BOARDMAN v PHIPPS

Fiduciary duty and the exploits of commercial enterprise often run counter to each other, while in this instance the opportunistic actions of a solicitor produces a profitable outcome for all involved, but not without a cost to the integrity of their working relationships.

Upon the death of a successful business owner, the second appellant and respondent’s father, the widow and surviving children were bestowed relatively equal portions of a company shareholding totalling 8,000 shares of a possible 30,000 held.

This particular firm operated in two countries, and control was divisible between two families; namely that of the deceased (Phipps), and another named Harris, who were the majority shareholders.  

Having read their latest financial returns, the trustee accountant Mr. Fox suggested that the company was in poor financial health, and that if one of the beneficiaries, Tom Phipps (the second appellant), were to the be appointed as director, they could look to improving the status of the firm; thereby increasing the annuity drawn by the children from the existing 8,000 shares.

Following a meeting with the family solicitor Thomas Boardman (the first appellant), it was agreed that the two men would attend the forthcoming annual meeting in order to secure Tom’s appointment; however, their bid was unsuccessful due to board hostilities.

In the face of defeat, it was then suggested that the two appellants’ could offer to buy the remaining 30,000 shares in order to gain sufficient control and to improve the company’s financial standing.

This idea was rejected by the accountant trustee on grounds that such a move would require an application to the court; which on the face of the matter, would be dismissed as throwing good trust money after bad.

Left with no other options, the appellants arranged to self-finance the initiative; and so, set about writing to the shareholders, offering above-market purchase rates. 

After first securing 2,925 shares, the appellants went on to successfully buy all 21,986 shares at prices that proved to be significantly profitable to the beneficiaries, while explaining to the children that they were doing so not as representatives of the trust, but as private buyers acting in the best interests of the trust and those standing to profit from it.

Upon successful redistribution of the shares to the beneficiaries, the older son issued a writ, claiming that the appellants had simply been acting as constructive trustees, and therefore any profits made on the 21,986 shares were proportionately owed to the beneficiaries on grounds that the solicitor had been acting within a fiduciary capacity when making representations to the shareholders, and while accessing company information that would have otherwise been denied him when making his enquiries. 

In the first hearing, the appellants argued that they had made it clear on a number of occasions that their commercial strategies and undertakings were beyond that of the trust, and that support and acknowledgement of this had been given by the majority of the trustees and the respondent.

Relying upon the principles held in Aas v Benham, it was contended that:

“To hold that a partner “(or trustee)” can never derive any personal benefit from information which he obtains as a partner would be manifestly absurd.”

Aas v Benham

And, that the source of such information was secondary as to how it was applied; whereupon the respondent used the opinion of Russell LJ in Regal (Hastings) Ltd v Gulliver  to explain that:

“I have no hesitation in coming to the conclusion, upon the facts of this case, that these shares, when acquired by the directors, were acquired by reason, and only by reason of the fact that they were directors of Regal, and in the course of their execution of that office.”

Regal (Hastings) Ltd v Gulliver

Which underlined the argument that by an abuse of position, the appellants worked together to extract information privy only to the trustees and beneficiaries in order to secure financial gain, while partially disclosing their intentions to a percentage of the trustees, as opposed to the whole.

The first court found in favour of the respondents, and the same outcome was found in the Court of Appeal, before arriving at the House of Lords.

By a close margin, the House held that while the appellants conducted themselves with reasonable transparency, there had been oversights as to who was informed and how much they knew.

And that despite professing that they had acted outside the scope of the trust, there had also been a number of instances where veiled threats and coercive statements were used under the pretence of the trustees in order to gain important (and private) information, prior to the negotiation and procurement of the outstanding shares.

Hence, for those reasons the appeal was dismissed while the court reminded the parties that:

“[A] person in a fiduciary capacity must not make a profit out of his trust which is part of the wider rule that a trustee must not place himself in a position where his duty and his interest may conflict.”

