Breach of Fiduciary - Duty of Agents
Where one person acts as agent for another, special rules apply to that relationship and they owe a duty of care to their principal. A fundamental aspect of this fiduciary duty is that the agent must not place himself in a position where his duty and his personal interest may conflict. The laws relating to agency can be somewhat complex and this was recently considered by the courts in the case of Northampton Regional Livestock Centre Company Ltd v Cowling and another [2014] All ER (D) 212 (Jan).
The Background
This case concerned the fiduciary duties owed by agents in relation to the sale of a commercial property (‘the Site’) by a company, (‘the Company’). The Company eventually went into litigation and the liquidators transferred their rights of action to the Claimants in this case, who brought the action on behalf of all shareholders.
The chairman of the Company, the first Defendant, was also a partner in the firm that was instructed to market the Site on behalf of the Company. His partner in this firm was the second Defendant. They were formally instructed in relation to the Site on the 18th October 2004. In the event of a sale, they would be paid a commission of 1.25% of the sale price. Prior to this they had carried out some work on a speculative basis for which they had not received any remuneration.
Early in 2005, the second Defendant indicated to the first that he did not want to continue the partnership business and ultimately the business was sold in September 2005.
Prior to this, however, in July 2005, another company, Earlplace, became interested in purchasing the Site. The Second Defendant agreed to act for them in relation to the Site. It was agreed that he would be paid a third of any uplift in value between the price Earlplace paid to the Company for the Site and the value that Earlplace later realised on the subsequent sale or disposal of the Site to a third party. On the 23rd September 2005, the Company exchanged contracts for the sale of the Site to Earlplace for a consideration of £2.25m. Earlplace, subsequently sold the Site to a third party for £5million and the Second Defendant was paid the sum of £744,035.02, being one third of the uplift between £2.25million and £5million.
The Claimant’s Case
The Claimant’s contended that the Defendants were liable in negligence, that there was a breach of fiduciary duty, and also that the first Defendant was vicariously liable for the actions of the second Defendant.
The Court’s Findings
It is clear that professional surveyors and valuers owe a duty of care to their clients to use reasonable care and skill when carrying out their duties. This is the case even if the service is provided gratuitously. As a director of the Company, the first Defendant was required to act to the standard of a reasonably competent company director having the knowledge and experience which he possessed, i.e. he must exercise some degree of both skill and diligence. However, hindsight is a wonderful thing and when deciding whether a professional has acted negligently, the courts will look at the facts that prevailed at the time that the relevant decisions were made. No professional can be criticised for failing to take account of future, unforeseeable events. The court found that the first Defendant had acted reasonably in all the circumstances. He had considered other offers for the Site and pursued a viable course of action. Therefore, he was not liable in negligence, nor was the second Defendant.
Breach of fiduciary duty
The court ruled that the first Defendant had consulted with the other directors, who were fully informed of the situation. He had acted with the Board’s delegated authority and express agreement and had acted in good faith, especially given the financial difficulties of the Company. The Board had collectively discussed the issue and authorised the first Defendant to act as he did. Consequently, there was no breach of his fiduciary duty.
The position was somewhat different in relation to the second Defendant. Here, he was clearly in a position where there was a conflict of interest between the Company wanting to secure as high a sale price as possible, and the second Defendant wanting to achieve a lower price so that there would be a greater uplift on a subsequent sale. He was also receiving a fee from the Company in relation to the work he carried out in relation to the marketing of the Site.
The second Defendant had confidential information relating to the Company and he continued to owe a duty to the Company until they had exchanged contracts for the sale of the Site. The Company would not have wanted him to divulge this information as it weakened their bargaining position and they had not consented to the second Defendant’s conduct. The second Defendant continued to hold himself out as acting on behalf of the Company and consequently continued to owe it a fiduciary duty, even though he had expressed his desire to leave the partnership. The court ruled that he was in breach of this fiduciary duty and liable to account to the Company for the sum of £744,035.02.
In terms of vicarious liability, it was ruled that the second Defendant’s conduct had not been in the ordinary course of his business, he had been “on a frolic of one’s own” and acted without the knowledge or consent of the first Defendant, who was not liable for his actions.
This case is useful in demonstrating the extent of the duty owed by those in a fiduciary relationship and the risks involved if you were to put yourself in a position where your own interest conflicts with those of your principal. If you are in any doubt it’s always best to seek independent advice, otherwise you could be in the position of having to account for any personal gains as a result of your actions or any detriment to your principal!
Here at Redress Law our professional negligence solicitors can advise on a range of commercial disputes, including commercial agency disputes and can also represent you in court proceedings. In the event of a dispute contact us without delay for expert advice and assistance regarding how to proceed.
