The Fiduciary Obligation

Author(s): Ernest J. Weinrib

Source: The University of Toronto Law Journal, Vol. 25, No. 1 (Winter, 1975), pp. 1-22
Published by: University of Toronto Press
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ErnestJ. Weinrib* THE FIDUCIARY OBLIGATION

I Introduction

When Lord ChancellorKing declared in the famouscase of Keech v Sand-

ford1thatthe defendantmusthold therenewedlease as a constructive trustee
fortheinfantbeneficiary, he setin traina line of developmentwhoseimpetus
has not been spent to the presentday. In the interveningtwo and a half
centuries,thenotionofthehighstandardincumbenton a fiduciaryhas spread
fromits originalhomeland in the law of trustsand has subjected a diverse
varietyof entrepreneurs- directors,partners,agents, employees- to its
colonizingsway. This expansion has proceeded in a manner characteristic
of doctrinalevolutionin a case-law system:the comparisonof successivesets
of factswith one anotherand with general formulaethat embody,in the
judges' view, the appropriate moral norms. Thus the propositionsthat a
fiduciarymustnot allow his dutyto conflictwith his interestand must not
make a profitfromhis positionreverberatethroughthe judgments,dislodg-
ing or reallocatingimproperlyacquired gains.
This piecemealtreatment, effectiveenoughforthedispositionof individual
as
disputes theyarise, has not on the whole been appropriateforthe elucida-
tion of the broader problemsof policy which underliethe whole fiduciary
concept.Why is it that certaincategoriesof actorsand certaintypesof acts
are singledout forthe applicationof the fiduciarystandardand its attendant
severeremedies?What is the criterionof the fiduciary?Must a fiduciarywho
violates the standard be exposed to the full gamut of available remedies?
What is the relationbetweenthe generalizationconcerningprofitand that
prohibitinga conflictbetweendutyand interest?It is vain to expectthatthe
answersto these questionswill be produced totidemverbisby the diligent
weighingand parsingof the wordsof the judgments.2The decisionsin this
* Associate Professor,Faculty of Law, Universityof Toronto. I would like to thank my
colleague, ProfessorArnold Weinrib,fordiscussingthis topic with me and for criticising
an earlier draft of this paper. Of course, he is not responsible for the defects which
remain.
I (1726), Sel.Cas.Ch. 61; 25 E.R. 223
2 Contrast Dean McLean's attempt, in 'The theoretical basis of the trustee's duty of
loyalty,' (1969), 7 Alta. L.R. 218, to resolve the question of whether the formulae
about conflict and profit are two separate rules or alternate forms of a single rule
on the basis of whether the courts have regarded them as two rules or one. I would
submit that the real problem here is whether-thereis a functional or conceptual need
for two rules, and this can be settled by analysis rather than authority.

(1975), 25 UNIVERSITY OF TORONTO LAW JOURNAL I

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2 UNIVERSITY OF TORONTO LAW JOURNAL

area have supplied 'rules' and illustrationsof the 'rules.' What is presently
required - and what the cases do not give us - is an elucidation of the
purposesthattheserulesserve,thevaluestheypromote,and theprocessesthey
seek to protect.
The absence of concernwiththesemorecomprehensive issuesis not neces-
sarilya defectbut in part a reflectionof the pressuresconfronting the judge
in his task. It would be unrealisticto expect in the hurly-burly of judicial
activityelaboratelyabstractcommentsabout underlyingpurposes.All that
a systemofjusticecan demand is thattheunderlying principlesbe consistently
feltand applied, even if theyare not crystallizedinto words. Moreoverthe
evolvingcommon law is the productof specificfact situationsratherthan
self-contained generalizations,and the judge enunciatesthe latteronlyin so
faras theycan be wedded to the former.Beneaththe weightof responsibility
he willshyaway frombroad statements whichmightdefyorderlyapplication
to cases whichhave not yetarisen.
But theremaybe a deeperreasonforcaution.Examinationof the activities
of fiduciariesinvolves,above all, an inquiryinto the proprietyof profit-
making.What is at stake is whetherthe courtshould sanctionor stigmatize
a particularact performedby a businessmanin a commercialcontext.Given
the acceptance by the courtsof the value inherentin a capitalistsocial order,
at least in a rudimentary sense,and the fearthatit may be beyonda judge's
competence supervisethe moralityof businesstransactions,judicial dif-
to
fidenceis understandable.This diffidence is reflectedin thespectrumof tech-
niques, not all conceptually consistent,which the courtsapply in theirpiece-
meal regulationof the marketplacein the absence of statutorydirection.
Certain behaviour, for example where misrepresentation is involved, has
crystallized into readilyperceivedstereotypes of conduct which is injurious
and thereforeforbidden.But, if the profitis made by a personacting in a
fiduciarycapacity,the courtscouple a declarationthat the profitis tainted
witha disavowal of the need to examinerealisticallythe motiveof the actor
or the damage done to the claimant.3At the otherextreme,certainformsof
profitmay be regardedas acceptable withoutany assessmentof the reason-
ablenessof the profit-making activityand indeed the profitmotiveitselfmay
be regardedas the elementthatpurifiesthe transactionand clothesit witha
legal justification.'
3 Eg, Hovenden v Milhoff, (1900oo),83 L.T.R. 4 1 (C.A.)
4 The classic judgment is that of Bowen LJ in Mogul Steamship Company, Ltd v
McGregor and Company, (1889), 23 Q.B.D. 598, at 614 (C.A.), affirmed[1892] A.C.
25 (H.L.). 'I can find no authorityfor the doctrine that such a commercial motive
deprives of "just cause or excuse acts done in the course of trade which would but
for such a motive be justifiable.So to hold would be to convert into an illegal motive
the instinctof self-advancementand self-protection,which is the very incentive to all
trade. To say that a man is to trade freely,but that he is to stop shortat any act which
is calculated to harm other tradesmen,and which is designed to attract business to
his own shop, would be a strange and impossible counsel of perfection.But we were
told that competitionceases to be the lawful exercise of trade, and so to be a lawful

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 THE FIDUCIARY OBLIGATION 3

In view of thesejudicial attitudesthispaper does not propose to pass in

reviewthe myriadof judgmentsin commonlaw jurisdictionsthathave dealt
withthefiduciaryobligation.Ratherthescope ofthefollowingexpositionwill
be limitedby two factors.First,the Canadian experiencein dealing with
fiduciarieswill occupy centrestage. For betteror worse,the common law
jurisdictionsof Canada have providedan interesting laboratoryforobserving
how a doctrineoriginatingin theEnglishlaw oftrustsinterplayswithinnova-
tive United States formsof commercialenterprise.Especiallyrelevantis the
existenceof a vibrantmineraland resourcesindustrywhich holds forththe
prospectof enormousprofits,but in which flexiblyco-operativeformsof
venturedo not clearlydemarcatethe limitsof possibleindividualgain.
Secondly,theenquirywill focuson the purposesthatthe law is attempting
to accomplishin thisfield,withcases citedfortheirusefulnessas illustrations
ratherthan fortheirimportanceas precedents.In thisarea elucidationof the
social values is particularlyapposite. For, howevertypicalthe historyof the
fiduciaryobligation'sevolution,the substanceof the obligationappears to be
strikinglyunique. Althoughit functionswithinthe contextof planned trans-
actions,itsunderlyingpremisesare not thoseof individualisticprivateorder-
ing. Thus it is presentin the relevantrelationexceptin the face of a specific
exclusion,and, far from embodyinga standard which is universallyand
naturallyaccepted,it aspiresto thepedagogicfunction5 ofraisingthemorality
of the marketplaceby enforcingupon potential profiteersthe abnegation
of theirprofits.So strangea beast meritssome observation.

2 The primarypolicy

Familiardoctrineprovidesa suitablepointd'appui. Acceptanceby a fiduciary

of a paymentfroma thirdpartyis a violationof the fiduciary'sobligation
to his principal.Such behaviouron the part of the fiduciary,usuallyarising
wherethe fiduciaryin questionis an agent,obviouslyfallswithinthe scope
of the rigid prohibitionsagainst unauthorizedprofitsand conflictsbetween
dutyand interest.If, however,the agent acts as a middlemanto bringpur-
chaser and vendor togetherso that theycan striketheirown bargain, he is
not precludedfromreceivingpaymentfromboth sides.6
The purpose of the law's distinguishingbetween the middleman who
excuse for what will harm another,if carried to a length which is not fair or reasonable
... This seems to assume that,apart fromfraud,intimidation,molestation,or obstruction,
of some other personal right in rem or in personam, there is some natural standard
of "fairness" or "reasonableness" (to be determinedby the internal consciousness of
judges and juries) beyond which competition ought not in law to go. There seems
to be no authority,and I think,with submission,that there is no sufficientreason for
such a proposition. It would impose a novel fetter upon trade.' Contrast judicial
willingnessto apply a standard of reasonableness to contractual terms in restraintof
trade, eg Stephens v Gulf Oil Canada Ltd, (i974), 45 D.L.R. (3d) 161 (Ont. H.c.).
5 Freund, 'Social justice and the law,' in Brandt (ed) Social Justice (1962), 96
6 Clark v Hepworth, [1918] I W.W.R. 147 (s.c.c.)

