Fiduciaries and competing principals

At the end of July the Court of Appeal discussed in its judgment in Rossetti v Diamond Sofa Company Ltd [2012] EWCA Civ 1021 the capacity to which an agent could act for a competitor of their principal. The question was whether the fiduciary had breached their duty of loyalty to their principal by acting for a competitor.

The fiduciary in this case was an agent. The type of fiduciary and the role they undertake are always important facts to establish. The reason being as established by Sedley LJ: 'The fiduciary duty of a director to his company is uniform and universal. What vary infinitely are the elements of fact and degree which determine whether the duty has been breached'. Plus Group Ltd v Pyke [2002] EWCA Civ 370

It is generally accepted that one is a fiduciary because they owe a duty of loyalty rather than the other way round. Thus circumstances must demonstrate that loyalty was reasonably expected. When it is to be reasonably expected is open to competing theories but the most compelling argument is when one has been granted limited access to the affairs and property of another. Thus for example trustees, company directors and agents are obvious examples of individuals likely to owe the fiduciary duty. Directors are granted control of the company's property and affairs to advance the company's interests and not their own personal interests. However, with control of another's affairs and assets comes with it the problem of self-regard and opportunism to prefer one's own interests over their principal's. Thus the fiduciary duty of loyalty is owed to protect the principal for the director/trustee/agent acting opportunistically.

In Rossetti there was no question as to whether the duty was owed as they were clearly acting in a fiduciary capacity as an agent. However, the question was whether the duty had been breached; or was the duty of loyalty owed in the particular circumstance. For fiduciaries the duty of loyalty cannot be open ended as it would 'prevent a [fiduciary] from utilizing his spare time ... and impose upon a man, in relation to the rest of the week an obligation which would unreasonably tie his hands'. Hivac Limited v Park Royal Scientific Instruments Ltd [1946] Ch 169 . Therefore the duty of loyalty is only owed on matters for which they are retained. As Lord Upjohn described: 'It is perfectly clear that a solicitor can if he so desires act against his clients in any matter in which he has not been retained by them'. Boardman v Phipps [1967] 2 AC 46

Therefore scope can be a particularly tricky issue in identifying when loyalty is owed. For fiduciary relationships such as trustees, solicitors, estate agents the issue may be easier. These roles usually involve specific identifiable property that they have undertake to advance/protect/sell. Thus in the infamous case of Keech v Sandford (1726) 25 ER 223, the trustee was to protect the lease for an infant beneficiary. When he took the lease personally he was in breach of his duty of loyalty as his personal interests conflicted with his duty. Yet, his duty would not have prevented him from taking on personally a separate lease, even if the infant beneficiary was interested in it, since the trustee was only retained to hold on trust that specific lease.

Now to the facts of Rossetti. Diamond were a company based in Thialand who appointed SML as agents to advance their UK business. The agreement eventually came to an end and Diamond appointed another company, RML, to act for them. RML had in fact been set up by the people behind SML to take on the clients of SML. However, the relationship had begun to deteriorate. Diamond eventually terminated the agreement because it was discovered that RML had been representing two direct competitors.

Lord Neuberger delivered the judgment which Rimer and Moses LLJ agreed with. As a general rule he found that it would be a breach of fiduciary duty to act for competing principals but identified two situations where a fiduciary may act for a competing principal: (1) the principals agree to them so acting; and (2) where the principal appreciated it was the fiduciaries business to act for multiple principals.

The former is certainly true, the latter seems inaccurate based on the House of Lords decision in Boardman v Phipps. Here the beneficiaries to a trust were fully aware, and even encouraged the purchase of shares in a company by the trustees in which the beneficiaries already held shares. Yet the House of Lords decided in a 3v2 majority that there was a breach. The fact that a principal may appreciate them acting for multiple principals does not mean they should tolerate them acting for a competing principal. If the conflict has not been approved by the principal(s) the only question that needs to be addressed is whether there is real sensible possibility of a conflict. If Lord Neuberger is correct then it is conceivable that a non-executive director could act for numerous principals, even competing ones, and not incur liability. This would seem unlikely based on the Court of Appeal's decision in Pyke. Sedley LJ, again, said, what if a director used his boardroom vote/influence to assist a competitor when the 'competitor was the director himself or another company of which he was also a director'. Strict fiduciary liability cannot be watered down on the fact that the principal knew it was the fiduciaries business to act for multiple principals. Such leniency would easily allow the fiduciary to be negligent or opportunistic if they deem it preferable to prefer one principal over another. Acting for multiple principals though is not the offending act. As Lord Upjohn stated, acting against your principal on matters for which you have not been retained is not objectionable. It is objectionable, however, to compete against your principal.

Yet, Lord Neuberger did not find either of these exceptions in this case.  He found that Diamond had been told by SML there would be no clash of products with other competitors before it was discovered they were acting for two other competing businesses. This supported the conclusion that Diamond would not have expected SML, and subsequently RML, to act for competitors.

The Court of Appeal's decision fails to address a couple of points. One is what is mentioned above and determining the scope of fiduciary liability for different in different relationships. Second is discussing what is meant by competing. These two questions have serious consequences for directors ever since an earlier decision from Rimer J in Re Allied Business & Financial Consultants [2009] EWCA Civ 751 where he described directors as general fiduciaries with unlimited capacity meaning their loyalty was not circumscribed by the contract since a company's constitution is open to any business ever since the removal of the ultra vires rule, if not before. For non-executive directors it would seem excessively harsh to describe them as general fiduciaries when it is, as Lord Neuberger suggests, general place for such a fiduciary to act for multiple principals. Even executive directors commonly act for one other principal. Therefore determining the scope of fiduciary liability and what is meant by competing in such cases must be addressed in questions concerning competing principals. Answers to these questions are discussed in more detail in my thesis.