Does the Fiduciary Bell Toll?

Publication Date01 Mar 1995
AuthorKit Jarvis
SubjectAccounting & finance
Journal of Financial Crime Vol. 3 No. 2 Financial Fraud
Does the Fiduciary Bell Toll?
Kit Jarvis
The Law Commission has recently examined fidu-
ciary relations and securities regulation. The pur-
pose of this paper is a re-examination of some of
the questions posed in the Consultation Paper
124) published in April 1992, in the light of
recent case law, pending the imminent publication
of the Commission's final report on the matter.
The source of many of the problems associated
with fiduciary relations and the multi-service firm
is the law regarding attribution of knowledge
within a firm. The law at the moment leads to the
very apparent possibility that a firm can fail to use
the information available to the firm as a whole for
the customer's benefit, even when the firm is fol-
lowing best market practice. It is a well-founded
principle that all relevant information is attributed
to the whole of
firm for all purposes:
v E. B.
and Co.1 There have been two appar-
ent extensions to this rule recently. In El Ajou v
Plc,2 the Court of Appeal was
prepared to accept that the knowledge of a non-
executive director could be imputed to the com-
pany. It was necessary to identify the person who
had actual control in relation to particular acts to
decide whether he could be regarded as in de facto
control in the circumstances. If he could be so
regarded, then his knowledge could be imputed to
the company as a whole. In
Director General
of Fair
Trading v
Lord Templeman was
prepared to ignore the fact that a company had
prohibited its employee from entering into the
arrangements as he had, even though the prohibi-
tion was clear and unequivocal, since 'a company-
... like any other person ... falls to be judged by
its actions and not by its language'.
The combined effect of these cases could be
extreme: a firm will have the knowledge of anyone
who can be considered in de facto control of a
particular situation, even though that person might
have been specifically prohibited from carrying out
that action. Thus a whole company might know
what an employee knew with regard to a particular
transaction, even though that employee had been
specifically told to abide by the Core Rules or
warned not to go against company procedure.
It should be noted that El Ajou does concern a
fraud and the court in that case was clearly willing
to avoid the niceties of the case to trace the pro-
ceeds of the fraud, and in
Pioneer Cement
that Lord
Nolan was much more guarded in his comments
than Lord Templeman, confining his statements to
the Restrictive Trade Practices Act 1976. Paul Finn
has argued4 that in the modern world it is non-
sense to regard the large and diversified company
as a 'single monolithic legal person for all purposes
and in all circumstances'. In the light of these
recent cases, his criticism seems to have much
How might these conflicting fiduciary duties be
managed? The first possible method is by implying
a trade custom into a contract to modify the duties
owed. A trade custom must be
(i) certain,
(ii) notorious,
(iii) uniform and settled,
(iv) considered by both parties to be legally bind-
ing, and
(v) reasonable.5
Rules of SROs and RPBs should satisfy all
requirements except the last one of reasonableness.
The principle that seems to come out of
South Trust Co. v Berkley6 is that, exceptionally, a
fiduciary may be able to modify his duties without
the informed consent of the customer if the cus-
tom is reasonable. An example of such a situation
can be found in the New South Wales case of Jones
v Canavan7 in which stockbrokers were matching
orders, thus highlighting two conflicts: (1)
between the duty owed to the first customer, the
seller, to obtain the highest price, and the duty
owed to the second customer, the buyer to obtain
the lowest purchase price, (2) the brokers received
a commission on the sale and purchase of shares,
and this conflicted with their duty to the first cus-
tomer to obtain the best price for the shares. The
custom was held to be reasonable because it pro-
vided for the fixing of
fair price in relation to the
market value of the shares, and this was the best
Page 192

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