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4 UNIVERSITY OF TORONTO LAW JOURNAL

bringsthe contractingpartiestogetherand the agent who bargains or ad-

visesis not difficultto discern.The latterholds a mandate which cannot be
circumscribed withinnarrowtermini.His dutyto bargainor to advise requires
leeway forthe exerciseof individualjudgment.The controlof the principal
is necessarilyattenuated,forthe exerciseof thatcontrolwould necessitatehis
intervention in thedetailsofthetransactionand would stultify theveryreason
for which the agency was instituted.Thus thereis a relationin which the
principal'sinterestscan be affectedby, and are thereforedependenton, the
mannerin which the fiduciaryuses the discretionwhich has been delegated
to him. The fiduciaryobligationis the law's blunttool forthe controlof this
discretion.Its operation circumventsthe need for inquiringinto the good
faithof the agent's behaviourby concentratingon the possibilitythat dele-
gated discretionmay be influencedby considerationsof personaladvantage.
Two elementsthusformthecoreofthefiduciary conceptand theseelements
can also serveto delineateits frontiers.7First,the fiduciarymusthave scope
forthe exerciseof discretion,and, second,thisdiscretionmustbe capable of
affectingthe legal positionof the principal.In the middlemansituationthe
secondelementespeciallywas lacking: thesupposedagentservesas a conduit
for communicationbetween the two parties,but he does not influenceby
advice or createbynegotiationthelegal obligationthatthepurchasereventu-
ally assumestowardthevendor.But a fiduciaryobligationmay also failto be
establishedbecause of theabsence of thefirstelement.In R.H. Deacon & Co
Ltd v Varga,s forinstance,a stockbroker was instructedby his clientto pur-
chase at a givenpricea givennumberof sharesin a corporationin whichthe
stockbroker had an interest. The courtheld thattherewas no breachofa fidu-
ciaryobligation, since the dutywas restricted
stockbroker's to theveryprecise
instructions givenby the client.Althoughthe broker had the power to affect
the client'slegal positionby purchasingon his behalf,the transactiondid not
entail the exerciseof any discretion.There was nothingthat had to be con-
trolledby the impositionof the fiduciaryobligation.
The need to controldiscretionhas been a justificationforthe imposition
of theharshruleconcerningfiduciariessincethebeginning.Even in thesemi-
nal case ofKeech v Sandford'theLord Chancellorpointedout that'ifa trus-
teeon therefusalto renewmighthave a lease to himselffewtrustestateswould
be renewedto the cestuique use.' The desirability of deterringthe fiduciary
fromusinghis discretionexceptforthe benefitof the principalor beneficiary
is oftenmentionedin subsequentjudgments,and thisaspect is also enshrined
in the prohibitionagainstallowinga conflictof interestand duty.The wide
leewayaffordedto thefiduciaryto affectthe legal positionof the principalin

7 Qualifications will, however,be introduced in the next section.

8 (1972), 30 D.L.R. (3d) 653 (Ont. C.A.) ; affirmedin a short Supreme Court of Canada
judgment at (1973), 4I D.L.R. (3d) 767
9 Supra note I

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 THE FIDUCIARY OBLIGATION 5

effect
putsthelatter
atthemercy andnecessitates
oftheformer, theexistence
ofa legal devicewhichwill induce the fiduciaryto use his powerbeneficently.
In thisarea, discretionand obligationare correlativeconcepts."1
Awarenessofthecentralimportanceof theelementof discretionand of the
law's attemptto controlthisdiscretionmay also providea clue fordetermin-
ingwho is and who is nota fiduciary.This is a notoriously
intractableproblem,
and thecourtshavenotyetsucceededin grappling
it to theground.In Re
West of England and South Wales DistrictBank, Ex parte Dale and Co,11
forinstance,Fry j defineda fiduciaryrelationas 'one in respectof which if
a wrong arise the same remedyexistsagainst the wrongdoeron behalf of
theprincipalas would existagainsta trusteeon behalfof the cestuique trust.'
This definitionin termsof the effectproduced by the findingof a fiduciary
relationbegs the question in an obvious way: one cannot both definethe
relationbytheremedyand use therelationas a triggering deviceforremedy.12
Similarly,theobservationof Rand j in Midcon Oil & Gas Ltd v New British
Dominion Oil Co Ltd that'the fiduciaryrelationis thatof a trustin one who
is to act in relationto thebeneficialinterestof another'"3whileetymologically
correctcannotbe regardedas analyticallysatisfying. The factthata benefici-
ary has subjectively no trustat all in the judgment the personwhom the
of
settlorhas installedas trusteedoes not in any way relievethe trusteeof the
high standard that equity imposes. Usually the adjective 'fiduciary'is at-
tached to certaincrystallizedrelationssuch as trustee-beneficiary, principal-
agent, director-corporation, partners,employer-employee. This categoriza-
tion, while effectiveenough as a solventfor most cases, is not withoutits
dangers.The existenceof a listof nominaterelationsdulls the mind's sensi-
tivityto the purposesforwhich the listhas evolved and temptsthe courtto
regardthe listas exhaustiveand to refuseadmittanceto new relationswhich
have been createdas a matterof businessexigency.
Two Canadian cases illustratethisprocess.In Midcon v New British"4 the
parties entered into an to a
agreementjointly exploit prospectivepetroleum
and natural gas field. The plaintiffwas to drill on land reservedto the
defendantin returnforan undividedhalf-interest in the property,and the
defendantwas to be the 'operator' and thus responsiblefor the marketing
of any discoveries.Subsequently,afternatural gas was found,the president
of the defendantpromoteda fertilizer enterprisewhich then purchasedgas

that 'the greaterthe independentauthority

10 See Scott'sstatement to be exercisedby
the fiduciary,the greaterthe scope of his fiduciaryduty.''The fiduciaryprinciple,'
(1949), 37 CaliforniaL.J. 539, at 54I.
ii (1879), ii Ch.D. 772, at 778
12 Cf the criticismof Sealy, 'The fiduciary [1962] Camb. L.J. 69, at 72.
relationship,'
both in detail and in
is usefulbut, as will be seen,differs
Sealy'sown classification
spiritfromtheviewsbeingpropoundedin thispaper.
13 [1958]S.C.R.314, at 335
14 Ibid

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6 UNIVERSITY OF TORONTO LAW JOURNAL

found on the reservedland. The plaintiffsued for a declaration that the

defendantwas holdinghalfitsinterestin thefertilizer as a construc-
enterprise
tivetrustee,but was unsuccessful.The Supreme Court of Canada, speaking
throughLocke J,reasonedthatthepartieswerejointtenantsand thata joint
tenancydid not give rise to a fiduciaryrelation.Agency would have been
sufficientto supportsuch a relationbut the existenceof an agency was ex-
presslynegatived by the agreement.The defendantdid not fall into any
categorywhich created a fiduciaryobligation.
In JirnaLtd v MisterDonut ofCanada Ltd15the plaintiff was a franchisee
who had contractedwith the defendantfranchisorto operate a coffeeand
doughnutshop in accordancewithspecifications laid down by thedefendant.
Under the agreementthe plaintiffwas to purchaseingredientsfromcertain
suppliersdesignatedby thefranchisor. In factthe pricesof thesecommodities
were fixed eitherunilaterallyby the franchisoror by agreementbetween
franchisorand supplier,and the franchisor was able to extractfromthe sup-
pliers secret rebates based on the quantityordered by the franchisee.The
plaintiffnow sued for an accountingof the moneyrealizedfromtheserebates
claiming that the franchisor's conduct fellbelow the standard requiredof a
fiduciary. The trialcourt held forthe plaintiffon the groundthat the labels
of partnership, agency, and joint adventurecould be applied to the relation.
The appellate courtsreversed,pointingout that agency, partnership,and
joint venturewere expresslydisavowed by the agreementand that, in the
absence of contractualstipulationsto the contrary,no fiduciaryobligation
could be spelledout of dealingsby experiencedbusinessmenof equal bargain-
ing strengthactingat arm's length.
These two decisionsare, withrespect,suspectboth as to reasoningand as
to result.It cannot be the sine qua non of a fiduciaryobligationthat the
partieshave disparate bargainingstrength.An agent surelywould not be
heard to say that he had no fiduciarydutybecause his principalwas a man
of businessexperiencewho had created the agency relationwith his eyes
open. In contrastto notionsof conscionability, the fiduciaryrelationlooksto
the relativepositionof thepartiesthatresultsfromtheagreementratherthan
the relativepositionthat precedes the agreement.Nor should the analytic
processbe short-circuited by affixinglabels. In both thesecases the business
contextsdefied the labeling process because they involved new formsof
business organizationthat evolved or were excogitatedwithout reference
to themoretraditionalinstitutions. To attemptto decide whethertheoperator
in Midcon or thefranchisor in Jirnaare 'agents'requiresentryintothelinguis-
tic world of Humpty-Dumpty.The law in this area serves an educative
function,raisingthestandardsof commercialdealingsabove ordinarymarket
temptations.It is a functionthatshould be allowed scope even in novel and

