In Parkes Management Ltd. v. Perpetual Trustee Co. Ltd. , the manager of a unit trust was aggrieved by the trustee’s issue of a certificate that it was in the interest of the unitholders that the manager should be dismissed. On the question of the manager’s locus standi, Hope JA said:

It is submitted for the Trustee that it is only a beneficiary who can challenge the exercise by a trustee of a power . . . There would appear to be three answers to this submission. Firstly, that the Manager was a beneficiary; secondly, that the provisions of cl. 20(1) of the Deed entitled the Manager to ensure that the Trustee exercised any power under the Deed bona fide without indirect motive, and with a fair consideration of the issues; and thirdly that being a party to the Deed the Manager was entitled to challenge the certificate . . .

While this judgment supports the contractual nature of the unit trust, the discussion suggests that the three grounds given by his Honour are open to criticism. His Honour did not cite any authority to support his conclusion that the manager was a beneficiary. Some trusts cases suggest that for some purposes trustees’ remuneration constitutes an interest in the trust funds. It is unsure if his Honour was relying on these cases and if so what would constitute the basis for extending them to a manager. If a manager’s remuneration is contractual in nature, this ground is not a valid one. The second ground involves implying a new term without reference to precedents or principles on contractual implied terms. The third ground is the weakest of all. The fact that the manager is a party does not automatically give rise to a cause of action. The court should establish that the manager was the promisee of the relevant covenant. In the case of an authorized unit trust, it is not clear who is the promisee when the Financial Services (Regulated Schemes) Regulations 1991 are incorporated into the trust deed. There are strong grounds to construe the unitholders as the covenantees. There is therefore a possibility that the factors, such as the second and third grounds, considered by his Honour may not be present in other unit trusts.

FundsIt is submitted that fiduciary principles offer a better theoretical basis if similar situations were to arise.

At a general level, the trustee-manager relationship is not a fiduciary one. The relationship per se certainly is not an established class of status- based fiduciary. There is no question that the trustee and the manager act as principals in their negotiation of the terms of the unit trust. The result of this negotiation is that both ‘undertake’ to act for the unitholders, not for the other party to the transaction. Invariably, there are no elements of trust and confidence, reliance and vulnerability in the relationship itself.

However, a person ‘may be in a fiduciary position quoad a part of his activities and not quoad other parts: each transaction, or group of transactions must be looked at’. It is possible for the trustee or the manager to be characterized as fiduciary of the other in limited matters. In this context, it is important to bear in mind that both the trustee and the manager are dealing at arm’s length. The court will not find the existence of a fiduciary relationship that would alter the intended operation of the contract terms according to their true construction or merely for the purpose of providing proprietary remedy or of achieving priority over general creditors.

In a unit trust, there are specific matters in which the manager or the trustee will act as an agent for the other. That agency status will trigger the flow of fiduciary obligations incidental to that transaction. The scope of fiduciary relationship may be very limited and the fiduciary elements in it may be less intense than those arising in their respective relationships with unitholders.

In the situation of an abuse of power by a cofiduciary exemplified by Parkes Management, there is no element of an undertaking. The trustee does not undertake to exercise its powers contained in the trust deed ‘for’, ‘on behalf of or ‘in the interests of the manager. Nor does the manager undertake anything in the interest of the trustee. The ‘undertaking‘ is an undertaking to act for the benefit of the unitholders.

Arguably, it can be said that there is an expectation that each of them will take into account the interest of the other in the exercise of a power that will cause damage or injury to that other. In the second formulation of Finn’s definition of a fiduciary, the learned author’s focus is on the ‘entitlement’ to an expectation that one will act in the interest of the other. That entitlement may arise from an undertaking, which does not exist between the manager and the trustee. It also cannot be regarded as a contractual term between them. There is also no public policy reason for equity to impose such a fiduciary obligation. It would seem that a fiduciary relationship cannot be supported on an undertaking theory.

The existence of a fiduciary duty can, however, be justified in terms of the ‘vulnerability‘ test, as the relationship has the three characteristics described by Wilson J in Frame v. Smith. This can be illustrated by using the factual circumstances of Parkes Management. A trustee certifying that it is in the interest of unitholders to dismiss the manager is exercising some form of discretion or power. This exercise satisfies the second characteristic of her Ladyship’s formulation, as the trustee can ‘unilaterally’ exercise the power to affect ‘the beneficiary’s legal or practical interests‘. There is no doubt that the manager, as the person who initiates the unit trust scheme, has ‘practical’ interests in the scheme. It is particularly vulnerable because any abuse can be made under the cloak of protection of the unitholders.

Perhaps, the position can be better understood if the content of the obligations that may arise from this fiduciary finding is also examined. A finding of a fiduciary relationship between the manager and the trustee must imply that the fiduciary, be it the manager or the trustee, has the duty to consider the interest of its co-fiduciary in addition to that of the unitholders. Is it in breach of the undivided loyalty rule? The answer appears to be no. As Fletcher Moulton LJ has reminded us, it is absurd ‘that every kind of fiduciary relation justifies every kind of interference . . . The nature of fiduciary relationship must be such that it justifies the interference.’ Fiduciary relationships may take a variety of forms and may give rise to a wide variety of obligations.

In the context of the unit trust, the trustee or the manager ‘undertakes’ to exercise the powers ‘for’, ‘on behalf of or ‘in the interests of the unitholders. That undertaking is part of the covenants in the unit trust deed and the co-fiduciary, as a party to that deed, must have consented to such an arrangement. The character of the venture dictates that the interests of the unitholders must be paramount. There is no question that the trustee and the manager cannot be regarded as in a position of ‘vulnerability‘ on all matters of the unit trust.

Vulnerability occurs only when (1) honesty and good faith are missing in relation to an exercise of a particular power of a fiduciary which affects the ‘legal or practical interests‘ of the co-fiduciary and (2) that power is exercised under the cloak as an exercise for the benefit of unitholders.

Therefore, it is submitted that when the trustee or the manager exercises a power in the interest of unitholders which prejudicially affects the interest of its co-fiduciary, it has a duty towards that co-fiduciary to exercise that power ‘without indirect motive, with honesty of intention and with a fair consideration of the issues’. This is the same conclusion as was reached in Parkes. However, this is not reached on the basis that the manager is a beneficiary of a unit trust. It is reached by resorting to first principles of fiduciary law. A fiduciary analysis offers a consistent basis for actions for breaches of other fiduciary duties owed by the trustee where the manager can establish a fact-based fiduciary relationship between them. It also enables the trustee to sue the manager in a converse situation on the same theoretical foundation.

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