Understanding Fiduciary Duties and Duty of Fidelity in Employment Law, Study notes of Law

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DUTIES OF FIDELITY

WHAT IS EXPECTED OF SENIOR MANAGEMENT?

DAVID BERKLEY QC

Barrister

St John’s Buildings

Introduction

In this short Lecture I intend to address the need for Employment Lawyers to differentiate between the overlapping concepts of Fidelity; Good Faith; and Fiduciary Duties.

The Competent Employee

Duty to Exercise Reasonable Skill and Care

in contrast to Duty of Fidelity and Fiduciary Duties, i.e. loyalty; disclosure; non- competition etc.

The Obedient Employee

Duty of Fidelity

Robb v Green [1895] 2 QB 315, 317 per Lord Esher MR

a stipulation that the servant will act with good faith towards his master

Some judges have used fidelity and fiduciary interchangeably.

At least one academic has suggested that there is no difference between the duty of fidelity and fiduciary duties:

A proper comprehension of the progress of the case law indicates that the introduction of distinct duty of fidelity was nothing more than a mistaken elevation of a synonym into a separate doctrinal construct of redundant content.

(Robert Flannigan, (2015) Journal of Business Law 189)

However that is a revisionist view because: -

The duty of Fidelity arises at common law as an implied term of the employment contract.

In contrast Fiduciary duties have their origins in equity.

As we shall see the Court of Appeal has stated that Fidelity duty does not demand “single-minded loyalty” - much apparently will depend on the term of the contract. I would agree that the distinction does leave us with an essentially a vague and uncertain concept to map out.

Given the express terms the implied duty of Fidelity will be either expanded or constricted by the specific contract.

Take for example whole time clauses or express duties to report wrongdoing_._

Who is a Fiduciary?

• The reposing of Trust and Confidence
• Demand of single-minded loyalty
• Avoidance of self-interest

Policy:

Limited access undertakings, e.g. partnerships; agency etc. should not be compromised by unauthorised conflicts or benefits.

Distinction between Directors and Other Senior Employees

Directors : A well-recognised class of fiduciary.

The core duties now codified in sections 170-177, Companies Act 2006.

The Companies Act 2006

Section Description Comment 170 Introduction- The Scope and Nature of the General Duties- Replace the common law rules and the equitable principles upon which they are based. 171 Duty to act within Powers 172 Duty to promote the Success of the Company for the benefit of its Members 173 Duty to exercise independent judgment i.e. take personal responsibility 174 Duty to exercise Reasonable Care and Skill 175 Duty to Avoid Situations of Conflict of Interest. The No Conflict Rule 176 No acceptance of benefit from Third Parties The No Profit Rule 177 Duty to declare an interest in proposed transactions.

Continued Relevance of the Common Law and Equitable Principles and the earlier Caselaw

Note section 1781(1)

The consequences of breach (or threatened breach) of ss. 171 to 177 are the same as would apply if the corresponding common rule or equitable principle applied

Relevant to Remedies e.g. accounts; enquiries; tracing etc.

Who is a Director?

Statutory Directors

De facto Directors :

Section 250, Companies Act 2006-

HMRC v Holland [2010] 1 WLR 2793 (Supreme Court)

Smithson v Naggar [2014] EWCA 939 per Arden LJ [33]-[45]

In general, examine the corporate governance structure objectively and in the round so as to decide whether cumulatively in relation to the business of the company the person’s acts were directorial in nature.

Shadow Directors:

Section 251, Companies Act 2006 -

A person in accordance with whose directions or instructions the directors are accustomed to act.

• The Overlap with de facto directors.
• Will a fiduciary duty be assumed?

Contrast:

Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638 per Lewison J - (Answer: No)

with:

Vivendi SA v Richards [2013] EWHC 3006 per Newey J - (Answer: Yes)

Non- Director Employees, as Fiduciaries?

Non-director employees might be fiduciaries but there is at present no settled definition or test.

However there has been a tendency to extend certain duties, which are fiduciary in character even when the relationship falls short of being fiduciary.

In conclusion:-

A. Employees : Current thinking is that relationship not inherently fiduciary - see for example Stafford & Ritchie Fiduciary Duties (Second Edition, 2015) Chapter

B. Senior employee is not by analogy equivalent to a director

Customer Systems plc v Ranson [2012] EWCA 841 [20]-[24]

“dangerous to reason by analogy”

per Lewison LJ

C. The contractual duty of fidelity is not equivalent to that of fiduciary duties.

The present case law results in a potential for some confusion between all these principles.

As we have seen it is possible to argue that the duty of fidelity is no more than an expression of the status based fiduciary status, which was acknowledged in Blake (cf. Flannigan (ibid.) )

In cases involving springboarding; misuse of information; conflicts of interests; and diversion of opportunities it is vital that the lawyer:-

(1) Identifies the status of the Employee - Is he a Statutory Director; De Facto Director; Shadow Director; Non-Director; (2) Examines the Contract and the Circumstances for the duties roles and responsibilities; (3) Considers the potential for branding the Employee as a Fiduciary and the effect that might have on the Remedies and Merits of any Judicial intervention; (4) Pleads with sufficient care any Statement of Case so as to be able to present a coherent argument before the Court.

David Berkley QC

St John’s Buildings 24a-28 St John Street Manchester