15 (1970), 13 D.L.R. (3d) 645 (Ont. H.c.); (1972), 22 D.L.R. (3d) 639 (Ont. c.A.);
D.L.R. (3d) 303 (s.c.c.)
(x973),40

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 THE FIDUCIARY OBLIGATION 7

developingformsof enterprise.Like the categoriesof negligence,the cate-

goriesof fiduciaryshould not be consideredclosed."
Indeed, it would be desirableto go beyond the categoriesand the labels
to an awarenessof the purposeforwhich the categoriesand the labels have
been enshrined.The reason that agents,trustees,partners,and directorsare
subjectedto thefiduciaryobligationis thattheyhave a leewayforthe exercise
of discretionin dealingswiththirdpartieswhichcan affectthe legal position
of theirprincipals.As we have seen, if theyhave no discretionto advise or
negotiateand iftheirinstructions are narrowand precisethereis nothingon
whichthefiduciaryobligationcan bite.Accordinglythehallmarkof a fiduci-
ary relationis that the relativelegal positionsare such that one partyis at
the mercyof the other'sdiscretion.In Midcon, for instance,the success or
failureof the joint enterprisewas entirelyin the controlof the operatorwho
underthe agreementhad the powerto make all decisionsabout marketing."
In Jirnathe franchiseewas entirelyhelplessin the face of the pricesthat the
franchisor arrangedwithor imposedupon thesuppliersof ingredients.Given
the dependence of one side on the discretionexercised by the other, the
circumstanceswere appropriatefor the impositionof the standard of the
fiduciaryso as to obviate the danger that discretion'sexercisemightbe pre-
judiced by self-serving considerations.s8
Acknowledgement of the functionof the fiduciaryobligationas a method
ofcontrollingdiscretionshouldnot,however,precludea realisticexamination
of thescope of thatdiscretion.In Phipps v Boardman"9the defendantsolici-
tor'spurchaseof sharesdoes not seem to have been withinthe ambit of his
dutyto advise or negotiateand the impositionof a constructivetrustis per-
haps undulyharsh.As Lord Upjohn pointedout in his dissent,the prohibi-
tionagainsta conflictbetweendutyand interestshouldreferto 'a real sensible

I6 A furtherapposite illustration is Ostrander v Niagara Helicopters Ltd,

(x973) 40
D.L.R. (3d) 16I (Ont. H.c.), in which it was held that a receiver appointed by a
secured creditor to sell a debtor's assets is not (like a court-appointed receiver) a
fiduciary,and thereforehe may sell to a company in which he has an interest.On the
surface it is hard to see why the fiduciaryobligation should attach to one but not the
other of two figureswho are functionallyidentical. The court seems to have reasoned
that the receiver's duties are exhausted by the contract under which he is appointed
and that his duty of loyaltybelonging as it does to the creditor cannot be enlisted by
the debtor. But the firstreason begs the question since the contract is exhaustive of
the duties only if he is not a fiduciary(and in any case the lesser duty of good faith
that the court did impose was presumably non-contractual). And the second reason
is not strongwhen the interestsof debtor and creditorare not repugnant,and anywayit
does not justifyallowing a conflictof interestin the process of sale.
17 The plaintiffhad the rightto veto any dispositionmade by the operator,but, as Rand j
pointed out, in the circumstances there was 'the strongestbusiness coercion' on the
operator to approve of the arrangements: supra note 13, at 336.
18 Cf the trial court's animadversionto the intimateand long-rangenature of the franchise
relation, (1970), 13 D.L.R. 645, at 656ff. For a more comprehensivetreatmentof the
Jirna situation see Brown, 'Franchising: A Fiduciary Relationship,' (1971), 49 Tex.
L.R. 650.
i9 [19671 2 A.C. 46 (H.L.)

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8 UNIVERSITY OF TORONTO LAW JOURNAL

possibilityof conflict.'20
A pair of more recentcases have indeed been more
inclinedto examinetherealityof thesupposed discretionthan the legal label
that the defendantformallybore. Thus an executorwho purportedto re-
nounce his executorshipwas allowed to purchasetrustpropertydespitethe
concessionthat the renunciationwas invalid,on the groundthat he was no
longertakingpart in the administrationof the estate.21And a stockbroker
who filleda client'spurchaseorderby 'marryingit' to anotherclient'sorder
to sell was held not to have fallenfoul of the prohibitionagainst acting for
twoadverseprincipals:theagent,dealingas he is in a commoditywhoseprice
could be immediatelyand adequatelyascertained,was occupyingthe role of
an intermediary ratherthana negotiator.22
Since the courtsprofessedlyrefuseto enquire into whethera potentially
improperinfluenceactuallyaffectedthe exerciseof the fiduciary'sdiscretion
or damaged the interestsof the principal,23the major task facingthe court
is to delineatetheambitof the discretionitself.In thesecontextsthe problem
will oftenbe approached by askingwhetherthe profitwas realized'by reason
and onlyby reason' of the fiduciaryposition.24This testis unfortunately not
completelyappropriate fortwo reasons. the
First,putting question in thisway
encouragescounselto attemptto bifurcatea singlepersonalityinto different
personae. In Midcon, for instance,the majorityof the Supreme Court of
Canada held that even if the defendantoperatorwas a fiduciary,the de-
fendant'spresidentwas actingqua promoterin settingup thefertilizer plant,
not qua operator.As Rand j pointedout in his dissent,thissubjectsthe facts
to an utterlyunrealisticanalysis.25 Division of single activitiesinto their
constituentparts has a respectablephilosophicalgenealogygoing back to
Zeno's Eleatic paradoxes, and the law itselfis fond of seeing two entities
where the lawman's eye can discernonly one.26 But, in a rationalsystemof
law, divisionmustbe predicatedupon viable criteriaformakingthe division,
and these the cases have failed to elucidate. Indeed recentdecisionsshow
a growingcognizanceof the inadequacy of unrealisticbifurcation.27

20 Ibid, at 124, 131. The academic criticismis copious, eg McLean, supra note 2, at 226;
Fridman, 'Agencyand secretprofits,'(1968), 3 Man. L.J. 17; Jones,'Unjust enrichment
and the fiduciary'sduty of loyalty,' (1968), 84 L.Q.R. 472, at 494.
2 I Holder v Holder, [1968] 1 Ch. 353 (C.A.)
22 Jones v Canavan, [1972] 2 N.S.W.L.R.236, at 244 (C.A.)
23 Supra note 3
24 Regal (Hastings) Ltd v Gulliver, [1942] I All E.R. 378 (H.L.)
25 Supra note 13, at 334
26 The notionof causation can supply an illustrationof both proper and improperdivision.
In negligence law the bifurcationinto factual and proximate cause has a policy basis
which rendersit viable if applied sensitively.In insurance law the attempt to isolate
the proximatecause, being withouta rational underpinning,requiresin effecta judicial
flippingof the coin, eg Marsden v City & County Assurance Co, (i865), L.R. I C.P.
232; contrastHarris v London & Lancashire Fire Ins., (1866), io Low.Can.Jur. 268
(Que. s.c.). For another strange bifurcationsee Twine v Bean's Express, (1946), 62
T.L.R. 458 (C.A.).
27 Industrial Development Consultants v Cooley [1972] All E.R. 162, at 173 (Assizes);
Canadian Aero Services Ltd v O'Malley, (i973), 40 D.L.R. (3d) 371, at 383, 387,
390 (s.c.c.)

