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Fiduciary Relationships

Fiduciary Relationships. Professor Cameron Stewart. Fiduciary?.

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Fiduciary Relationships

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  1. Fiduciary Relationships Professor Cameron Stewart

  2. Fiduciary? • The word ‘fiduciary’ has its roots in the Latin word fiducia, which means confidence. A fiduciary relationship is thus a relationship of confidence. The person in whom confidence is reposed within that relationship is referred to as the fiduciary. If a fiduciary abuses his or her position to obtain an advantage or benefit at the expense of the confiding party, the latter will be able to seek relief from a court of equity to prevent such advantage accruing to the fiduciary.

  3. Equity and fiduciaries Equity intervenes ... not so much to recoup a loss suffered by the plaintiff as to hold the fiduciary to, and vindicate, the high duty owed to the plaintiff ... [T]hose in a fiduciary position who enter into transactions with those to whom they owe fiduciary duties labour under a heavy duty to show the righteousness of the transactions. Maguire v Makaronis (1997) 188 CLR 449 at 465

  4. Undivided Loyalty The essence of fiduciary obligations is that the fiduciary is precluded from acting in any other way than in the interests of the person to whom the duty to so act is owed. In short, the fiduciary obligation is one of ‘undivided loyalty’: Beach Petroleum NL v Kennedy (1999) 48 NSWLR 46–7.

  5. Undivided Loyalty • The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) (2009) 70 ACSR 1 at [4552], Owen J said: • In my view the state of the law is this. Where a person has undertaken to act in the interests of another and where the nature of that relationship, its surrounding circumstances and the obligations attaching to it so require, it will be held to be fiduciary. But the fact that it is categorised as fiduciary does not mean that all of the obligations arising from it are themselves fiduciary. Unless there are some special circumstances in the relationship, the duties that equity demands from the fiduciary will be limited to what I have described as the core obligations: not to obtain any unauthorised benefit from the relationship and not to be in a position of conflict. They stem from the fundamental obligation of loyalty

  6. Strict duties • The fact that there was no intent to defraud on the part of the fiduciary is irrelevant: Nocton v Lord Ashburton [1919] AC 492. • The liability of the fiduciary does not depend on establishing that the person to whom fiduciary duties are owed suffered loss or injury: Birtchnell v Equity Trustees, Executors and Agency Co Ltd (1929) 42 CLR 384 at 408–9, per Dixon J. • A fiduciary’s liability arises even if the person to whom the duty is owed was unlikely or even unable to have made a profit from an opportunity exploited by the fiduciary: Warman International Ltd v Dwyer (1995) 182 CLR 544 at at 558; 128 ALR 201 at 209. • Nor will it matter that the beneficiary would have consented to the fiduciary making a profit had the beneficiary been properly informed, if informed consent was never obtained: Murad v Al-Saraj [2005] EWCA Civ 959.

  7. Nocton v Lord Ashburton • Nocton was a solicitor • Lord Asburton was his client • Nocton and Baring (Ashburton’s brother) entered into a land development • They later agreed to sell the land to Douglas and Holloway but Douglas and Holloway needed a mortgage • Nocton convinced Ashburton to lend them the money, after a valuation (even after being warned by • Later, as the properties were developed, it became clear that there was insufficient security in the land • At trial the judge treated the case as one of fraud and found not evidence of intention • The Court of Appeal, found that there was actual fraud which would enable an action in deceit

  8. Nocton v Lord Ashburton • Viscount Haldane was very critical of the proceedings but said that there was a third way – breach of fiduciary duty • That breach did not require that actual fraud be proved in the common law sense of intention • Lord Dunedin and Lord Shaw agreed

  9. Horizontal duties • Fiduciary duties Partner Partner

  10. Vertical duties Guardian Fiduciary Duties Ward

  11. Negative duties • Equity does not require the fiduciaries to act positively in the interests of their beneficiaries: Friend v Brooker (2009) 255 ALR 601 at [84] • A fiduciary’s obligation ‘does ... not impose positive legal duties on the fiduciary to act in the interests of the person to whom the duty is owed’: Breen v Williams (1996) 186 CLR 71 at 113; 138 ALR 259 at 289 • It is said that such positive duties are better regulated by contract, tort or other equitable doctrines: Pilmer v Duke Group Ltd (in liq) (2001) 207 CLR 165 at 198

