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LAWS10162 The Law of Fiduciary Duties | Standard of Duty and Skill

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Task 1

By referring to relevant case law critically discuss the general and fiduciary duties
owed by an agent to the principal. These should include:

1. The duty to follow the lawful and reasonable instructions of the Principal

2. The duty of care and skill

3. The duty to avoid conflict of interest.

4. The duty not to act for his own benefit or the benefit of a third person without
the informed consent of the principal.

5. The duty not to accept a bribe (commission or other inducement) from a third
party that is secret from the principal.

6. The duty to account.

7. The duty not to delegate authority.

Task 2

By referring to the decision of the House of Lords in Salomon v Salomon [1896].

Critically discuss the key features of the doctrines of corporate separate personality
and limited liability of companies in the UK. 

Answer:


Task 1:

Agency forms a tri-parte relationship between an agent, principal and a third party. In such relationship certain duties are owed by the agent to the principal. The nature of these duties may be general or fiduciary. The concept of agency is such that it has been misrepresented in modern context. Therefore, mention can be made about the contractual duties of the agents and the fiduciary duties owed to the principal. These duties can be categorized as-

The duty to follow the lawful and reasonable instructions of the Principal:

There is a right on the part of a principal to appoint an agent for the purpose of negotiating and facilitating a transaction on his behalf. In this case, the agent owes a lawful duty to the principal and follows the reasonable instructions accordingly. However, in practice, the duty to act in lawful and reasonable instructions of the principal requires to act in due care and diligence while negotiating the terms of a transaction with a third party. In Ireland v Livingston (1872), the agent must act according to the instructions provided by the principal.

Agents are at the duty to obey the lawful and reasonable instructions of the principal. However, the nature of the instructions is such that, it must be clear and unambiguous. It is noteworthy to mention here that, there is no discretion on the part of the agent to follow the instructions unless and until such agent is professional and the principal is dependent upon such agent for exercising his professional skills and experiences. In cases when the instructions on the part of the principal are not clear and ambiguous, then, the agent must clarify the instructions prior acting.

The duty of care and skill:

Under the provisions of common law, it is important on the part of the agent to act in due care and skill while performing his duties on the behalf of the principal. However, in this regard, if the agents fail to meet the standard of duty and skill; then in such cases the acts of the agents are considered to be negligent. In general, agents belonging to certain profession or trade should perform their duties with a degree of care and skill that is reasonably expected. In Fray v Voules (1859), the agent shall be held liable if he failed to act according to standard of duty and skill.

The duty to avoid conflict of interest:

The duty to avoid conflict of interest has been established in the case Parker v McKenna (1874–75) LR 10 Ch App 96. In this case, a rule of agency was established which emphasized on the fact that, an individual cannot be allowed to put himself in such a position in which there will be conflict in his duties and interests. In this case, it was held that if an agent is involved in conflict of interests by accepting payments from third parties without prior consent of the principal, then conflict of interest is strict.

An agent who has been appointed by a principal to act on his behalf should not act on the behalf of any other principal on appointment. In this regard, it is worth mentioning that, if such agent fully discloses his interests to both the principals without their prior consent, then in such cases, it gives rise to conflict of interests. However, the nature of conflict of interests on the part of the agent is such that on full disclosure of the interests by obtaining consent of the principal, it gives rise to dual agency. In such cases, there develops no conflict of interests. If the agent fails to disclose information to the principal regarding the breach of his fiduciary duties; the agent shall be accountable for any profit made by him from the transactions including other available remedies on the part of the principal for the breach of the duty of the agent.

The duty not to act for his own benefit or the benefit of a third person without the informed consent of the principal:

The agent should not make any profit o acquire any benefit from any third party without receiving prior consent from his principal. This kind of profit is generally termed as secret profit. In this context, mention can be made about certain situations in which an agent may act for his own benefit without informing the principal. There situations are-

Use of property:

An agent may use any property entrusted to him by his principal for his personal benefit without receiving prior consent of the principal. For instance, if the principal of a real estate has entrusted the keys of property to the agent and in such process if the agent rents such property to a third part without the consent of the principal, then there is a breach of secret profit.

Use of position:

In most of the cases, agents can obtain the benefits of agents simply from their position as an agent. For instance, an agent was appointed by the principal to purchase goods in his behalf. In such process, the agent can make monetary benefits from the supplier without informing his principal.