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 THE FIDUCIARY OBLIGATION 9

Second, to testprofitsaccordingto whethertheywere acquired 'by reason

and onlybyreasonof' thefiduciarypositionis to missthemarkof theenquiry.
The testpresupposesthat thereis a fiduciaryobligationand asks whetherit
was violated by the behaviourat issue. But the existenceand extentof the
fiduciaryobligationis itselfco-extensivewiththe scope of the discretionthat
can be exercised.What is crucialis theambitofthediscretionnot thecapacity
of the profiteer.Once the formeris determinedso that the conduct of the
supposedfiduciaryeitherfallswithinit or standsoutsideit,thelatterbecomes
superfluous.More helpfulis the approach favouredby United States courts
whichanalyseproblemsof corporateopportunity by examiningthe corpora-
tion'sline of business.28
This at least directsthe court'sattentiontowardthe
relevantfactorby focusingon the range of potentialactivitiesthat come
withinthe director'spurview.

3 The secondarypolicy

So far we have been concernedwiththe fiduciaryobligationas a device for

regulatingthe conductwithina sphereof delegatedpower which allows the
supposed fiduciarya leeway in affectingthe legal positionof his principal.
This howeveris not the only contextin which the fiduciaryobligationmay
be relevant.Compare the followingtwo cases.
In McLeod and More v Sweezey29a group of principalsemployed a
prospectorto stake and recorda certaingroup of 'asbestosmineralclaims.'
The prospectorwent to the designatedlocation, staked some claims, but
reportedto his principalsthat therewere no signs of asbestosand that the
claimswerenotworthrecording.The prospector,however,had realizedfrom
his investigations that othervaluable mineralswere perhaps presentin the
area and he subsequentlyreturnedand stakedit forhis own benefit.In due
course chrome was discoveredand the formerprincipalssued successfully
to have the prospector'sinterestimpressedwith a constructivetruston their
behalf.
In Pre-Cam Explorationand DevelopmentLtd v McTavish3Othe plaintiff
retaineda miningengineeringfirmto take magnetometerreadingsof land
stakedbytheplaintiff and ofadjacent land. The firmdispatchedan employee
who took all the requiredmagnetometerreadingsbut while doing so came
to realize that the adjoining land had mineraldeposits.He accordinglyquit
the firm'semployand staked thisland forhimself.Again, the courtforced
him to disgorgeby imposinga constructive trustin favourof the plaintiff.
The cases bear a strikingand obvious similarity.In both, constructive
trustsare imposedon interestsin land stakedby supposed fiduciarieson the
basis of informationacquired during the performanceof their delegated
task.Traditionallyboth cases could be viewed as examples of misappropria-
28 Note, 'Corporate opportunity,'(1961), 74 Harv. L.R. 765, at 768
29 [19441 2 D.L.R. 145 (S.c.C.)
30 (1966), 57 D.L.R. (2d) 557 (s.c.c.)

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IO0 UNIVERSITY OF TORONTO LAW JOURNAL

tion by the fiduciaryof an opportunitybelongingto the principal.But the

reasoningby which the resultis reached is different. In McLeod the court
startswith an elucidationof the scope of the defendant'sundertaking:the
law, presumablyreflectingthe expectationinherentin mineralexploration,
does not evince an interestin particularmineralsbut coversall mineralsin
thestakingofa givenarea; theprincipalswerenotrelyingon the prospector's
advice regardingasbestosonlybut had bargainedforhis judgmenton all the
potentialitiesof the area; by disclosingthe location theyhad divestedthem-
selves of any possibilityof protectingtheirown interestsand were totally
dependenton the prospector.Here thenis an excellentand lucid application
of the principlesadumbratedabove. The extentof the fiduciary'sdiscretion
is demarcated,and the fiduciaryobligationis imposed in orderto compel a
properexerciseof that discretionwithinthe scope of the authoritythus de-
lineated.Pre-Cam bycontrastdoes notyieldto such precisereasoning.Indeed
if the McLeod patternof reasoninghad been followedthe decision would
have gone theotherway.31All the defendantwas employedto do was to take
magnetometer readings,and thisis exactlywhat he did do. He had no discre-
tionregardingthestakingof claimsor theproferring ofexpertadvice. Instead
of sketchingin the scope forthe exerciseof discretion,the courtin Pre-Cam
outlineda largerprinciplethat 'the constructive trustis imposedin a case of
this kind because of the mere use of confidentialinformationfor private
advantage againstthe interestof the personwho made the acquisitionof the
informationpossible.'32And in a famous parallel United States decision,
Cardozo j gave an even moreabstractand far-reaching outlineof the court's
attitude: a constructivetrust,being 'the formulathroughwhich the con-
science of equity findsexpression'is imposed upon propertywhen it has
been acquired 'in such circumstancesthat the holder of the legal titlemay
not in good conscienceretainthe beneficialinterest.'33
There is a temptation,when confrontedwithsuch broad formulations, to
reducethemto manageablelegal proportionsby invokingthe notionof prop-
erty.Thus confidentialinformationcan be designatedas the propertyof the
beneficiary or the opportunity itselfcan be said to 'belong to' the plaintiff.34
This has the advantage of providinga familiarlandmark,of stirringrecollec-
tion of equity'sprimordialjurisdiction,and of diffusing an aura of technical
precision. But property is itselfmerely the label for that crystallizedbundle
of economic interestswhich the law deems worthyof protection.When
the decisionat the Courtof Appeal stage: (1965), 55 D.L.R.(2d) 59
3I1 As is shownby
(Sask. C.A.)
32 Supra note30o,at 561
33 Beattyv Guggenheim ExplorationCo 122 N.E. 378, at 380 (N.Y. C.A. 1919)
34 Eg Lord Cohen,in Phippsv Boardman,supranote20o,at Io2, whois,however,careful
thatinformation
to add thequalification and opportunityare notproperty 'in thestrict
sense.'For an extremeexampleoftheinvocationofproperty see Act Oils Ltd v Pacific
PetroleumLtd, (1972), 27 D.L.R. (3d) 444 (Alta. S.C.A.D.), wherethecourtconcluded
that sincethe 'trustres' was the proceedsof a certainventure,the fiduciary relation
could not embracethemarketing methodsthatproducedthe proceeds.

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 THE FIDUCIARY OBLIGATION I I

intangiblessuch as informationand opportunityare at stake, affixingthe

label of propertyconstitutesa conclusionnot a reason.35The difficulty is not
to supplya label but to identifythe protectedinterest.
In thePre-Cam situationtheplaintiff would nothave been able to complain
if a strangerhad staked the propertyin question. The factorthat justified
the impositionof the constructive trustwas that the claims were stakedas a
result of an activityundertakenon behalf of the plaintiff.In effectthe
employeewas an elementin the plaintiff'scommercialapparatus, and to
the extentthat the court intervenesit safeguardsthe integrity of the plain-
tiff'sbusinessstructure.In part,as Cardozo j's concernwith'good conscience'
implies, the court is concerned with the apparent immoralityof the de-
fendant'sreaping where he had not sown, though it begs the question to
assume that the plaintiffhad sown theresince the verymatterat issue is the
statusof land thathad previouslynot been staked." More basic is a realiza-
tion of the economic importanceof fosteringincentiveby protectingthe
entrepreneur's businessapparatus.A sophisticatedindustrialand commercial
societyrequiresthat its membersbe integratedratherthan autonomously
self-sufficient,and throughthe concepts of commercialand propertylaw
provides mechanisms of interactionand interdependence.The fiduciaryob-
ligationexemplifiedby Pre-Cam constitutes a means by which thosemecha-
nismsare protected.
As such the fiduciaryobligationis only one thread in the net thrownup
by thecommonlaw fortheprotectionof businessstructures. A fewexamples,
not by any means comprisingan exhaustivelist,will show the pervasiveness
of the theme. The law of agency, providingas it does the vehicle for the
creationbyone partyoflegal relationsbetweentwo others,is itselfa reflection
of commercialneeds that were not strongenough to be recognizedeven in
thesophisticatedlegal systemof the Romans.37But whereasthe commonlaw
saw no difficulty in holdingthe principalliable when the agent acted within
his actual authority- here the objective manifestationof consentby both
principal and third party allowed for the satisfactionof their reasonable
expectations38- the idea of apparent authoritywas more problematic.39
35 .United States courts have long been aware of this,eg Metropolitan Opera Association
Inc v Wagner-Nichols Recording Corp ioi N.Y.S. (2d) 483 (N.Y. County s.c. 1950).
Cf Cohen, 'Transcendental nonsenseand the functionalapproach,' (1935), 35 Columbia
L.R. 8o9, at 814.
36 'Contained in this ingenious phrase [reaping where one has not sown] is the hint that
the reaper is an intruderwho has activelyappropriated somethingnot really his, swing-
ing a scythein anotherman's field.This kind of hint of course begs the central question,
which is - to whom should the crop belong.' Dawson, 'The self-servingintermeddler,'
(1974), 87 Harv. L.R. 1409, at I415.
37 Watson Contract of Mandate in Roman Law (1961); Weber, Law in Economy and
Society (Rheinstein,ed, 1954) 122
38 See the classic article by Seavey, 'The rationale of agency,' (192o), 29 Yale L.J. 859,
at 872, reprintedin Studies in Agency (1949) 65, at 8i.
39 See the differentviews expressed by Seavey, supra note 38, and Ewart, 'Estoppel
principal and agent,' (1902-3), 16 Harv. L.R. I86.

