The Short-form 'Best Interests Duty' - Mad, Bad and Dangerous to Know
(2018) 32 TLI 106 & 176
106 Pages Posted: 19 Dec 2018
Date Written: October 4, 2018
Under English law, trustees, company directors and others occupy a “fiduciary” position towards the relevant trust, company or other principal. There is clearly a need for an explanation to be given to the relevant office holder of what this means – and for judges to describe the relevant duties when looking at claims of breach. How should the relevant board actually exercise a relevant power or discretion?
Much of the caselaw and commentary seeks to encapsulate the essence of the fiduciary duties in a simple phrase: that a trustee owes an overarching duty to “act in the best interests of the beneficiaries”. In the UK (where private sector pension schemes are established as express trusts), many pension lawyers play “best interests” bingo in spotting (and condemning) the use of this phrase. It even creeps into legislation (rather worryingly).
But, as this article will seek to demonstrate, this is a very misleading encapsulation of the nature of fiduciary duties. There is a risk that, understandably given its use by judges and sometimes in statutes, trustee boards and directors take the formulation literally. This could easily take them into error. Clearly it does not override the terms of the trust, nor can it be taken literally.
This article is split into two parts. Part 1 (“Background, Cowan v Scargill and MNRPF”) looks at:
• The nature of any “best interests duty;
• Why does the analysis of the supposed duty matter;
• Some examples of a best interests duty in official guidance
• Why the test appears in cases about who is a fiduciary (including looking at the decisions of Millett LJ in Mothew and Armitage v Nurse in this context);
• Why a literal duty is both dangerous and imprecise and unworkable.
• A discussion of the decisions of Megarry V-C in Cowan v Scargill, Nicholls V-C in Harries and Asplin J in Merchant Navy Ratings Pension Fund ;
• A look at two English cases rejecting a literal reading of an express contractual best interests duty (Fish v Dresdner) or an express regulatory duty: (IG Index v Ehrentreu).
Part 2 (“The problems and a suggested better formulation”) looks at:
• the problems with such a supposed best interest duty, if taken literally;
• looks at the recent caselaw that holds that there is no such duty - in particular the decision of Asplin J in 2015 in; and
• warns against the use of such a phrase by advisers (and in legislation);
• seeks to suggest a better formulation, based on exercise of powers for proper purposes and in the interests of the success of the trust/company; and
• compares the statutory duties on directors under s172, Companies Act 2006 and in particular notes the modified duty for trustee companies under s172(2); and
• (briefly) the Australian position (where Parliament has scattered statutory “best interest” duties with abandon).
This article does not consider the separate issues of how this impacts on ethical or social investment issues (see the recent Law Commission Reports) or how pension trustees should take account of the interests of the employer.
Keywords: Fiduciaries "best interests" "proper purposes" "Cowan v Scargill" MNRPF
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