Court of Session's "tough moralistic stance" on fiduciary duties a warning to agents, says expert

Out-Law News | 12 May 2014 | 8:05 am | 3 min. read

A recent decision by the Court of Session in Scotland illustrates in "graphic terms" the seriousness with which courts regard the fiduciary, or good faith, duties owed by agents towards those they are working on behalf of, an expert has said.

In its judgment, the Court of Session said that the nature of the agency relationship required stricter disclosure requirements than would otherwise have been the case during the sale of a company. Colin Campbell, the former managing director of that company, was in breach of his duties as agent for the rest of the company's shareholders in relation to the sale because he had not fully disclosed to them the exact position in relation to the enhanced price he was to receive for his shares.  It was not sufficient that another agent knew of the position.

Litigation expert Craig Connal  of Pinsent Masons, the law firm behind Out-Law.com, said that the decision acted as a warning to directors and others negotiating deals on behalf of a company. They might not always appreciate the full extent of their obligations and potential liability, he said.

"While the concepts discussed in this case are not new the illustration, in graphic terms, of what they may actually mean in practice is relatively rare," he said.

"It is crystal clear that the courts will take the most exacting – moralistic, even – approach to this topic, with potentially grave consequences for those caught up in the action. It must be doubtful if everyone who has heard or read of fiduciary duties really appreciates the full import of the obligations which come with them. Many may not even realise they have those obligations – for example, where it is not readily understood in advance that a transaction involves an agency relationship," he said.

A fiduciary duty is a duty to act in the interest of another and requires a high degree of good faith and fair dealing. Such duties typically arise in the context of a trustee-beneficiary relationship, between agents and their principals and, in some cases, between a company director or partner and the company itself or its shareholders.

In 2007, Campbell negotiated the sale of LAGTA Ltd, a company of which he was managing director and also a shareholder, to the SPX Corporation on behalf of all of LAGTA's shareholders, including transport company Parks of Hamilton. As part of the agreement, Campbell would receive a higher purchase price for each of his shares and would provide consultancy services to LAGTA for 18 months after the sale.

According to the judgment, the other shareholders were told that the enhanced price for Campbell's shares was to reflect the consultancy services he would be providing after the sale. As part of its legal action against Campbell seeking any "undisclosed profits" he made from the deal, Parks claimed that this was the sole reason it accepted the difference in price. It later emerged that the consultancy services would be paid for separately, in addition to the higher share price.

Parks' argument was based on its belief that Campbell had acted as agent for all of the shareholders when negotiating the sale, meaning that he owed them a fiduciary duty not to make a secret profit from the sale. Liability for breach of this duty can only be avoided by the agent obtaining informed consent from the principal (in this case the other shareholders) by fully disclosing all the circumstances to them before making the sale. Campbell argued that as LAGTA's solicitors were fully aware of the circumstances of the sale, the company and its shareholders should be deemed to have the same knowledge.

Upholding the decision of the Lord Ordinary and finding in favour of Parks, Lady Dorrian said that in the context of a fiduciary relationship between an agent and its principle, any disclosure must be made to the principal by the agent itself.

"To expect such disclosure to be made directly by the fiduciary is in keeping with the nature of the relationship, which expects that fiduciary to answer to the highest ethical standards," she said.

"Without such a requirement, the reliance which could be placed on the fiduciary nature of the relationship would be diluted, and uncertainty introduced into mercantile dealings. To allow disclosure through the medium of those standing in a different relationship to the principal [in this case its solicitors] would make it more difficult to identify whether disclosure has indeed taken place. The decision as to whether the facts are such that disclosure is required is a decision which can only be taken by the fiduciary and cannot be laid on the shoulders of another," she said.

Litigation expert Craig Connal said that those acting as agents should also be aware of the "drastic" remedies courts could award for breach of fiduciary duty.

"In these cases, there is no need to prove fault or establish loss as would be usual," he said. "Nor does it help that the principal would not have benefited even if proper advance disclosure had been made. If the agent gets the 'secret profit' he must hand it over in full regardless."