  12. Exception? • Duty to disclose possible conflicts of interests and seek the informed consent of the beneficiary of the relationship • Fitzwood Pty Ltd v Unique Goal Pty Ltd (in liq) (2001) 188 ALR 566, at 576, Finkelstein J refused to describe the obligation to seek informed consent as a positive duty but instead described it as a ‘means by which the fiduciary obtains the release or forgiveness of a negative duty.

  13. Exception? • The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) • Directors had breached their duties to act in the best interests of their companies and to exercise their powers properly, when they had authorised loans which where in the overall interests of the corporate group, but not in the interests of some of the individual companies within that group • Owen J found that the directors’duties to act in the companies’ best interests and to exercise powers properly were fiduciary duties. In so finding Owen J argued that these duties were, in substance, negative or proscriptive duties. • How?

  14. Fiduciary duties protect economic interests • Traditional reluctance • New equity? Giller v Procopets [2008] VSCA 236

  15. The existence of a fiduciary relationship Breen v Williams at CLR 92; ALR 273, Dawson and Toohey JJ observed that the law has not formulated ‘any precise or comprehensive definition of the circumstances in which a person is constituted a fiduciary in his or her relations with another’

  16. Presumed fiduciary relationships A number of commercial and professional relationships: • Trustee and beneficiary • director–company • legal practitioner–client • agent–principal • partner–partner

  17. Key features? • Loyalty • Trust • Confidence • Vulnerability • Undertaking • Finn – reasonable expectations • Glover – same old problem

  18. Fiduciary Relationships outside of the presumed categories • Factors include • the undertaking to fulfil a duty in the interests of another, • the scope for one party to unilaterally exercise a power or discretion that may affect the rights or interests of another; and • a dependency on the part of one party which causes that party to rely upon the other.

  19. Fiduciary Relationships outside of the presumed categories • Economic power/free hand of market • Equity’s intervention distorts economic activity? • Should equity be reluctant to intervene?

  20. United Dominions Corporation Ltd v Brian Pty Ltd • Joint venture agreement for the development of land between United Dominions Corporation (UDC), Security Projects Ltd (SPL) and Brian Pty Ltd (Brian). • Land owned by SPL • Financed by UDC on security raised from SPL • Profits made but UDC kept more than its share by using a clause in the mortgage to SPL • Brian didn’t know about the clause and received no profit • Did UDC owe Brian a fiduciary duty?

  21. United Dominions Corporation Ltd v Brian Pty Ltd • The High Court found in Brian’s favour. It held that SPL and UDC owed fiduciary duties to Brian and that the collateralisation clause in the mortgage was obtained in breach of such duties. Dawson J at CLR 16; ALR 750–1 said: [I]t is quite clear that a fiduciary relationship may arise during negotiations for a partnership or, for that matter, a joint venture, before any partnership or joint venture agreement has been finally concluded if the parties have acted upon the proposed agreement as they had in this case. Whilst a concluded agreement may establish a relationship of confidence, it is nevertheless the relationship itself which gives rise to fiduciary obligations. That relationship may arise from the circumstances leading to the final agreement as much as from the fact of the final agreement itself.

  22. Hospital Products Ltd v United States Surgical Corporation • Blackman had an exclusive distributorship arrangement for products manufactured by United States Surgical Corporation (USSC) • Blackman’s company, Hospital Products Ltd (HPL), was soon after substituted as the distributor. • HPL, using USSC products as models, began to manufacture products that were essentially identical to those manufactured by USSC > HPL went into competition with USSC • Was HPL a fiduciary?