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12 UNIVERSITY OF TORONTO LAW JOURNAL

While the United States authoritieslean toward a contracttheory,40Com-

monwealthjurisprudenceutilizesthe device of estoppel4'despitethe grave
inconveniencesand theoreticalinconsistencies thatthisengenders.42But what-
ever the juristictechnique that is used, the law's goal is fairlyclear. The
purpose of agencyis to facilitatethe delegationof the power to create legal
relations,and thisunderlyingpurpose would be stultifiedif the thirdparty
had to make detailed inquiriesas to the precisescope of the authorityof the
personwithwhomhe was dealing.43Withoutthenotionofapparentauthority,
thirdparties,who would be dealing with agents at theirperil,would soon
prefernot to deal with them at all. Therefore,thoughin specificlitigation
the doctrineof apparent authorityis a potentweapon in the hands of the
thirdparty,itsinstitutionalvalue accruesno lessto the principalwhoseenter-
priseis therebypreventedfromunravelling.44
A similarfunctionis servedin a different contextby the tortof inducing
breach of contract. Indeed only from this perspectivecan this otherwise
anomalous developmentbe understood.Contractis the strongholdof indivi-
dualism,stressingand protectingthe operationof freewill in the formation
of the mutual legal obligation.Accordinglythe consequencesof contracting
are usually confinedto the contractingparties,excluding in English and
Canadian law even outsiderswhom both contractorsintendto benefit.But
althoughthe contractingpartiesprimarilycreate duties only in themselves,
thetortof includingbreachof contractalso allows themto createin strangers
the dutyof abstainingfrominterfering in the contractualrelation.By thus
adding tortremedies to the sanctions providedby the law of contracts,the
commonlaw is seekingto fortify the continuingstructureof businessdealings
thathas been createdby the parties.45

40 Restatementof Agency (2d), s 8, commentd

41 Mac Fisheries Ltd v Harrison, (1924), 40 T.L.R. 709 (H.C.); Freeman and Lockyer v
BrockhurstPark Properties (Mangal) Ltd, [1964] I All E.R. 63o, at 644 (C.A.)
42 For instance, (i) the thirdpartycannot sue until he has detrimentallychanged position;
(ii) when he does sue he in effectuses estoppel as a sword; (iii) since estoppel is a
one-way street, a plaintiffprincipal must invoke the theory of ratification; (iv) it
entails the fictitiousseverance of the representationactually made by the principal,
as pointed out by Learned Hand j in Kidd v Thomas A. Edison Inc. 239 F. 405 (Dist.Ct
S.D.N.Y. 1917); (v) the third party may know the principal's representationbut have
no means of knowing whetherit was heeded, as in Grant v Norway, (1851), Io c.B.
665 (Common Pleas); (vi) the action may be founded on a statute which requires
the existenceof a contract; cf Guy JAdissentingin Berryerev Fireman's Fund Insurance
Co, (1965), 5I D.L.R. (2d) 603 (Man. C.A.).
43 Kidd v Thomas A. Edison Inc, supra note 43; Smith v M'Guire, (1858), 3 H & N
554, at 561 (Exch.). Contrast the attitude of Bramwell B in Baines v Ewing, (1866),
4 H. & C. 51I (Exch.).
44 Cf Hetherington, 'Trends in enterpriseliability: law and the unauthorized agent,'
(1966), i9 Stan. L.R. 76.
45 Perhaps the most undisguised example of judicial solicitude for the structuralintegrity
of a business enterpriseis International News Service v Associated Press 248 U.s. 215
(1918, u.s.s.c.). Pitney j, at 241, expresslyalluded to the by-laws which formedthe
frameworkof the plaintiff'senterpriseand held that since they reflectedthe practical
requirements of the commercial activity in question the court should intervene to
prevent them frombeing undermined.

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 THE FIDUCIARY OBLIGATION 13

The extensionof the conceptof the fiduciaryobligationto the protection

of the principal'smechanismof commerceis thus bottomedupon a value
protectedbythecourtsin diversecontexts.Indeed even in fiduciarysituations
it comesto theforein circumstances otherthan theappropriationof informa-
tionor opportunity embodiedbyPre-Cam. In Coy v Pommerenke46" an agent
refusedto sell land to a prospectivepurchaserunlessthe latterallowed the
agent a half interestin the land in question. The purchaser reluctantly
agreed,and aftera subsequentresale the principalsued both the agent and
the purchaserfor an accountingof the profitthat theyhad realized. That
he recoveredagainst the agent is not surprisingsince the latterhad allowed
his discretionin negotiatingthe sale to be prejudiced by considerationsof
self-interest.More noteworthy forpresentpurposesis the principal'ssuccess
in recoveringfromthe purchaseron the groundthat he was a knowingac-
complicein theagent'smisconduct.Here thetentaclesof thefiduciaryobliga-
tionwerelong enoughto enmesha personwho was nota fiduciaryat all.47As
in the Pre-Cam case the court was presumablyconcernedwith vindicating
theintegrity of the principal'scommercialapparties,but unlikePre-Cam the
enterprise here was beingprotectednotfromsubversionfromwithinbut from
tampering from without.Indeed the purchaser'sexternalitywith regardto
the protectedenterpriseis verymuch analogous to thatof one who inducesa
breach of contract.But the court'sprotectionof the fiduciaryrelationfrom
extrinsicinterference is more comprehensivethan its protectionof the con-
tractualone in thatneitherthe reluctanceof the thirdpartyto co-operatein
the agent's misbehaviournor the failureof the principal to show that he
sufferedactual damage is sufficient to relievefromliability.
Even more extraordinary are the consequencesof the receiptof a secret
commissionby the agent. Of coursethe principalcan forcethe agentto dis-
gorge the amount of the bribe which exposed the agent to the temptation
of an improperexerciseof the discretiondelegatedto him. But the principal
can also recoverthe amountof the bribefromthe thirdparty,and thiseven
if he has also recoveredonce fromthe agent."4Again, an outsideris caught
in the toilsof the fiduciaryrelation,and again withoutany proofof actual
damage to theprincipal.The justification advanced bythecourtsforrecovery
againstthethirdpartyis thatthereis a presumptionthatthethirdpartyseller
raisedthepriceoftheitemby theamountof thebribe (or converselylowered
it if he was vendor)."4 But this argumentringshollow if the principalhas
already recoveredfromthe agent the amount which has been notionally
divertedfromhis fisc.The real reasonfortherecoveryfromthe briberis that
the latter has wronged the principal by underminingthe integrityof his
businessorganization,and so sharpis the courts'disapprovalof such conduct

46 (1911),44 S.C.R. 543

47 Cf Fonthill Lumber v Bank of Montreal, (1959), 19 D.L.R. (2d) 6I8 (Ont. c.A.) where
the court talks in termsof a 'transmittedfiduciaryobligation.'
48 Mayor, etc of Salford v Lever, [1891] I Q.B. 168 (C.A.)
49 Hovenden v Milhof, supra note 3

