Boardman and another v Phipps

[1966] 3 All ER 721
[1967] 2 AC 46

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(Judgment by: Lord Hodson)

Boardman and another
vPhipps

Court:

Judges: Viscount Dilhorne
Lord Cohen

Lord HodsonLord Guest
Lord Upjohn

Hearing date: 7, 8, 9, 13 June 1966
Judgment date: 3 November 1966

UK

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Judgment by:
Lord Hodson

My Lords, I will not repeat the facts already set out in te judgment of Wilberforce J (See [1964] 2 All ER at pp 189 et seq) and in the speech of my noble and learned friend, Viscount Dilhorne.

The proposition of law involved in this case is that no person standing in a fiduciary position, when a demand is made on 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 on any ground save that he made profits with the knowledge and assent of the other person. I take the above proposition from the opening words of the speech of Lord Wright in Regal (Hastings) Ltd v Gulliver ([1942] 1 All ER at p 392, letter c), where he states the proposition in the form of the question which he answered, as had all the members of your lordships' House, in such a way as to affirm the proposition. It is obviously of importance to maintain the proposition in all cases and to do nothing to whittle away its scope or the absolute responsibility which it imposes.

The persons concerned in this case, namely, Mr Boardman and Mr Tom Phipps, are not trustees in the strict sense, but are said to be constructive trustees by reason of the fiduciary position in which they stood. As Lord Selborne pointed out in Barnes v Addy ((1874), 9 Ch App 244 at p 251):

"That responsibility [viz., of trustees] may no doubt be extended in equity to others who are not properly trustees, if they are found either making themselves trustees de son tort, or actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust. But, on the other hand, strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions, perhaps of which a Court of Equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees."

There is no question of fraud in this case; it has never been suggested that the appellants acted in any other than an open and honourable manner. If, however, they are in a fiduciary position they are as trustees bound by duty, succinctly stated by Lord Cranworth LC, in Aberdeen Ry Co v Blaikie Brothers ([1843-60] All ER Rep 249 at p 252).

"... and it is a rule of universal application that no one having such duties to discharge shall be allowed to enter into engagements in which he has or can have a personal interest conflicting or which possibly may conflict with the interests of those whom he is bound to protect."

So far as Mr Tom Phipps is concerned, he was not placed in a fiduciary position by reason of his being a beneficiary under his father's will. He was acting as agent for the trustees with Mr Boardman before any question of acting with him for his own benefit arose. He has not, however, sought to be treated in a different way from Mr Boardman on whom the conduct of the whole matter depended and with whom he has acted throughout as a co-adventurer; he does not claim that he should succeed in this appeal if Mr Boardman fails.

Mr Boardman's fiduciary position arose from the fact that he was at all material times solicitor to the trustees of the will of Mr Phipps senior. This is admitted, although counsel for the appellants has argued, and argued correctly, that there is no such post as solicitor to trustees. The trustees either employ a solicitor or they do not in a particular case, and there is no suggestion that they were under any contractual or other duty to employ Mr Boardman or his firm. Nevertheless as a historical fact they did employ him and look to him for advice at all material times and this is admitted. It was as solicitor to the trustees that he obtained the information which is so clearly summarised in the judgment of Wilberforce J ([1964] 2 All ER at pp 204, 205) and repeated in the speech of my noble and learned friend, Lord Upjohn. This information enabled him to acquire knowledge of a most extensive and valuable character, as the learned judge pointed out, which was the foundation on which a decision could and was taken to buy the shares in Lester & Harris, Ltd. This information was obtained on behalf of the trustees, most of it at a time during the history of the negotiations when the proposition was to divide the assets of the company between two groups of shareholders. This object could not have been effected without a recostruction of the company and Mr Boardman used the strong minority shareholding which the trustees held, that is to say eight thousand shares in the company, wielding this holding as a weapon to enable him to obtain the information of which he subsequently made use.

As to this it is said on behalf of the appellants that information as such is not necessarily property and it is only trust property which is relevant. I agree, but it is nothing to the point to say that in these times corporate trustees, eg, the Public Trustee and others, necessarily acquire a mass of information in their capacity of trustees for a particular trust and cannot be held liable to account if knowledge so acquired enables them to operate to their own advantage, or to that of other trusts. Each case must depend on its own facts, and I dissent from the view that information is of its nature something which is not properly to be described as property. We are aware that what is called "know-how" in the commercial sense is property which may be very valuable as an asset. I agree with the learned judge ([1964] 2 All ER at pp 201-203) and with the Court of Appeal ([1965] 1 All ER at p 856) that the confidential information acquired in this case, which was capable of being and was turned to account, can be properly regarded as the property of the trust. It was obtained by Mr Boardman by reason of the opportunity which he was given as solicitor acting for the trustees in the negotiations with the chairman of the company, as the correspondence demonstrates. The end result was that, out of the special position in which they were standing in the course of the negotiations, the appellants got the opportunity to make a profit and the knowledge that it was there to be made.