  23. Hospital Products Ltd v United States Surgical Corporation • By a bare majority the High Court held that there was no fiduciary relation ship between the parties and that USSC’s right to relief rested in a claim for damages for breach of contract. The majority considered that because the relationship between the parties was a commercial one entered into by equal parties at arm’s length with the intention that both parties would gain a profit, it was inappropriate to find a fiduciary relationship between the parties

  24. A vexed question…. • Why was there a fiduciary relationship in one and not the other? • Does Equity have any role in commercial bargaining? • Are the economic costs of imposing fiduciary relationships outweighed by advantages? • Length of the Chancellor’s Foot?

  25. The fiduciary obligation • Aberdeen Railway Co v Blaikie Brothers [1854] 1 Macq 461 at 471 • [A fiduciary will not be permitted] to enter into engagements in which he has, or can have, a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound to protect

  26. The fiduciary obligation • The duty imposed upon a fiduciary operates in circumstances where there is a conflict between the fiduciary’s ‘duty’ and his or her ‘interest’.

  27. Duty • The word ‘duty’ in this context does not have a technical meaning. It does not refer to legally imposed obligations. Rather, it refers to the actions undertaken by a fiduciary on behalf of another person. These actions are not confined to those undertaken in the performance of a fiduciary’s mandatory or discretionary functions. These actions also include voluntary acts.

  28. Interest • The word ‘interest’, in this context, signifies the presence of some personal concern on the part of a fiduciary or of possible significant pecuniary value in a decision to be taken by the fiduciary. Finn (1977) at 204 notes: The pecuniary dimension of the fiduciary’s concern may take the form of an actual, prospective, or possible profit to be made in, or as a result of, the decision he takes or the transaction he effects. Or it may take the form of an actual, prospective, or possible saving, or a diminution of a personal liability

  29. Informed consent • The duty imposed upon the fiduciary is strict. The only way a fiduciary is able to escape liability for conduct that amounts to a breach of fiduciary duty is if the conduct was undertaken with the fully informed consent of the person to whom the fiduciary obligations are owed. The disclosure must be of all material facts and information that could affect the decision to give the consent

  30. Examples of informed consent • In Phipps v Boardman [1967] 2 AC 46; [1966] 3 All ER 721 the House of Lords made comments on the question of consent to a transaction involving a solicitor who owes fiduciary duties to clients who are trustees of a trust. In such cases there is no doubt that the unanimous consent of the trustees is necessary: Phipps v Boardman at AC 128; All ER 759, per Lord Upjohn. However, in that case, Viscount Dilhorne at AC 93; All ER 737 and Lord Cohen at AC 104; All ER 744 suggested that the consent of the beneficiaries to the trust is also necessary

  31. Examples of informed consent • Director–company relationship, the House of Lords in Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134; [1942] 1 All ER 378 held that, for a director to escape liability for breach of fiduciary duties, the consent of the company through a resolution of shareholders at a general meeting of the company was required • Queensland Mines Ltd v Hudson (1978) 18 ALR 1, the Privy Council upheld the validity of the consent of a company given by its board of directors

  32. Unauthorised remuneration • Reading v R [1951] AC 507 • Reading was a sergeant in the English army stationed in Egypt. He accompanied civilian trucks through security checkpoints in order to assist them in transporting contraband goods. In return he was paid for his assistance. The court ruled that Reading owed fiduciary duties to the Crown and the amount recoverable by the Crown was the full amount that Reading had received for his services.

  33. Assuming a double character • In Armstrong v Jackson [1917] 2 KB 822, Armstrong instructed Jackson, a stockbroker, to buy shares in a certain company. Jackson transferred his own shares in that company to Armstrong. The court ruled that Jackson had breached his fiduciary duties to Armstrong A broker who is employed to buy shares cannot sell his own shares unless he makes a full disclosure of the fact to his principal, and the principal, with a full knowledge, gives his assent to the changed position of the broker ... [A] broker who secretly sells his own shares is in a wholly false position

  34. Benefits derived by fiduciary to the exclusion of another • Cases in this category involve a fiduciary, acting within the scope of his or her undertaking, deriving a profit or benefit that should have gone to the person to whom the fiduciary duties were owed

  35. Benefits derived by fiduciary to the exclusion of another • Chan v Zacharia (1984) 154 CLR 178 at 199; Deane J said: • Stated comprehensively in terms of the liability to account, the principle of equity is that a person who is under a fiduciary obligation must account to the person to whom the obligation is owed for any benefit or gain (i) which has been obtained or received in circumstances where a conflict or significant possibility of conflict existed between his fiduciary duty and his personal interest in the pursuit or possible receipt of such a benefit or gain or (ii) which was obtained or received by use or by reason of his fiduciary position or of opportunity or knowledge resulting from it.