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14 UNIVERSITY OF TORONTO LAW JOURNAL

thattheyare morepreparedto allow the principalto realize a windfallthan

to forgothepunishmentofthewrongdoer.In effectthesecond recoveryfulfills
the functionof punitivedamages withthe amount of the bribeservingas an
administratively easy methodof quantifying the award.
The same analysiscan be usefulin dealing with the troublesomecase of
Reading v Attorney-General.50 Here the plaintiffunsuccessfullysued to re-
cover moneythat had been taken fromhis possessionby the Britishgovern-
ment.He had servedas a sergeantwith the Britisharmyin Egypt and had
receivedthe moneyfromsmugglersin returnforaccompanyingin uniform
thepassage of contrabandmaterialthroughthe streetsof Cairo so as to spare
it any molestationby the Egyptianpolice. Althoughthe sergeantacted dis-
honestly,"5 the episode was totallyunrelatedto the exerciseof any delegated
discretionand he cannot be said to have appropriatedan opportunitythat
rightfullybelonged to the Britisharmy.Indeed the profithad been realized
at the expense of the Egyptian governmentand it was conceded that the
defendanthad sufferedno damage. Lord Porter,who gave the main judg-
mentin the House of Lords expresslydisavowed the attemptby Denning j
at trialto explain the defendant'spositionin restitutionarytermsand noted
thatthesergeantwas a fiduciaryonly'in a wide and loose sense.'52Presumably
the real basis forthe court's decisionwas the sense that a wrong had been
done to the defendantby an act which endangeredthe reputeand integrity
of thedefendant'smilitaryestablishment in a foreigncountry.Here theenter-
prise that was being protectedby the court was a militaryratherthan a
commercialone, but the same underlyingprincipleapplied. This would be
more apparent if the factsin Reading were varied to make the plaintiffan
officerof a powerfulEnglish corporationdoing businessin Egypt who had
similarlyabused his documentsof identification.
One finalcommenton thisextendedconcept of fiduciaryobligationis in
order,especiallyin view of recentUnited Statesdevelopments.Legal institu-
tionstypicallyservea varietyofpurposes.53 The harshconsequencesofbribing
an agent, for instance,primarilyvindicatea wrong done to the principal's
enterprise,but they also safeguardthe mechanismsof fair competitionin
50 [1951] All E.R. 617 (H.L.)
51 This factor is treated as decisive by Jones, supra note 2o, at 476. But although the
plaintiffdeserves no sympathy,it is hard to see why his cheating of the Egyptian
governmentshould enure to the benefitof the Britishgovernment.That the sergeant's
dishonestydoes not per se justify the British government'sretention of the money
should be evident from Gordon v Chief Commissionerof Metropolitan Police, [191o]
2 K.B. Io8o (C.A.) in which the plaintiffsuccessfullysued to recover money obtained
in illegal streetbettingwhich had been seized by police in a raid. As Fletcher Moulton
LJ put it (at Io96), 'I know of no principle of law, or decision, or even dictum, which
rendersmoney which has become the propertyof an individual liable to be taken and
kept with impunityby any person who chances to get hold of it, merely because it
has been acquired by some wrongfulor prohibited act.' Contrast Lee On v Long 234
P.2d 9 (Cal. s.c. 1951).
52 Supra note 50, at 620
53 Fuller Anatomyof the Law (1969) 6o

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 THE FIDUCIARY OBLIGATION 15

themarketplacein whichthebriberparticipates.54 In the courseof protecting

the plaintiff'sorganization,the fiduciaryconcept simultaneouslyperforms
the subordinatefunctionof maintainingthe integrity of the marketplacein
whichtheorganizationoperates.This subsidiarypurposehas recentlyreceived
a notable elaborationin United States decisionswhich have, throughthe
vehicleofthefiduciaryrelation,supplementedstatutory and regulatoryshare-
holder suits against insidertradingwith a judicially created action on the
part of the corporationitself.55Here no harm was done to the corporation,
especiallysince its own tradingin the shares on the basis of the insider's
informationwould have run afoul of the regulatoryprohibitions.56 Rather,
the subordinatemotiveof preservingfair competitionamong the investors
in the corporatemarkethas taken on a life of its own.57The quibble over
nomenclature- whetheran insiderin thiscontextcan be labelledas a fiduciary
- is not important.But it is importantto realizethatthe insider-trading
cases
mark the beginningof a substantiallynew conceptual directionfor the
fiduciaryrelation.This is new wine whichis being poured into old bottles.58

4 Consequencesof thisclassification

In two contexts,then,the viabilityof the fiduciaryobligationmanifestsitself.

At its narrowestit is a device for controllingand purifyingthe exerciseof
a discretionto adviseor negotiate.More broadlyit is partofa pervasivepolicy
of thelaw to protecttheintegrity of commercialorganizations.In a sensethe
latterpurposeis broad enoughto swallow theformer,sincejudicial insistence
on properlyexerciseddiscretionis one means of preservingan orderedframe-
work for commercial activity.But both historicallyand conceptuallythe

54 Dobbs Remedies (1973) 702

55 Diamond v Oreamuno 248 N.E. 2d 90I (N.Y.C.A. 1969); Schein v Chasen 478 F.2d
817 (2nd Cir. 1973), remanded sub nom. Lehman Brothersv Schein, 42 U.S.L.W. 4603
(29 April 1974)
56 Note (1970), 8o0Harv. L.R. 1421, at 1429
57 The virulence of this new vitalityis seen in the Court of Appeals decision in Schein v
Chasen, supra note 55, where a non-tradingnon-insiderin the channel of information-
flow from insider to tippee had to account to the corporation for the tippee's gains.
It seems extraordinarythat this defendant,who was neithera fiduciarynor a profiteer,
should have to disgorge to a plaintiffwho sufferedno damage a benefit he did not
receive as a resultof a wrong he did not commit.
58 A touchstone for measuring the new direction is to compare Diamond v Oreamuno,
supra note 55, with a more traditional fiduciarycontext. In Diamond the insider was
held accountable to the corporation for the 'profit' he made by avoiding a loss by
selling shares he owned. In Pre-Cam, supra note 32, what if the magnetometerreader
had realized that some adjacent land that he happened to own was worthless,and
acting on this inside informationhe had avoided a loss by selling it to a third party?
Would he also have to hold this 'profit'for his employer?The novel purpose is implied
by the fact that the devices which are being used to regulate insider tradingare statutes
concerned with securities and corporations specificallyand also the Criminal Code;
see Johnston,in (1973), 5I Can. Bar Rev. 676. On the adaptation of archaic ideas
to novel purpose as a feature of a legal order see Renner The Institutionsof Private
Law and theirSocial Functions (i949).

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I6 UNIVERSITY OF TORONTO LAW JOURNAL

factorof discretioncontrolhas played so centrala role in the elucidationof

the fiduciaryobligationthat littleis lost by recognizingthat it deservesa
discreetniche of its own.
Moreover,theremaybe a gain both in theoreticalclarityand in functional
utility.For one thingthe cases have used two formulationsto restrictthe
fiduciary'sopportunity forprofit:first, thathisdutymustnotconflictwithhis
and
interest, second, that he must not profitfromhisposition.Much erudition
has been expended in attemptingto clarifywhethertheseformulationsem-
body two different rulesor are alternativemethodsof expressinga singlerule,
and court usage has not itselfbeen consistent.59 However thismay be, the
two formulations functionally appropriate the two kindsof situation
are to
outlinedhere.The conflictrule pointsto the untaintedmannerin which the
fiduciarymustexercisehisdiscretion,and the profitruleis theverbalformula
throughwhich the principal'sbusinessstructureis protected.Thus the clas-
sificationcan be used to providea conceptualhome fortwo hithertorootless
formsof words.
More important,thisclassification can serveas a tool forappreciatingthe
dynamics of the judicial treatment of fiduciarylitigation.Ever since Keech v
Sandford60 the courts have been zealous to deterimproperexercisesof discre-
tion by a fiduciary.Avoidance of the conflictof duty and interesthas been
consideredto be a goal so obviouslyworthyof promotionby the courtsthat
it has constantlysecuredjudicial approbation.While courtsmightdifferin
any set of factsconcerningthe existenceof the conflictor the causal relation
betweenprofitand position,the principleitselfhas become establishedas the
irreduciblecoreof thefiduciaryobligation.61
On the otherhand, the protectionof the enterprisehas receiveda much
moreuneventreatment.Aside fromsuch crystallized situationsas the agent's
receiptof a double commission,a uniformjudicial responsehas been lacking.
This uncertaintyhas reflecteditselfin the vaguenesswith which the courts
have articulatedthefactorsthattriggerthe operationof the fiduciaryobliga-
tion in thesecontexts,fromthe exploitationof intangiblessuch as knowledge
or opportunity to the invocationof 'good conscience.'62 As a practicalmatter
the jurisprudencein this area is litteredwith dissents,reversalson appeal,
and inconsistent holdings.
59 McLean, supra note 2
60 Supra note I
61 A potentiallyprejudiced exercise of discretionis allowed in only three circumstances:
(i) where thereis a full disclosureby the fiduciaryto the principal, Regier v Campbell-
Stuart, [i939] Ch. 766 (Ch. D.); (ii) where the court exercises its jurisdiction to
allow the trusteeto bid for trustpropertyon a showing that there is no other way to
secure an adequate price, Tennant v Trenchard, 1869), L.R. 4 Ch. 537; (iii) where
a person is directorof two corporationsthat are dealing or competingwith each other;
Canadian Western Natural Gas v Central Gas Utilities, [i966] S.C.R. 630. This last
exception has been encroached upon by statutes promoting competition and by pro-
visionssuch as s 134 of the BusinessCorporationsAct, R.S.O. 1970, c 53 (which arguably
would not cover the opportunitysituation of Canadian WesternNatural Gas).
62 Supra notes 32 and 33