The appellants argue that this is not enough, and in support of the contention rely on the authority of Aas v Benham. This case was concerned with a partnership of ship brokers, and the defendant carried on the business of ship builder using knowledge acquired in the partnership business. A claim against him to account to the partnership for the profits of his business as ship builder failed. Lindley LJ said ([1891] 2 Ch at p 256) that it is not the source of the information but the use to which it is put which is important:

"To hold that a partner [or trustee] can never derive any personal benefit from information which he obtained as a partner would be manifestly absurd."

It was held that the defendant was not liable to account because the profit was made outside the scope of the partnership and that in no sense was the defendant acting as the agent of the partners. Similarly the appellants contend that the purchase of the shares in question was outside the scope of the fiduciary relationship existing between them and the trustees.

The case of partnership is special in the sense that a partner is the principal as well as the agent of the other partners and works in a defined area of business, so that it can normally be determined whether the particular transaction is within or without the scope of the partnership. It is otherwise in the case of a general trusteeship or fiduciary position such as was occupied by Mr Boardman, the limits of which are not readily defined, and I cannot find that the decision in the case of Aas v Benham assists the appellants, although the purchase of the shares was an independent purchase financed by themselves. Aas v Benham was a case depending on the alleged relationship of principal and agent as it exists between one partner and another. There was no such relationship here, but the position of an agent is relevant and the expression "self-appointed agent"used by the learned judge ([1964] 2 All ER at p 200, letter e) is a convenient way to describe someone who, assuming to act as agent for another, receives property belonging to that other so that the property is held by the self-constituted agent as trustee for such other. Such a case was Lyell v Kennedy, Kennedy v Lyell. Thus the learned judge found that the appellants were in the same position as if they had been agents for the trustees in the technical sense for the purpose of using the trust shareholding to extract knowledge of the affairs of the company and ultimately to improve the company's profit-earning capacity.

Keech v Sandford was a case in which it was impossible for the cestui que trust to obtain the renewal of a lease, nevertheless the trustee was held accountable for renewal obtained by him. Similarly in Regal (Hastings) Ltd v Gulliver, from which some of your lordships have cited passages, the directors of Regal were held accountable to the company for the profit they made in acquiring shares when the opportunity fell to them as directors of the company notwith-standing the fact that it was impossible for Regal to take the shares owing to lack of funds.

Regal (Hastings) Ltd v Gulliver differs from this case mainly in that the directors took up shares and made a profit thereby, it having been originally intended that the company should buy these shares. Here there was no such intention on the part of the trustees. There is no indication that they either had the money or would have been ready to apply to the court for sanction enabling them to do so. On the contrary, Mr Fox, the active trustee and an accountant who concerned himself with the details of the trust property, was not prepared to agree to the trustees buying the shares and encouraged the appellants to make the purchase. This does not affect the position. As Keech v Sandford shows, the inability of the trust to purchase makes no difference to the liability of the appellants, if liability otherwise exists. The distinction on the facts as to intention to purchase shares between this case and Regal (Hastings) Ltd v Gulliver is not relevant. The company (Regal) had not the money to apply for the shares on which the profit was made. The directors took the opportunity which they had presented to them to buy the shares with their own money and were held accountable. Mr Fox's refusal as one of the trustees to take any part in the matter on behalf of the trust, so far as he was concerned, can make no difference. Nothing short of fully informed consent, which the learned judge found not to have been obtained, could enable the appellants in the position which they occupied, having taken the opportunity provided by that position, to make a profit for themselves.

Likewise it is no answer to the respondent's claim that there was no contract of agency, and that the appellants were at all times acting for themselves without concealment and indeed with the encouragement of one of the trustees, namely, Mr Fox.

If they received confidential information from Lester & Harris Ltd in their capacity as representing the trustees it matters not whether or no there was a true agency. I refer again to the passage from Lord Wright's judgment in Regal (Hastings) Ltd v Gulliver ([1942] 1 All ER at p 392) when he speaks of "an agent, a director, a trustee or other person in an analogous fiduciary position" and, as an illustration, says that the most usual and typical case of this nature is that of principal and agent.

The relevant information is not any information but special information, which I think must include that confidential information given to the appellants which is so fully detailed in the judgment of Wilberforce J ([1964] 2 All ER at p 205). There is a passage in Aas v Benham in the judgment of Bowen LJ ([1891] 2 Ch at p 258) which, I think, is of assistance, although the learned lord justice was dealing with partnership not trusteeship: he was explaining some observations of Cotton LJ in Dean v MacDowell, Dean v MacDowell ((1878), 8 ChD at p 354). These were:

"Again, if he [that is, a partner]makes any profit by the use of any property of the partnership, including, I may say, information which the partnership is entitled to, there the profit is made out of the partnership property."