  36. Benefits derived by fiduciary to the exclusion of another • Two sub-rules, namely: • 1. cases in which a fiduciary is not to derive a profit or benefit that should have gone to the person to whom fiduciary duties are owed (the breach of undertaking sub-rule); and • 2. cases in which a fiduciary is not to gain a profit or benefit through the misuse of his or her position as a fiduciary (the misuse of position sub-rule).

  37. The breach of undertaking sub-rule • The purpose of this sub-rule is to prevent a fiduciary acting for his or her own benefit in a transaction undertaken for the benefit of the person to whom he or she stands in a fiduciary relationship. • Critical to determining if there has been a breach of fiduciary duties is the determination of the scope of the fiduciary’s undertaking. The relationship between the parties must be examined to ascertain the scope of the fiduciary’s duties before any question of breaches of fiduciary duties can be entertained

  38. The breach of undertaking sub-rule • In Clark Boyce v Mouat [1994] 1 AC 428; [1994] 4 All ER 268, solicitors acted for a woman who mortgaged her property to cover her son’s debt to a finance company. The same solicitors acted for the son. The solicitors had disclosed the potential conflict between their respective duties to the woman and her son on a number of occasions. The solicitors’ advice to the woman that she obtain independent legal advice was never acted upon by the woman. The woman claimed a breach of fiduciary duties by the solicitors, arguing that they should have advised her on the wisdom of the transaction and investigated the son’s financial position before she executed the mortgage. In the circumstances, the Privy Council rejected the woman’s claim on the ground that the solicitors’ undertaking to the woman extended only to giving legal advice.

  39. The breach of undertaking sub-rule • Phipps v Boardman[1967] 2 AC 46 • Boardman acted as a solicitor for a trust. He attended the annual general meeting of Lester & Harris Ltd, a company in which the trust had a substantial shareholding. Boardman and Tom Phipps, one of the beneficiaries under the trust, were unhappy with the state of the company. • Together they planned to acquire shares in the company to take over the company. Boardman was able to assess the viability of the takeover because of information about the company he gained whilst acting as solicitor for the trust. • Boardman advised the beneficiaries of the trust of these plans and no objection was made by any of them. He also had the consent of two of the three trustees, the third, being senile, was not advised of these plans.

  40. The breach of undertaking sub-rule • The takeover was successful and resulted in profits to the trust in relation to its shareholding in the company as well as for Boardman and Tom Phipps in relation to the shares they had personally acquired. John Phipps, one of the beneficiaries under the trust, sought an account of the profits made by Boardman and Tom Phipps on the grounds of breach of fiduciary duties. • By a bare majority the House of Lords held in favour of John Phipps.

  41. The breach of undertaking sub-rule • The majority Law Lords (Lords Cohen at AC 100–3; All ER 741–3; Hodson at AC 109–11; All ER 747–8; Guest at AC 114–17; All ER 750–2) all held that the information obtained by Boardman was trust property and that it was irrelevant that the trustees of the trust were in no position to acquire the shares in the company for the trust. Because there was a conflict, or at least a possibility of a conflict, between Boardman’s duty and interest, the informed consent of the trustees was needed

  42. Misuse of fiduciary position sub-rule • The purpose of this sub-rule is to prevent a fiduciary using his or her position to secure or assist in exploiting a profit-making opportunity. If a fiduciary acts in such a way he or she must account for any profit or benefit derived as a result

  43. Misuse of fiduciary position sub-rule Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 The directors of Regal formed a subsidiary company with the intention that Regal own all the shares in the subsidiary company. The directors sought a lease of two cinemas for the subsidiary company. However, the landlord was not prepared to grant the lease unless the subsidiary company had a paid-up capital of £5000. Because Regal did not have the necessary capital to invest £5000 in the subsidiary, the directors decided that Regal would invest £2000 and that they would invest the balance themselves. From the shares issued to them in the subsidiary, the directors made a profit.