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 THE FIDUCIARY OBLIGATION 17

A fewexamplesmightillustratethe natureof the judicial divergences.The

judgmentof Cardozzo cj in Meinhard v Salmon,63wherebythe long-term
renewal of a lease by one joint venturerwas in part impressedwith a
constructive trustforthe benefitof the otherco-venturer, standsas a classic
and sublimeexpositionof thefiduciarystandard.However,threeof theseven
membersofthecourt,speakingthroughAndrewsj, dissentedand pointedout
that thiswas no generalpartnershipbut merelya joint ventureof restricted
purpose and duration and that the renewal of the lease fell outside the
venture'stemporal scope. The dissentthus delineated the bounds within
which the defendant'sdiscretioncould be exercisedand noted that the con-
duct in questionwas notwithinthosebounds.In effectthedifference between
the two opinionswas that whereasthe majorityfeltthat the integrity of the
commercialarrangementsbetween the litigantsrequired a holding for the
plaintiff,the dissentwas reluctantto apply the fiduciaryobligationbeyond
the core purpose of controllingdiscretion.
A similardivisionunderliesthe historyof the Pre-Cam case."64 When the
case was beforethe SaskatchewanCourt of Appeal65that court,in a two to
one decision,reversedthe trial judge and exoneratedthe employeeon the
groundthat his delegatedjob was the takingof magnetometerreadingsand
thisjob had been done properly.The dissentat thisstagepointedout thatthe
effectof theemployee'saction 'was to defeatthewhole purposeof Pre-Cam's
enterprise'and this wider concept was upheld at the Supreme Court of
Canada level althoughthe reasoningwas based on the employee'suse of in-
formationthat the court consideredconfidential.Again the root of the di-
vergencewas whetherthe fiduciaryobligationsshould be used to control
discretionsolelyor whetherit should also be a device forthe maintenanceof
businessstructures.
The broader view does not, however,always triumph.In Pine Pass Oil
and Gas Ltd v PacificPetroleumLtd66the defendantwas to drillforoil and
gas on land whichtheplaintiff had underpermitin returnforgrantingto the
a
plaintiff percentage of the revenuesproduced afterexpenses.On the dis-
covery of oil or gas the permit holderwas by statuteforcedto cede a corridor
of adjacent land to the crown which then auctioned it off.The defendant
successfullybid forcertaintractsat the auctionon thestrength of information
acquired while the
conducting originalexploration.Althoughthe courtheld
thatthe defendantwas in a fiduciaryrelationwiththe plaintiffit refusedto
declare that the new tractswere subject to a constructivetrustproportional
to theplaintiff's interestin theiroriginaljointventure.In thecourt'sview the
factthat the agreementdeliberatelyrefrainedfromrequiringthe defendant
to disclosesuch informationto the plaintiffmeant that the defendant'sex-

63 164 N.E. 545 (N.Y.C.A. 1928)

64 Supra note 30
65 Supra note 31
66 (1968), 70 D.L.R. (2d) 196 (B.c.s.c.)

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18 UNIVERSITY OF TORONTO LAW JOURNAL

ploitationof its knowledgewas outside the scope of the fiduciaryrelation.

Of course the court had the leeway to reach the opposite conclusion by
reasoningthat the fiduciaryincidentsmust be expresslydisclaimedin the
contractifthefiduciaryobligationis to be blunted,but the judge apparently
feltthat the fiduciaryconceptshould serveonlythe narrowpurposeof con-
trollingdiscretion.Pre-Cam was not citedin the judgment,and Meinhard v
Salmon was distinguishedon its factswithoutthe slightestindicationas to
what the distinguishing factswere.
The reasonforthisjudicial disarrayis notdifficult to discern.Whereasthe
requirementthat the fiduciary'sdiscretionbe untaintedis incontrovertibly
recognized as the minimumvalue inherentin the fiduciaryrelation,the
broadergoal ofsafeguardingtheprincipal'scommercialstructuremustinter-
play withthe discrepantneed to provideeconomicincentive.Here the courts
mustnavigatea delicate course betweenthe encouragementof co-operative
mechanismsof businessenterpriseand the encouragementof profit-making
by individualentrepreneurs. Thus in the fieldof mineralexploration,from
whichmanyof themoreinteresting Canadian and Americandecisionscome,
the courtsmust reconcilethe social need of discoveringand exploitingthe
resourcewiththe aggrievedparty'sinterestin the integrity of his enterprise.
As Learned Hand j remarkedwhen a similardilemma presenteditselfin
a differentcontext,penalizingthe winneris not consistentwith encouraging
therace."' It is hardlysurprising thatthesediscordantgoals cannotreadilybe
resolved.
The vagaries of judicial determinationof these difficultproblemsis in
large measurethe resultof the failureto develop reliable conceptualinstru-
ments. Only recentlyhave Canadian courts begun to elucidate with the
demanded by businesscontextsthe factorswhich are pertinentto
flexibility
theresolutionoftheconflicting policies." More usuallythecourtsjustifytheir
resultsby theinvocationofsuch huge and unmanageableconceptsas 'knowl-
edge,' 'opportunity,' and 'good conscience.'Since theseslogansdo not point
withsufficient to the real policiesat play, theirapplicationinevit-
specificity
ably becomes capricious,so that the veryprocessof the judicial declaration
ofreasonstakeson theappearance ofa ritualratherthana rationalexercise."

67 United States v Aluminum Co of America, 148 F.2d 416, at 430 (2nd Cir 1945)
68 Canadian Aero Services Ltd v O'Malley, supra note 27, at 39 I: 'The general standards
of loyalty,good faith and avoidance of a conflictof duty and self-interestto which
the conduct of a director or senior officermust conform,must be tested in each case
by many factors which it would be reckless to attempt to enumerate exhaustively.
Among them are the factor of position or officeheld, the nature of the corporate op-
portunity,its ripeness,its specificnessand the director'sor managerial officer'srelation
to it, the amount of knowledge possessed, the circumstancesin which it was obtained
and whetherit was special or, indeed, even private, the factor of time in the continua-
tion of fiduciarydutywhere the alleged breach occurs afterterminationof the relation-
ship with the company, and the circumstances under which the relationship was
terminated,that is whetherby retirementor resignationor discharge.'
69 Cf Frank, 'What courts really do,' (1932), 26 Ill. L.R. 645, at 653.

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 THE FIDUCIARY OBLIGATION 19

To thecreditofthecourts,however,theresultsthemselves seemto be evidence

of an awarenessof the interplayof morerealisticfactors.Thus the Pre-Cam
and the Pine Pass cases, which seem irreconcileablewhen viewed through
thesurrealisticlensofknowledgeand opportunity, mayin theirresultsembody
a consistentapproach to the broader concept of the fiduciaryrelation.In
the formercase the defendantwas a magnetometerreader whose interest
in resourcedevelopmentwas a momentaryand isolatedphenomenoncreated
by his particularemployment.In the latterthe defendantwas a corporation
for whom mineralexplorationand exploitationwas the veryessence of its
commercialactivity.Whereas in each case the plaintiffmay have had an
equal interestin the protectionof his businessstructure,the consequences
ofrepressing incentivewould have been farmoregrievousin thelatterthanin
the former.The same competingpolicies are balanced but the resultis ex-
plicable by the different
weightingsproducedby the varyingfactualcircum-
stances.70
The conceptofthefiduciaryobligationembraces,then,notonlytwodiverse
underlyingpolicies but two policies that are applied with varyingdegrees
of confidence.This groupingof divergentinterestsunder a single umbrella
in turnaffectsthe considerationof the remedyto be applied. In the view of
thecourtsa defendantwho has violateda fiduciaryobligationcan findhimself
exposed at theoptionof theplaintiffto any of lossof commission,"7'rescission,
damages, an accounting,or the impositionof a constructivetrust.72These
sanctionsare of varyingseverity,but theirapplicationis in no way correlated
to theheinousnessof the conductin question.No distinction is made between
the incontrovertible evil of tainted discretionand the more problematic
balancingof protectionof commercialstructures as againstthe cultivationof
incentive.The fiduciaryconcept,beingregardedas a monolith,entailsmono-
lithicconsequences.
Phipps v Boardman73stands as an example of the difficulties that flow
fromthisattitude.Here the House of Lords imposeda constructive truston
shares purchased by the defendantsolicitoron the basis of information
acquired by him whilein a fiduciaryposition.Since thesesharescould in any
case not have been acquired by the trustand since the solicitorwas acting
honestlyand indeed improvingthe beneficiary'sfinancial position,there
was no wrongdone to the beneficiary'sbusinessstructureand no reason to
penalize and dampen the defendant'sincentiveto profit.Indeed the court
itselfwas aware of the harshnessof the decision since afterjustifyingthe

