A recent High Court decision has considered the principles the court will apply when deciding whether a party owed a fiduciary duty in circumstances outside of the established categories of fiduciary relationships and in the absence of an explicit undertaking. The judgment suggests that such cases will be exceptional or at least uncommon: Kelly & Anor v Baker & Anor  EWHC 1879 (Comm).
The court considered that the hallmark of cases where a fiduciary duty has been recognised in the absence of an express undertaking is legitimate expectation. That could arise from the parties' historical relationship or from particular representations or dealings. In either case, the question is not whether a party did in fact repose the relevant level of trust in the other but whether they were objectively entitled to do so in all the circumstances.
The existence of a close, personal relationship, such as in small closely held companies, may make it more likely that such a legitimate expectation could arise, but that circumstance is not determinative and does not itself give rise to the duty.
In the present case, two individuals who had worked in and for a family business empire for many years were held to have not owed fiduciary duties to the family members when leading a management buyout of part of the business. A level of informality in the running of the business may have fed the claimant's subjective perception that there was a special relationship of trust and influence, but that was not the objective reality.
The decision illustrates that, while fiduciary duties can conceptually arise in any context where there is the necessary special relationship of trust and influence, claimants face a high bar in establishing the factual foundation for that.
The dispute concerned the sale of part of a family business empire in demolition and related services. The first claimant, Mr Kelly, and his family entered into a share purchase agreement under which they sold two of the family companies for just over £100 million. The sale was structured as a management buyout, in which corporate financiers supported a group of purchasers headed up by the two defendants, Mr Baker and Mr Braid (although Mr Kelly initially disputed that he was aware of their buy-side involvement at the time).
Both defendants had worked in or for the family business for many years. Mr Braid was a quantity surveyor and at the time of the sale was a director of one of the relevant companies. Mr Baker had provided accountancy and tax services to the business and to family members personally, via his own corporate vehicle, and in the latter stages had become ‘semi-attached' to one of the companies for the purpose of assisting with its possible sale.
Following the transaction, Mr Kelly and a related corporate vehicle brought proceedings against Messrs Braid and Baker alleging:
- breach of fiduciary duties for, amongst other things, failing to disclose their buy-side position and failing to attempt to achieve the best possible sale price for the family; and
- fraudulent misrepresentation that they would achieve the best possible price and (later) that the sale price accurately reflected the companies' value.
It was alleged that, but for these facts, the transaction would not have gone ahead and a sale for £200 million (ie double the price) would have been achieved.
As the fraudulent misrepresentation action was effectively dependent on the factual allegations in the fiduciary claim, the primary question for the court was whether Mr Braid and Mr Baker owed and breached fiduciary duties to Mr Kelly. They were alleged to be in a special position of trust and influence not by virtue of their official roles but because of the reality of their historic relationship with the Kelly family.
Fiduciary duties – legal principles
The parties accepted that the starting point when considering where a fiduciary duty could arise is the classic formulation in Bristol & West Building Society v Mothew  Ch 1 that a fiduciary is "someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence".
The circumstances here did not fall into any of the well-established categories of relationships that have been recognised as involving such an undertaking (such as the director/company relationship). It was common ground that fiduciary duties could arise outside those archetypal relationships, and need not include an explicit undertaking to act for or on behalf of another. The question was how far that line extends. Cockerill J observed that it would not be a common circumstance, and noted that Leggatt LJ in Al Nehayan v Kent  EWHC 333 described such cases as “exceptional”.
Based on a review of authorities where fiduciary duties have been recognised in the absence of an explicit undertaking of trust, Cockerill J considered that the hallmark of such cases was the existence of a legitimate expectation on the part of the beneficiary. Further, referring to Al Nehayan, the court emphasised that the test for whether there is a legitimate expectation is an objective one, involving the normative question of whether the nature of the relationship was such that one party was entitled to repose trust and confidence in the other.
The court acknowledged that, as observed in Sharp v Blank  EWHC 3220, the existence of a close and personal relationship, especially in companies that are small and closely held, may make it more likely that such a legitimate expectation will exist. However, it is not determinative. The existence of the close relationship is not the hallmark – it is merely a situation in which it is more likely that (objectively) one party will be entitled to repose trust and confidence.
Application to the facts
Based on the above principles, Cockerill J accepted that a fiduciary duty could conceptually arise in the present case if:
- the pre-existing relationship was one in which My Kelly placed such a level of faith and trust in the defendants that the duty arose; or
- even without that pre-existing relationship, the duty was created by an offer or a representation in relation to the particular transaction.
The case based on the pre-existing relationship failed. Having heard evidence regarding the parties' historic roles and dealings, the court rejected the pleaded factual position that Mr Kelly was accustomed to following any recommendations or directions from the defendants, whom he allowed to have significant control and influence over financial and business affairs.
The evidence indicated that Mr Braid was liked and trusted by all the Kelly family and he felt a loyalty to them. But he did not see himself as an intimate or as a friend. Mr Baker was less universally embraced but was certainly the family's “go to” man in the relevant period and he had an operationally close relationship with Mr Kelly. However, the court concluded, it was a purely functional trust.
On the key questions of trust and influence, it was important to distinguish between subjective and objective perceptions. Cockerill J accepted that Mr Kelly genuinely believed that the Kellys and Messrs Baker and Braid were close and/or friends. However, she considered that his perception of the level of trust and confidence was distorted by the somewhat blurred lines in the management structure and the informality of how the business was run, which created an appearance of intimacy. That appearance was not the same as the perceptions of Mr Baker and Mr Braid, and it belied the objective reality – which was that they were outside the circle of power and of real trust. All meaningful decisions were taken by the Kellys, with others in the management team not invited. The wider team also had very limited visibility of the businesses, which were run on a somewhat “need to know” basis. The circumstances were not akin to the quasi-familial closeness which, in some cases, had been found to exceptionally create a fiduciary relationship.
Further, the court considered that even if such a pre-existing relationship of closeness had been made out, the scope of any duty it entailed would not have extended to fiduciary duties alleged in respect of this particular transaction.
On the second question of whether a fiduciary duty had been created by any offer or representation in the context of the transaction, the court noted that My Kelly's pleaded case on representations was not consistent with the evidence as it emerged and was largely not ultimately pressed. In particular, the defendants had not offered to take responsibility for the sale or to get the best price available in the market. The court found that, to at least some extent, hindsight and a degree of confusion had coloured Mr Kelly's recollection in this regard.
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