NAVIGATING THE MAZE

• Citation: (2016) 28 SAcLJ 884
• Date: 01 December 2016
• Published date: 01 December 2016

Making Sense of Equitable Compensation and Account of Profits for Breach of Fiduciary Duty

This article examines the main monetary remedies for breach of fiduciary duty under Singapore law: equitable compensation and account of profits. It focuses on the role as well as the operation of causation in these two monetary remedies for breach of fiduciary duty. It suggests that studying the account of profits and equitable compensation side-by-side illuminates the proper questions that should be asked. By considering the fundamental tenets of the fiduciary doctrine as well as recent case law developments, we argue that relevant considerations for crafting appropriate remedial principles include scope of duty, deterrence, proportional consequences and good faith. Part of our discussion also examines the structural differences in the analysis of the two remedies under current law, and attempts to rationalise the differences.

I. Introduction

1 This article examines the main monetary remedies for breach of fiduciary duty under Singapore law: equitable compensation and account of profits. Both areas of law are in need of clarification, though for different reasons. The law on the account of profits appears stable and uncontroversial. There has not been an opportunity for the courts to consider more fully the proper limitations on the scope of account. However, the authorities that are on point suggest that the duty to account for profits follows almost as a matter of course from breach. In

particular, causation between profits and breach is seemingly irrelevant for the errant fiduciary's liability. This article, however, cautions against an overly simplistic analysis. The law on equitable compensation for breach of fiduciary duty is, by contrast, a muddied terrain as a result of recent developments in Singapore and elsewhere. Yet, it may be that there is more orderliness to the apparent legal mess, as this article seeks to show.

2 Judicial clarification from the Singapore Court of Appeal is required but may take some time in arriving. This article seeks to contribute towards clarity of the law by proposing a way of navigating the legal maze. This article focuses on the role as well as operation of the causation concept in monetary remedies for breach of fiduciary duty. It suggests that a study of the account of profits and equitable compensation side-by-side, though unconventional, illuminates the proper questions that should be asked. By considering the fundamental tenets of the fiduciary doctrine as well as case law developments, we argue that relevant considerations for crafting appropriate remedial principles include scope of duty, deterrence, proportional consequences and good faith. How these considerations are to be prioritised and whether all of them should be taken on board may vary depending on jurisdictional prerogatives. In this article, we also highlight the structural differences in the analysis of the two remedies under current law and attempt to rationalise the differences.

3 By way of background, we consider in Part II1 of this article the fundamental tenets of the fiduciary doctrine under Singapore law. This part of the discussion sets out the common basis upon which we examine and analyse the monetary remedies. We then turn to equitable compensation in Part III.2 The first segment focuses on the local developments. The second segment highlights the possible directions that Singapore law may take in the future. In Part IV,3 we consider the law on account of profits and its relationship with equitable allowance. The cases suggest that the duty to account for profits is strict, although a bona fide fiduciary may, in very exceptional circumstances, be entitled to an equitable allowance. We argue that the primary duty to account must be considered together with the jurisdiction to award allowance so as to have a clear picture of the remedial principles for account of profits. In particular, our analysis shows that the same factors underpinning equitable compensation are relevant for account of profits, though expressed differently. Given the similar underlying

objectives and themes, we suggest issues that merit closer scrutiny for account of profits.

II. The fiduciary doctrine

4 This article argues that the fundamental tenets of the fiduciary doctrine are relevant to the crafting of appropriate remedial principles. The doctrine must be internally consistent, from the imposition of duty to the imposition of liability for breach. In this part, we highlight four core tenets of the doctrine under Singapore law.

A. A continuum of fiduciary relationships

5 Historically, courts identified fiduciary relationships based on status: some relationships are regarded as fiduciary per se.4 Over time, fiduciary obligations have been imposed on parties who fall outside of the established categories based on the circumstances of each case5 and even in commercial relationships.6 Millett LJ's famous pronouncement in Bristol & West Building Society v Mothew7 (“Mothew”) provides guidance on when a relationship outside the status-based categories may be fiduciary in nature:8

A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of the fiduciary is the obligation of loyalty.