Use of information or knowledge:

A principal may appoint an agent to obtain relevant information for the benefit of the principal. In this regard, the agent may use such information for gaining personal benefits. In such way, the agent will cause breach of his fiduciary duties.

It is worthwhile to refer here that, if the nature of the secret profit is such that it was made during the course of agency, then the principal-agency relationship can be terminated. In the case of BURDICK V GARRICK: HL 1870, it was observed that the agent sold the property entrusted to him by his principal and transferred the amount in his personal account making unauthorized profit.

The duty not to accept a bribe (commission or other inducement) from a third party that is secret from the principal:

From the beginning, an agent has been prohibited from accepting any bribe or secret commission from any third party. If the agent accepts the bribe, then it shall be presumed by the Courts that, the nature of the bribe was such that it influenced the agent. In the case of The Attorney General for Hong Kong v Reid (New Zealand) (UKPC) [1993] UKPC 2 [1993] UKPC 1993_36, it was held by the Court that the extremity of protection offered to the principal shall be given much preference. In this case, it was observed that, f the nature of the bribe is such that it could be held in trust; the interests of the principal shall be protected to the greatest extent.

The duty to account:

If any agent receives any property for the benefit of his principal or receives any property from such principal; then in such cases there is an authority in his part to keep such property as a separate entity from its own. He is also bound to act as the trustee of the property. There is a duty on the part of the agent to keep records of the accounts of the property assigned to him by the principal during the course of agency. In such process, the agent may render such account to the principal on his prior request. It is noteworthy to mention here that, in case the agency relationship ceases to exist; the duty on the part of the agent to account to the principal shall continue. However, the agent must return to his principal all the relevant documents that were entrusted to the agent by the principal or the documents formulated by the agent at the expense of the principal. In Foley v Hill (1848) 2 HLC 28, 9 ER 1002, there was a fiduciary duty on the part of the agent to account for the loss caused to the principal however; he failed to do so.

The duty not to delegate authority:

As a result of the existing fiduciary relationship between an agent and principal, the agent cannot delegate his duties to the sub-agent without prior consent of the principal. In regard to the fact mentioned above, it is worth noting that, the nature of the agency agreement is such that it is privy to the principal and the agent. The principal entrusts the authority of delegation to the agent on account of skill, experience and trustworthiness. However, there is a duty on the part of the agent not to delegate his duties to a sub-agent unless there is an implied authority to do so. In the case of De Bussche v Alt (1878), it was held that the agents must act personally without employing any sub-agents.

In some cases, the agent may not be authorized to delegate his powers. In this regard, the activities of the sub-agent shall not be held binding upon the principal. The agent delegating his responsibilities to a sub-agent causes breach of his duty and is therefore liable to compensate for the losses incurred by the principal as a result of such action on the part of the agent.

Task 2:

The concept of corporate separate personality and limited liability of companies in the United Kingdom can be explained in reference to the case of Salomon v Salomon [1896]. In this regard, corporate personality can be referred to as the recognition on the part of the states regarding the fact that certain organizations possess separate legal personality. In this regard, early scholars were of the opinion that, traditionally, in the United Kingdom, the doctrine of separate legal personality signified that certain organizations shall have the authority to hold property rights that includes religious orders and the decisions of the local authorities; in which they could sue and be sued of their own (Hopt 2015). In such process, these organizations may not rely upon the rights of the existing members of the organization. Modern authors were of the perspective that, when a company is formed it becomes a separate legal entity or personality (Dari-Mattiacci et al. 2017). In such cases, the liability of the members becomes limited. However, there exists a clear distinction between separate legal personality and limited liability companies.

From the very beginning, the concept of separate legal personality has created the foundation of company law. Modern scholars argued that, determination of the fact regarding the existence and the functioning of the company is consistent with the principle of corporate jurisprudence and the perception of separate legal entity (Kraakman and Hansmann 2017). However, in present situation, this rule has been subjected to various negotiation processes and has been considered as one of the most disputed aspects till date. It is worthwhile to refer here that, since time immemorial, the concepts of separate legal entity and limited liability has been acknowledged unanimously on the part of the national corporate legal systems as an unclear concept; i.e. during lifting of corporate veil; the Courts are at the authority to enforce general rules and statutes (Skinner  2015).  However, the nature of the scope of these exceptions is such that, these conflicts are more evident in case of parent and subsidiary companies.