R v SECRETARY OF STATE FOR THE HOME DEPARTMENT EX P FIRE BRIGADES UNION

In a collective application for judicial review, the actions of the Secretary of State for the Home Department were held to account when a decision was made to override and subsequently remove, existing but as yet unenforced statute, in lieu of a more cost effective solution to criminal offence compensation.

In 1964, the unprecedented Criminal Injuries Compensation Scheme was created under the Crown’s prerogative powers, and while described as “one of the most generous state compensation schemes for the victims of crimes of violence anywhere in the world”, all payments were made ex gratia through nominated funds reserved by the House of Commons, meaning that its operation existed beyond the scope of legislation and remained subject to the discretion of the appointed personal injury assessors.

In 1978, the Pearson Commission on Civil Liability and Compensation for Personal Injury Command Paper proposed that the scheme needed to become statutory and operate upon tortious principles, as had already been applied.

In 1986, it was reported that the scheme had now been included within sections 108 – 117 of schedules 6 and 7 of the Criminal Justice Act 1988, in which section 171(1) of the Act read:

“Subject to the following provisions of this section, this Act shall come into force on such day as the Secretary of State may by order made by statutory instrument appoint and different days may be appointed in pursuance of this subsection for different provisions or different purposes of the same provision.”

Criminal Justice Act 1988

This translated that the Secretary of State was afforded a degree of discretion as to exactly when the powers of the scheme were to become fully enforced.

In financial terms, the programme had experienced enormous growth, and by 1984, the government was paying out over £35m per year, with a backlog of nearly fifty-thousand claims.

Based upon calculated projections, the government concluded that by the year 2000, the annual cost would have risen to around £550m, therefore a proposal was made to replace the existing system with a newly drafted compensation tariff, which was presented through a White Paper titled ‘Compensating Victims of Violent Crime: Changes to the Criminal Injuries Compensation Scheme’.

In contrast, this system offered claimants a flat-rate compensation tariff that while lower in award levels, expedited the claim process and removed the need for legal advice aside from appeal cases, thus lowering the anticipated costs to an estimated £225m per year.

It was also decided that the tariff-based scheme would likewise operate ex gratia, despite calls for statutory implementation of the existing system.

In light of this unexpected turn, the respondent Fired Brigades Union along with the National Association of Schoolmasters and Union of Women Teachers, UNISON, GMB, the Royal College of Nursing, the Transport and General Workers’ Union, the Prison Officers’ Association, the Associated Society of Locomotive Engineers and Firemen, the Civil and Public Services Association, the Trades Union Congress and the NatWest Staff Association applied for judicial review on grounds that the decision by the Secretary of State to avoid enforcement of sections 08 – 117 of schedules 6 and 7 of the Criminal Justice Act 1988 and implement the Criminal Injuries Compensation Tariff scheme, constituted a breach of statutory duty and abuse of position, and therefore the courts were required to issue an order of mandamus to enforce the statute, and an interlocutory injunction to prevent the implementation of the tariff.

In the first instance, the respondents were awarded leave for judicial review on the proviso that the tariff scheme remained in stasis until a verdict had been reached, and in lieu of the injunction being dropped; whereupon the court dismissed the application but granted leave to appeal.

In the Court of Appeal, it was held that the terms of sections 108 – 117 of schedules 6 and 7 of the Criminal Justice Act 1988 were in principle effective and so no action was needed, but that the overriding of existing statute in favour of the tariff constituted an abuse of position; at which point the Secretary of State appealed, while the respondents cross-appealed.

Heard before the House of Lords, the facts of the case were given due consideration; however, the lines were drawn between political discourse and the powers of the court; in which, the suggestion that the House ought to ‘enforce’ the enactment of a statute already enshrined was held as ultra vires to the judiciary, but that circumvention of the powers of the Criminal Justice Act 1988 amounted to an abuse of prerogative powers, and one representative of a frustration of statute through the actions of those obliged to enforce them with unanimity.

Whereupon, both appeals were dismissed by majority, while the House reminded the parties that:

“It is for Parliament, not the executive, to repeal legislation. The constitutional history of this country is the history of the prerogative powers of the Crown being made subject to the overriding powers of the democratically elected legislature as the sovereign body.”

