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My thanks to Tony Ward and the anonymous referees for helpful comments on an earlier draft of this paper.
I.
Introduction
A fiduciary may breach his obligation of loyalty by taking benefits from third parties, notwithstanding that the benefits never belonged to his principal. Common examples include the fiduciary who takes a bribe to betray the trust and confidence reposed in him by his principal1 and the company director who pursues a corporate opportunity for personal gain.2 In these circumstances equity compels disgorgement. But how is the disgorgement to be implemented? Should the fiduciary be made a constructive trustee of the gain or should he be personally liable to account for its net value? A clear and persuasive answer to this question remains elusive. The answer is, however, of crucial importance since it has far reaching implications for both the immediate parties to the relationship and outsiders, most notably unsecured creditors of the fiduciary.3
A handful of cases over the past twenty years or so - most notably Attorney-General for Hong Kong v. Reid 4 - assert that a constructive trust is the automatic consequence of acquisitive breaches of fiduciary obligation.5 However, this is controversial both as a matter of policy and doctrine. Concern about the impact of invisible proprietary claims on third parties has led many to question any apparent extension of such claims and the case law immediately preceding Reid was notable for its lack of clarity, if not hopeless ambiguity. Boardman v. Phipps 6 is illustrative. The focus there was on whether a breach of fiduciary obligation had occurred, there was no discussion of the remedy and inconsistent and contradictory language was used to describe the nature of the fiduciary's liability.7 Consequently judges and jurists cannot even agree on whether proprietary relief was ordered in the case.8 There were, of course, cases in which proprietary claims were clearly recognised, but the facts and reasoning were capable of supporting a more limited role for the constructive trust.9
The reasoning in Reid 10 suggests it is possible to cut through the controversy and confusion by revisiting the eighteenth century origins of fiduciary law and the seminal case of Keech v. Sandford