
"The courts below have held that it does not apply in the present case, for the reason that the purchase of shares by the respondents, though made for their own advantage, and though the knowledge and opportunity which enabled them to take the advantage came to them solely by reason of their being directors of the appellant company, was a purchase which, in the circumstances, the respondents were under no duty to the appellant to make, and was a purchase which it was beyond the appellant's ability to make, so that, if the respondents had not made it, the appellant would have been no better off by reason of the respondents abstaining from reaping the advantage for themselves. With the question so stated, it was said that any other decision than that of the courts below would involve a dog-in-the-manger policy. What the respondents did, it was said, caused no damage to the appellant and involved no neglect of the appellant's interests or similar breach of duty. However I think the answer to this reasoning is that, both in law and equity, it has been held that, if a person in a fiduciary relationship makes a secret profit out of the relationship, the court will not inquire whether the other person is damnified or has lost a profit which otherwise he would have got. The fact is in itself a fundamental breach of the fiduciary relationship. Nor can the court adequately investigate the matter in most cases."
Applying these principles to the present case I have no hesitation in coming to the conclusion that the appellants hold the Lester & Harris Ltd shares as constructive trustees and are bound to account to the respondent. It is irrelevant that the trustees themselves could not have profited by the transaction. It is also irrelevant that the appellants were not in competition with the trustees in relation to the shares in Lester & Harris, Ltd. The appellants argued that as the shares were not acquired in the course of any agency undertaken by the appellants they were not liable to account. Analogy was sought to be obtained from the case of Aas v Benham, where it was said that before an agent is to be accountable the profits must be made within the scope of the agency (see per Lindley LJ ([1891] 2 Ch at pp 255, 256). That, however, was a case of partnership where the scope of the partners' power to bind the partnership can be closely defined in relation to the partnership deed. In the present case the knowledge and information obtained by Mr Boardman was obtained in the course of the fiduciary position in which he had placed himself. The only defence available to a person in such a fiduciary position is that he made the profits with the knowledge and assent of the trustees. It is not contended that the trustees had such knowledge or gave such consent.
In the Court of Appeal Lord Denning MR and Pearson LJ, decided the case in the respondent's favour on the basis that the appellants were "self-appointed agents" and thus placed themselves in a fiduciary capacity. Reference was made to Lyell v Kennedy, Kennedy v Lyell. I prefer, however, to base my opinion on the broader ground which was epitomised by counsel for the respondent in his closing submission. Mr Boardman and Mr Tom Phipps, he said, placed themselves in a special position which was of a fiduciary character in relation to the negotiations with the directors of Lester & Harris Ltd relating to the trust shares. Out of such special position and in the course of such negotiations they obtained the opportunity to make a profit out of the shares and knowledge that the profit was there to be made. A profit was made and they are accountable accordingly.
I would dismiss the appeal.