The concept of limited liability can be referred to as the logical consequences of the existence of a separate corporate personality. According to modern jurists, in reality as individuals can impose restrictions on their legal personalities; a company having can also impose certain restrictions having a legal personality of its own and such restrictions can be conferred by stature (Hannah 2015). However, a registered company may exist without a limited liability according to the provisions of Section 3(1) of the Companies Act 1992.  It is important to mention in this regard, that, the concept of separate corporate personality and limited liability has not been explained fully until the late of the nineteenth century. The concept of separate corporate personality and limited liability has been established in the case of Salomon v Salomon & Co. (1897) A C 22.

In the case of Salmon v. Salmon, it was observed that, Salmon was a leather merchant and his company was incorporated in 1892 along with his wife and five children. Each of them was holding one share of the company. However, it was observed that, the formation of a company requires at least seven members and as a result of which the family members were registered as shareholders. The company which was newly incorporated purchased the sole trading leather business. The leather business was valued at £39,000.00 given by Salmon. However, the full price was paid in £10, 000.00 that is worth the debentures thereby giving full charge over the assets of the company. During this point of time, the sole trading business creditors were paid in full by Salmon. In this context, mention can be made about the concept of debentures which is present in the form of loan capital and based on which the debenture holder is at the authority to lend money to the company at a fixed rate of return. In this case, it can be stated that, personal liability on the part of Salmon for the debts incurred out of the business has completely changed from a sole trader to that of a limited liability.

In this case, the House of Lords, expressed disagreement regarding the fact that the shares held by the shareholders were in fact irrelevant. According to the provisions of the Companies Act of UK, the shares can only be held by a shareholder if such individual is able to carry on the economic reality of the business. It was held by the House of Lords that, the interests of the investors can be protected with the use of debentures other than shares. It is worth stating that, the concepts of separate corporate personality and limited liability has been considered as the pillars the companies of United Kingdom. The Courts, from the very beginning, were keen in maintaining such principle. Most importantly, modern authors emphasized on the part that, under the provisions of company law, a trade can be conducted by applying the concept of limited liability without exposing the individuals to the provisions of bankruptcy law (Turley 2015). It is worth noting that, a company has the authority to raise money on debentures; which cannot be ordinarily performed by a trader. The members of the company acting in good faith, is in fact, entitled to take hold of the debentures of the company by acting as an outside creditor.

Lastly, it can be stated that from the decision of the House of Lords in the case of Solomon v. Solomon, the concepts of separate corporate personality and limited liability has come into light. These two doctrines are regarded as the twin pillars upon which the subject-matter of modern company law is vested. The fundamental principle of corporate personality is that it is a separate legal entity distinct from all its members. In short, this legal personality is often regarded as an artificial person capable of suing and being sued on its own. According to modern authors, the decision in Salmon v. Salmon, established the legality of one-man company and in such process emphasized on the part that the concept of incorporation is applicable in case of both sole traders and small private partnership companies same as to that of large public companies. It can be finally concluded that, a sole trader can actually limit his liability in regard to the sum which he invested in the enterprise with the subscription of debentures rather than shares.

References:

Cases:

BURDICK V GARRICK: HL 1870.

De Bussche v Alt (1878).

Foley v Hill (1848) 2 HLC 28, 9 ER 1002.

Fray v Voules (1859).

Ireland v Livingston (1872).

Parker v McKenna (1874–75) LR 10 Ch App 96.

Salomon v Salomon & Co. (1897) A C 22.

Salomon v Salomon [1896].

The Attorney General for Hong Kong v Reid (New Zealand) (UKPC) [1993] UKPC 2 [1993] UKPC 1993_36.

Journals:

Dari-Mattiacci, G., Gelderblom, O., Jonker, J. and Perotti, E.C., 2017. The emergence of the corporate form. The Journal of Law, Economics, and Organization, 33(2), pp.193-236.

Hannah, L., 2015. A global corporate census: publicly traded and close companies in 1910. The Economic History Review, 68(2), pp.548-573.

Hopt, K.J., 2015. Groups of Companies-A Comparative Study on the Economics, Law and Regulation of Corporate Groups.

Kraakman, R. and Hansmann, H., 2017. The end of history for corporate law. In Corporate Governance (pp. 49-78). Gower.

Skinner, G., 2015. Rethinking Limited Liability of Parent Corporations for Foreign Subsidiaries' Violations of International Human Rights Law. Wash. & Lee L. Rev., 72, p.1769.

Turley, S., 2015. Developments in the framework of auditing regulation in the United Kingdom. In Auditing, Trust and Governance (pp. 223-240). Routledge.

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