  44. Misuse of fiduciary position sub-rule The House of Lords unanimously ruled that irrespective of whether or not Regal could have purchased the shares, the directors were liable to Regal for the profit they made: The point was not whether the directors had a duty to acquire the shares in question for the company and failed in that duty. They had no such duty. We must take it that they entered into the transaction lawfully, in good faith and indeed avowedly in the interests of the company. However, that does not absolve them for accountability for any profit which they made, if it was by reason and in virtue of their fiduciary office as directors that they entered into the transaction

  45. Misuse of fiduciary position sub-rule Victoria University of Technology v Wilson [2004] VSC 33, academics working at a university, exploited for themselves an opportunity to develop certain computer programs in circumstances where they were approached, by a former student of the university, for help with such a project whilst employed by the university. The court held that the academics breached fiduciary obligations owed to the university in that they should not have exploited the opportunity for themselves as the opportunity was one presented to the university which the university would have exploited for itself.

  46. Presumed Relationships that Carry Fiduciary Duties • Trustee-beneficiary • Youyang Pty Ltd v Minter Ellison Morris Fletcher – Y was discretionary trust • Money was deposited in Minters’ trust account as part of a subscription agreement for shares – later the investment went bad • It was argued that the breach of trust did not cause any damage • HC: Monies were paid in breach of trust when the solicitors did not obtain a deposit certificate on the purchase of the shares • Other events which contributed to the loss were not relevant if there was a sufficient connection between the breach and the damages

  47. Presumed Relationships that Carry Fiduciary Duties • Director–company • Equity and statutory rules: Corporations Act 2001 (Cth) • English courts have found that directors must disclose past wrongdoing to their companies, even where that wrongdoing had no negative effect on the company’s position: Item Software (UK) Ltd v Fassihi [2004] EWCA 1244. This argument was rejected in Australia in P & V Industries v Porto [2006] VSC 131, by Hollingworth J, who found that such a duty was prescriptive and outside fiduciary principles.

  48. Directors and Shareholders? • Directors do not ordinarily owe fiduciary duties to shareholders: Joinery Products Pty Ltd v Imlach(2008) 67 ACSR 520. • However, if ‘a special factual relationship between the directors and the shareholders’ exists, the directors may also owe fiduciary duties to shareholders: Peskin v Anderson [2001] 1 BCLC 372 at [33]; St George Soccer Football Association Inc v Soccer NSW Ltd [2005] NSWSC 1288. • Thus, where directors conduct negotiations for a takeover or an acquisition of the company’s business, they are obliged to loyally promote the interests of all shareholders: Brunninghausen v Glavanics (1999) 46 NSWLR 538; Silversides Superfunds Pty Limited v Silverstate Developments Pty Limited [2008] NSWSC 904.

  49. Directors and Shareholders? • Directors owe a fiduciary duty to shareholders to advise them fully and frankly of relevant information necessary to make an informed decision at a general meeting: Chequepoint Securities Ltd v Claremont Petroleum NL (1986) 11 ACLR 94. • This obligation to make full and fair disclosure does not oblige the directors to give shareholders every piece of information that might conceivably affect their voting. The adequacy of the information must be assessed in a practical, realistic way having regard to the complexity of the proposal: ENT Pty Ltd v Sunraysia Television Ltd [2007] NSWSC 270.

  50. Directors to creditors? • No - there do not appear to be general fiduciary obligations owed by directors to creditors: R v Spies (2000) 201 CLR 603; 173 ALR 529. • Fiduciary obligations may arise in cases where the company has become insolvent, as the interests of the creditors begin to take over the interests of the shareholders, as the assets of the company effectively become the assets of the creditors as the company lurches into liquidation: Angas Law Services Pty Ltd (in liq) v Carabelas (2005) 226 CLR 507; 215 ALR 110; The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) at [4418], [4439].

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