6 In particular, courts, when dealing with cases falling outside of the established categories, look for elements of vulnerability and dependence within the relationship.9 As such, whilst the trustee is the paradigmatic fiduciary,10 it is clear that the kinds of relationships which

attract the application of the fiduciary obligations are diverse, and the categories are not closed.11 Fiduciary relationships therefore fall on a continuum, with some closer to the traditional trust paradigm and others more removed. After all, not all fiduciaries owe custodial duties as a traditional trustee does and yet these fiduciaries can unilaterally exercise a power or discretion to affect the principal's interests,12 thereby justifying the imposition of fiduciary duties. Moreover, it may be that fiduciary relationships arising in the commercial context are subject to different considerations from those arising in the non-commercial context.

7 Hence, one must not assume that every fiduciary owes the same duties as a trustee, or that trust principles, without appropriate modification, are exported in entirety for application in other fiduciary contexts. That being the case, there are fundamental obligations that set the fiduciary apart from other actors and it is to this aspect of the fiduciary doctrine we now turn.

B. Fiduciary obligations

8 In Mothew, Millett LJ said that the “distinguishing obligation of a fiduciary is the obligation of loyalty”.13 It is also well established that at the core of the fiduciary obligation of loyalty are two fundamental rules: the no-conflict and no-profit rules.14 The precise boundary as well as the exact function of the fiduciary doctrine remain matters of debate.15 But these matters need not vex us in the present discussion. There are two important points to note for the analysis to follow. First, it is clear

that the fiduciary obligations exist to prevent abuse of position by the fiduciary.16

9 Secondly, not all duties owed by a fiduciary are fiduciary duties. For instance, duties of care and skill are not regarded as such.17 A distinction therefore needs to be drawn between the breach of a fiduciary duty and the breach of a non-fiduciary duty by a fiduciary because they attract different remedial consequences.18

10 Whilst the distinction is important, there is a close relationship between fiduciary and non-fiduciary duties. As mentioned above, whether fiduciary duties – arising from a relationship of trust and confidence – are to be imposed is dependent upon the scope and content of the non-fiduciary duties. Whilst a relationship of trust and confidence is presumed in status-based fiduciary relationships, the exercise of examining the alleged fiduciary's non-fiduciary duties is crucial for determining whether fiduciary duties have arisen on an ad hoc basis.19 Moreover, whether there has been a breach of fiduciary duty is partly dependent upon the scope and content of non-fiduciary duties: whether there has been a conflict of duty and interests; whether the profits earned by the fiduciary are unauthorised; whether the profits were earned by the errant fiduciary in the execution of his duties as opposed to any other capacity20 and so on.

C. Honesty and good faith: Centrality or culpability?

11 Yet, it is frequently recognised by the courts that parties to a contract can modify or completely exclude fiduciary duties from arising,21 although the precise permissible limits and means of contracting out remain contentious.22 One particular query concerns

whether parties can contract out of a fiduciary's duties to act honestly and in good faith.23

12 In the trust context, which is the paradigmatic fiduciary relationship, it was established in Armitage v Nurse24 that the “irreducible core” of trustee obligations is the trustee's duty to “perform the trust honestly and in good faith for the benefit of the beneficiaries”.25 The duties of honesty and good faith are the minimum content of a trust relationship: contracting out of these duties would mean that the relationship ceases to be one. It also follows that a trust exemption clause that purports to exempt liability for breach of the “irreducible core” of trustee obligations is void.26 It appears that the “irreducible core” of trustee obligations can be further reduced in a specialised commercial context, as suggested by Citibank NA v MBIA Assurance SA.27 The decision has caused controversy for being inconsistent with trust principles.28 But it may be explained on the exceptional facts of the case as arising in...