FRAUD

When finding effect through the inception of the Fraud Act 2006, there are three ways fraud can occur: fraud by false representation, failure to disclose information and abuse of position, which we shall look at here and support each one with suitable cases where applicable.

Fraud by False Representation

S.2(1) of the Fraud Act clearly states that a person is guilty of fraud by false representation when it is proven that they did so to (i) cause gain for themselves or another party or (ii) cause or expose another person to loss or a risk of loss (this can be achieved in a number of ways and so oral and written methodology equally apply), as demonstrated in R v Lambie, when a consumer continued to use her credit card, despite exceeding her credit limit and after being asked by the bank to return it.

When carrying out a purchase in a Mothercare store, the appellant in the appeal case was accused by the defendant of knowingly encouraging a transaction in the knowledge that the bank had no longer given the respondent authority to continue using the card.

This argument was stringently dismissed, while emphasis was placed squarely upon the intention of the respondent to knowingly defraud the store.

An illustration of fraud by false representation was summed up by Lord Roskill, who explained:

“[I]t is in my view clear that the representation arising from the presentation of a credit card has nothing to do with the respondent’s credit standing at the bank but is a representation of actual authority to make the contract with, in this case, Mothercare on the bank’s behalf that the bank will honour the voucher upon presentation.”

R v Lambie

This ethos was also outlined in Rex v Sullivan, where Humphreys J stressed:

“[T]he facts are such that it is patent that there was only one reason which anybody could suggest for the person alleged to have been defrauded parting with his money, and that is the false pretence, if it was a false pretence.”

Rex v Sullivan

Fraud by Failure to Disclose Information

Subject to s.3 of the Fraud Act, a person dishonestly failing to disclose information when (i) under a legal duty to so and (ii) by intention gains for themselves or another or causes or exposes another to a loss or risk of loss is thus guilty (where proven) of fraud.

As this relates more to those in public body roles or parties to contract, the establishment of guilt falls to the judicial interpretation of civil law and statute as opposed to the collective opinion of a jury.

An example of this R v Padellec in which a man accused of harbouring indecent images on his computer refused to disclose the encryption password as required under s.53 of the Regulation of Investigatory Powers Act 2000.

After being summarily convicted, the appellant appealed under plea in order to reduce his sentence; at which point, Singh J exclaimed:

“The whole point of requiring access is so that it can be seen what was in fact there. We express the hope that in a situation such as arose in this case, and in the context of an offence under the Regulation of Investigatory Powers Act (section 53), there will never again be a basis of plea accepted which is based upon keeping the contents secret and the defendant saying, to his advantage, what was or was not contained.”

R v Padellec

Fraud by Abuse of Position

S.4(1) of the Fraud Act convicts those (again where proven) for gainful abuse of a position held to safeguard and preserve the financial interests of another, while the gain can be both personal or on behalf of third party(s) and such profits must cause (or expose those assigned protection) loss or risk of loss.

Given the nature of the breach, it is typically applied to fiduciary or professional relationships where trust has been given under express conditions; however, it could just as easily apply to family matters depending upon the relationship shared and the declarations made.

As with fraud by failure to disclose information, the judgments are typically free from jury persuasion and will benefit from equitable principles as much as civil laws for guidance.

An example of this was found in R v Conway (Catherine); in which, a domestic care worker abused the trust placed in her by her client by obtaining and then keeping the victim’s debit card, before defrauding her of £27,000 over a period of three years.

Once caught and convicted, the defendant then accused the victim’s family members of conspiring to the fraud before admitting full liability, and when passing sentence, Weir LJ illustrated the gravity of the abuse, when he said:

“This was the calculated and systematic theft over years of a vulnerable lady’s life savings by the very person employed to assist and befriend her at a time in her life when she was at a low ebb and grateful for the help which this appellant cynically pretended to be giving her by buying her a few necessaries using her post office savings card.”

R v Conway (Catherine)
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