A fiduciary is someone who has undertaken an act for on behalf of another in circumstances which give rise to a relationship of trust and confidence. It gives rise to a legitimate expectation that the fiduciary will not utilise their interest in an adverse way to the interests of the principal.
The High Court held that a headteacher and members of a maintained school’s governing body owed and breached a fiduciary duty to a local authority in respect of spending a school’s delegated budget under the School Standards Framework Act 1998. The Headteacher and members of the governing body paid ‘bonuses’ to staff amounting to £2.7 million. Governors were held to be ‘public officers’ and therefore liable to pay compensation to the council under the tort of misfeasance in public office. Recipients were found to be liable under being in knowing receipt of funds paid in breach of a fiduciary duty. Brent London Borough Council v Davies and others.
Copland Community School was a foundation school in the London Borough of Brent and was funded by the council’s local education authority by way of a delegated budget. Between 2003 and 2009 some staff were paid significantly above their basic salaries as ‘bonus payments’ amounting to a total of £2.7 million. The headteacher received approximately £900,000. In the hearing some of the Defendants were recipients and there were two governors of the school who has authorised the payments outside of the school’s pay review committee on the headteacher’s recommendation (referred to in the judgment as the “ad-hoc” procedure).
The Council made multiple claims to the Court and their primary claim based on the tort of unlawful means conspiracy against all of the defendants failed. The Court made various findings against the defendants individually and held that the school’s governing body owed a fiduciary duty to the Council in spending their budget and had dishonestly breached it. They further upheld the claim for misfeasance in public office and being in knowing receipts of funds had been paid in breach of a fiduciary duty.
- Fiduciary Duty
The relationship between a Governing Body and a Local Authority does not in itself establish a fiduciary duty nor does an employee and a local authority. The Court held that under s.49(5) of the School Standards and Framework Act is clear that the school’s governing body and a headteacher owes a fiduciary duty to the council and this established a trust relationship. Funds then given under a delegated budget were the council’s property until spent either by the Governing Body, which they did as agents of the council. The Court further outlined that a fiduciary did not need to owe all of the duties that are commonly associated in such a relationship for a duty to arise.
As a result of not following the relevant provisions of the legal framework affecting teacher’s pay, the payment of a significant portion of the budget to teaching staff could not be justified under the School Teacher Pay and Conditions Document. The justifications the headteacher put forward at the time were false and misleading and he had breached his fiduciary duty by allowing his personal interests to conflict with the interests of the council. In addition, the courts outlined that there are no limitation periods that apply to the claims for breaching a fiduciary duty.
- Misfeasance in public office
The court also partly upheld the council’s claim against the governors for misfeasance in public office. The court held that governors are public officers, as there is a public interest in the discharge of their duties. As they had acted recklessly authorising the payments under the ad-hoc procedure, the court determined that they had acted with targeted malice, which satisfied the requirements of the law. It was clear the council had suffered damage so it meant that the governors were also liable to pay compensation.
- Being in knowing receipt
Certain other defendants who had received overpayments pursuant to the ad hoc procedure were found liable for knowing receipt of funds paid in breach of a fiduciary duty. The underlying principle is that a recipient should not be able to unjustly enrich themselves at the expense of the rightful owner. Under this trust doctrine, the recipients are under a strict duty to repay the value, as it would be unconscionable for the recipient to retain the benefit of receipt. However, the relevant defendants were only liable for a “handful” of payments, as most had been received more than six years before proceedings were commenced and there were no grounds for postponing the limitation period.
This court has clarified many issues in this case and allows for recourse for a Council when the allotted budget is misused. It provides that maintained schools governed by the School Standards and Framework Act owe a fiduciary duty to a Council when spending their allocated budget. They should take caution when doing so and if there is a decision to pay bonuses to teachers, this must be allotted in line with the School Teachers Pay and Conditions Document. We would recommend legal advice is sought before doing so, to make sure that a Headteacher and Governing Body are made aware of any risks and that the correct procedure is being followed.
School governors are held to be public officers for the purposes of the tort of misfeasance in public office, as there is public interest in how they carry out their duties. This should be kept in mind when governors are making decisions, they should take care in their decisions, follow procedures and question when these procedures are not being followed or they will be personally liable to pay compensation.
Recipients of funds that are misused in this way are also liable for being in knowing receipt of funds paid in breach of a fiduciary duty. They are under a strict duty to repay the value received, however as the Statute of Limitation applies, this will only apply to payments received six years of less.
For Academies that have recently converted within the past six years, it is good business practice to ensure the school accounts have been reported on by a professional to ensure that there are no significant irregularities while the school was maintained and subject to the School Standards and Framework Act.