70 Similar considerationsmay reconcile Beatty v Guggenheim Exploration Co, supra note

33 and British American Oil Producing Co v Midway Oil Co 82 P.2d 10o49 (Okla.
s.c. 1938).
71 Though apparently not loss of salary: William Barnes v MacKenzie (1973), 44 D.L.R.
(3d) 9 (Ont. C.A.)
72 The one exception is the situation in Lister v Stubbs, (1890), 46 Ch.D. I (C.A.), dis-
cussed below.
73 Supra note 19

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20 UNIVERSITY OF TORONTO LAW JOURNAL

constructivetrustby declaringthat the fiduciarymustnot profit,it allowed

himto profit, albeitto a muchsmallerdegree,byawardinghim compensation
forhisserviceson a quantummeruitbasis.
The sledgehammerapproach of havingthe whole range of remediesavail-
able upon a breach of fiduciarydutiesmay be justifiablein connectionwith
the tainted exerciseof discretionto advise or negotiate,where values are
deeply ingrainedand crystallized.The broader contextof fiduciaryactivity
is, however,too delicate to be well servedby so blunt an instrument.Here
thereis no substitutefora realisticweighingof the competingsocial interests
at play,and the concomitantof thisshould be flexibility in the assessmentof
the sanction.In particular,theimpositionof a constructive trustwhichgives
the principala proprietaryinterestin the gains and theirfruitsshould be
recognizedas a drasticsanctionreservedforfiduciaries,such as the sergeant
in the Reading case,7"whose misbehaviouris clear.75
Applicationoftheavailable remediesin a gradedmannerdullsthetempta-
tion to introduceflexibility,as some United States jurisdictionshave done,
by open utilizationof punitivedamages. One Canadian court has recently
rejected, without elaborate reasoning,preciselysuch a suggestion.76The
court'sinstinctwas sound. Commonwealthcourtshave never regardedthe
field of deceit as suitable for the cultivationof punitive damages." The
rationaleapparentin the United Statesdecisionsis that,althoughexemplary
damages cannotbe based on a breach of contract,thisshould be restricted to
real notfictionalcontracts,and thattheactionagainsta fiduciaryis theequit-
able analogue to the commonlaw option of suingin tortor waivingthe tort
by a commonlaw action forassumpsit.78 But waiver of tortis itselfa means
ofpreventing unjust enrichment bycompellingrestitution ofthefruitsofone's
wrongful act and thus overlaps,at least with
partially, the purpose served
of
by punitivedamages preventingprofiting from one's own wrong.79Just
as waiver of tortis a neat way of quantifyingexemplarydamages, so in the
equitable sphere recourseto the impositionof the constructivetrustforces
the wrongdoerto disgorgefullyand rendersfurtherpunishmentsuperfluous.
The naturalcorollaryof this,however,is thatthe courtsshould use the con-
structivetrustin the same way that theyuse punitivedamages, thatis, with
an eyeto thedegreeof wrongdoinginvolved.
Such an approach would requirea realisticassessmentof the defendant's
conductagainstthe backgroundof the policiesat stakein judicial protection

74 Supra note 50
75 Cf Jones,supra note 20, who reaches a similar conclusion througha differentroute.
76 Fern Brand Waxes Ltd v Pearl, (1972), 29 D.L.R. (3d) 662 (Ont. C.A.). Cf also William
Barnes v MacKenzie, supra note 71.
77 Cassell v Broome, [1972] I All E.R. 8oI, at 874 (H.L.)
78 International Bankers Life Insurance Co v Holloway 308 s.w. 2d 567, at 583 (Tex.
s.c. 1963)
79 Cf the second category laid down by Lord Delvin in Rookes v Barnard, [1964] A.C.
1129 (H.L.).

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 THE FIDUCIARY OBLIGATION 21I

of businessstructures.It would also lead to a reversalof currentdoctrinein

two areas. In Coy v Pommerenke8so a constructivetrustwas imposed on an
outsiderwho unwillinglyacquiesced in the fiduciary'sviolationof his duty.
Here the remedyseems to have been disproportionate to wrongdoing,and
the principal'senterprisewould have been sufficiently safeguardedby im-
posing a constructivetruston the faithlessagent but holding the reluctant
third party liable in damages, if there were any. Conversely,in Lister v
Stubbss8theEnglishCourtofAppeal refusedto imposea constructive truston
a bribereceivedbyan agenton thegroundthatthebribehad neverbelonged
to the principal.But here the agent'sextrememisbehaviourcalls out forthe
mostextremesanction.The constructivetrustis properlya remedialdevice
that avoids unjustenrichment82 and is ofteninvokedeven in the absence of
a pre-existing property interestby the notionalbeneficiary.83Nor should it
be decisivea centuryafterthe fusionof law and equitythat the principal's
claim against the bribed agent was traditionallyregarded as an assumpsit
count formoneyhad and receiveds4ratherthan as a ground forequitable
intervention.Lord Atkin decades ago prescribedthe appropriate attitude
towardssuch fossilsoflegal evolution.85

5 Conclusion

The fiduciaryobligationis at thesame timeone of the mosttypicaland most

creationsofjudge-madelaw. In thecontextof theusual piecemeal
distinctive
dispositionof litigatedproblemsthe courtshave developed a far-reaching
doctrineof the responsibilitiesincumbentupon the occupants of strategic
positionsin the marketplace.More astoundingly,thisdevelopmenthas pro-
ceeded withoutregardfor,and indeed in the face of, the prevalentindivi-
dualisticnotionsof consensualprivateordering.

80 Supra note 46
8i Supra note 72. For criticismof this case see Maudsley, 'Proprietaryremedies for the
recoveryof money,' (1959), 75 L.Q.R. 234, at 244; Goffand JonesThe Law of Restitu-
tion (1966) 459-
82 This statement in itself opens a can of worms for Commonwealth, as opposed to
American, doctrine. See Waters The Constructive Trust (1964) and Strathy, 'The
constructivetrustas a restitutionaryremedy,' (1974), 32 U. of T. Fac. L.R. 83, and
the recent opinions of Denning MR in Binion v Evans, [1972] 2 All E.R. 70 (C.A.) and
Hussey v Palmer, [1972] 3 All E.R. 744 (c.A.) and Laskin j (dissenting) in Murdoch v
Murdoch, (1974), 4 D.L.R. (3d) 367 (s.c.c.).
83 As in the contextof secret trustsand mutual wills
84 Mayor, etc of Salford v Lever, supra note 49. The only context in which the precise
cause of action has been crucial is where the principal attemptsto acquire the amount
of the bribe from a third party who has not yet paid the agent. See the contrasting
cases of Powell v Evan Jones, [Igo905] I K.B. II and Rush v Curtis Wright25 N.Y.S. 2d
597 (s.c. 1941).
85 'When these ghosts of the past stand in the path of justice clanking their medieval
chains, the proper course for the judge is to pass through them undeterred.' United
Australia Ltd v Barclay's Bank, [I194] A.C. I, at 29 (H.L.).

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22 UNIVERSITY OF TORONTO LAW JOURNAL

Despite itsthrustand reach,thisachievementhas notbeen withoutitscosts

in termsof conceptualcoherence.An awarenessof the underlyingpurposes
of the fiduciaryrelationhas been swallowed up by a jungle of slogans and
shibboleths.When this overgrowthis cleared away, two basic values are
exposed to view: the primarynotion of the controlof discretionand the
penumbraldesirabilityof protectingcommercialstructuresand the market-
place withinwhich theyoperate.An awarenessof thisin turnmay not only
be helpfulin the assessmentof the reporteddecisionsbut may serveas a basis
forrefinement of the available remedies.Afterall, even the vague protean
ethicalstandardembodied by the fiduciaryobligationshould not existin an
analyticvacuum.

ROBERTSON, LANE, PERRETT

BARRISTERS AND SOLICITORS
JOHN F. PERRETT, Q.C. DAVIDD. HAGUE
W. MICHAEL TEMPLE, Q.C. PAUL A. ADAMS
JOHN D. BOOGART J. J. DOANE
JAMES J. MURPHY PETER J. CLARK
ALEC M. MCLENNAN GORDON R. BAKER
FREDERICK J. MATTHEWS PETER R. BROWN
BRIAN M. CAMPBELL GEORGE A. ROBERTSON
H. R. H. STIKEMAN

NORMAN S. ROBERTSON, Q.C.

Suite 900, 105 Adelaide Street West, Toronto, Canada M5H 1R3
TELEPHONE (416) 862-1400 TELEX 06-217829 CABLE "ROBLANE"

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