Bowen LJ. commented ([1891] 2 Ch at p 258):

"He is speaking of information which a partnership is entitled to in such a sense that it is information which is the property, or is to be included in the property of the partnership--that is to say, information the use of which is valuable to them as a partnership, and in the use of which they have a vested interest. But you cannot bring the information obtained in this case within that definition."

Aas v Benham is an important case as showing that a partner may make a profit from information obtained in the course of the partnership business where he does so in another firm which is outside the scope of the partnership business. In that case the partnership business was ship broking and the profit made was in a business which had no connexion with that of the partnership. This shows the limitation which must be kept in mind in considering the sense in which each partner is the agent of the partnership, but does not assist the appellants. Mr Boardman continued to be in a fiduciary position up to and including the time when the shares were purchased (March, 1959), and the scope of the trust concerning which his fiduciary relationship existed was not limited in the same way as a partnership carrying on a particular business. It cannot, in my opinion, be said that the purchase of shares in Lester & Harris Ltd was outside the scope of the fiduciary relationship in which Mr Boardman stood to the trust.

The confidential information which the appellants obtained at a time when Mr Boardman was admittedly holding himself out as solicitor for the trustees was obtained by him as representing the trustees, the holders of eight thousand shares of Lester & Harris Ltd As Russell LJ put it ([1965] 1 All ER at p 864; [1965] Ch at p 1031):

"The substantial trust shareholding was an asset of which one aspect was its potential use as a means of acquiring knowledge of the company's affairs, or of negotiating allocations of the company's assets, or of inducing other shareholders to part with their shares."

Whether this aspect is properly to be regarded as part of the trust assets is, in my judgment, immaterial. The appellants obtained knowledge by reason of their fiduciary position, and they cannot escape liability by saying that they were acting for themselves and not as agents of the trustees. Whether or not the trust, or the beneficiaries in their stead, could have taken advantage of the information is immaterial, as the authorities clearly show. No doubt it was but a remote possibility that Mr Boardman would ever be asked by the trustees to advise on the desirability of an application to the court in order that the trustees might avail themselves of the information obtained. Nevertheless, whenever the possibility of conflict is present between personal interest and the fiduciary position the rule of equity must be applied. This appears from the observations of Lord Cranworth LC in Aberdeen Ry Co v Blaikie Brothers ([1843-60] All ER Rep at p 252).

In the later case of Bray v Ford Lord Herschell stated the rule in a way which has peculiar application to the facts of this case, when he said ([1895-99] All ER Rep at p 1011; [1896] AC at p 51):

"It is an inflexible rule of a court of equity that a person in a fiduciary position, such as the plaintiff's, is not, unless otherwise expressly provided, entitled to make a profit; he is not allowed to put himself in a position where his interest and duty conflict. It does not appear to me that this rule is, as has been said, founded upon principles of morality. I regard it rather as based on the consideration that, human nature being what it is, there is danger, in such circumstances, of the person holding a fiduciary position being swayed by interest rather than by duty, and thus prejudicing those whom he was bound to protect. It has, therefore, been deemed expedient to lay down this positive rule. But I am satisfied that it might be departed from in many cases, without any breach of morality, without any wrong being inflicted, and without any consciousness of wrongdoing. Indeed, it is obvious that it might sometimes be to the advantage of the beneficiaries that their trustee should act for them professionally rather than a stranger, even though the trustee were paid for his services."

It is said that the appellants never had the necessary facts pleaded against them to raise the question of conflict of interest, so that they did not have the opportunity of dealing with allegations which would be relevant thereto. I cannot see what further facts were relevant to be raised other than those to which reference has been made in the judgments in the courts below and in the speeches of your lordships. The question whether or not there was a fiduciary relationship at the relevant time must be a question of law and the question of conflict of interest directly emerges from the facts pleaded, otherwise no question of entitlement to a profit would fall to be considered. No positive wrong-doing is proved or alleged against the appellants, but they cannot escape from the consequences of their acts involving liability to the respondent unless they can prove consent. This they endeavoured without success to do for, although they gave the respondent some information, that which they gave was held by the learned judge to be insufficient ([1964] 2 All ER at p 205) and there is no appeal against his decision on this point.

I agree with the decision of the learned judge, and with that of the Court of Appeal which, in my opinion, involves a finding that there was a potential conflict between Mr Boardman's position as solicitor to the trustees and his own interest in applying for the shares. He was in a fiduciary position vis-à-vis the trustees and through them vis-à-vis the beneficiaries. For these reasons in my opinion the appeal should be dismissed; but I should add that I am in agreement with the learned judge ([1964] 2 All ER at p 208, letter g) that payment should be allowed on a liberal scale in respect of the work and skil employed in obtaining the shares and the profits therefrom.