Fiduciary Obligations

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A fiduciary relationship is where one person (the fiduciary) undertakes to act for another (the principal), and in doing so, must place the principal's interests ahead of its own.[1]

A fiduciary has duties to his client. They include (:Breen v Williams[2]):

  • Not to place oneself in a position of conflict of duties relating to the principal and the fiduciary’s interests;
  • Not to make a profit out of the principal’s trust;
  • Not act for one’s own benefit or the benefit of third parties, without the consent of the principal.
    • These duties have a limited scope (ie, a solicitor only owes its client a fiduciary duty in his capacity as his solicitor).

The test for whether a fiduciary relationship arises is (:News Ltd v Australian Rugby Football League):[3]

  • If, in the actual circumstances of the relationship, the principal can reasonably expect the fiduciary to act in his (the principal's) interests in the relationship in a fiduciary manner.
    • In other words, can the principal reasonably expect the fiduciary to place his (the principal's) interest over his own, not to profit from the relationship etc.
    • Ascendancy, influence, trust, vulnerability, confidence or dependence all are relevant considerations, but are only evidence which support or suggest that a relationship exists, rather than definite indicators.
    • Recognised relationships of fiduciary duties include:
      • Solicitor and client, director and company, trustee and beneficiary, partners, and guardian and ward all automatically give rise to a fiduciary relationship.
      • Relationships of agent and client, joint-venturers, and employer and employee all usually give rise to a fiduciary relationship, but not automatically. The court will have to determine on the facts.

Fiduciary obligations are a creature of equity and are remedied by equitable remedies. The breach of a fiduciary duty is dealt with in the topic Breach of Fiduciary Duty.

This article is a topic within the subject Property, Equity and Trusts 1.

Contents

Required Reading

Evans, Equity and Trusts, 3rd edition, Lexis Nexis, 2012, pp. 122-65 (Chapter 12)

Introduction

[4] There is no singular definition to what a fiduciary obligation is. The fundamental idea behind a fiduciary obligation is that one person (the fiduciary) undertakes to act for another (the principal), and in doing so, must place the principal's interests ahead of its own.[5]

  • Fiduciary obligations usually arise where there is a relationship of trust and confidence between the parties, rather than 'arm's length' relationships.[6]
  • A fiduciary relationship (which exists in equity) is distinct from a common law relationship (such as contract) which is based on personal gain.
    • As such, breach of fiduciary obligations are remedied using equitable remedies..
  • Not all fiduciary duties are the same - the nature and extent of the duty undertaken by the fiduciary will be a question of fact in each case.[7]
    • However, every fiduciary relationship will have the requirement for the fiduciary not to have a personal interest conflicting with that of the principal.[8]

The attempt to exactly identify what constitutes a fiduciary obligation is discussed below

Fiduciary Duties are Negative

[9] In Australia, fiduciary duties are negative ('proscriptive') - in other words, a duty not to do something.[10] They include the duties:[11]

  • Not to place oneself in a position of conflict of duties relating to the principal and the fiduciary’s interests;
  • Not to make a profit out of the principal’s trust;
  • Not act for one’s own benefit or the benefit of third parties, without the consent of the principal.

The position in Australia is different to that of other jurisdictions like the US and Canada.[12]

Uni Study Guide editor's notes: there are judgments which support the the existence of a positive fiduciary duty to act in ‘good faith’ both in the Federal Court, Bristol, and NZ courts. This is not mentioned by the editor of the textbook, but it is mentioned in the extract which the textbook provides from Bristol in page 123. However, since it is not mentioned in Breen v Williams, which is the leading High Court authority, it is fair to assume there is no duty to act in good faith.

Common Misperceptions

[13] The following are instances which do not necessarily give rise to a fiduciary relationship, or are not a requirement.

  • Representation - whilst a fiduciary relationship usually involves the fiduciary 'representing' the principal, representation does not of itself entail a fiduciary relationship.
  • Legal relationship - the existence of a legal relationship (ie, a contract) between the parties is not a requirement of a fiduciary relationship.
    • In fact, a fiduciary relationship may form even if the parties have not agreed to consensual terms.[14]
  • Confidence - The imparting of confidential information to another party does not of itself create a fiduciary relationship between them.
    • LAC Minerals v International Corona Resources[15] concerned the imparting of confidential information from an exploration company to a mining company. The mining company declined the proposals of the exploration company, but then used the information for their own benefit. The court determined there was no fiduciary relationship (although things like misuse of information applied).

Contractual Provisions

Contractual provisions can give rise to fiduciary duties. To determine whether it is so is always a matter of construction in every case. Pilmer v Duke Group[16] is one such example:

  • Facts: The appellants were accountants that advised Kia Ora Gold Corp, who were pursuing a takeover offer for Western United. The appellants reported to Kia Ora that the price it was offering was ‘fair and reasonable’. A short time later, Kia Ora went into liquidation. They alleged the appellants’ breach of fiduciary duty.
  • Held:
    • Court of Appeal: the appellants had a contractual duty to act independently of Kia Ora. This duty had been breached when they consulted Kia Ora’s directors and those of Western United. That gave rise to a conflict of interest.
    • High Court: The appellants were not agents of Kia Ora. There was no ascendancy on the part of the appellants; and no descendancy on the part of Kia Ora. Reliance was placed on the appellants’ report, but the appellants were not in a position to ‘direct the affairs’ of Kia Ora.

The Court of Appeal was clearly in error in ascribing a fiduciary relationship to the appellants in retrospect. If anything, the appellants were not independent enough. It would amount, at most, to a breach of contractual duty, not fiduciary duty.

Identification of a Fiduciary Relationship

[17] The development of a single test on deciding whether a relationship is fiduciary has been problematic. Courts have preferred to take a case-by-case approach. There are two theories which look at the relationship from opposite perspectives:

  • Entrustment theory from the viewpoint of the principal: A fiduciary relationship will arise every time one party reposes particular trust and confidence in another.
  • Undertaking theory from the viewpoint of the fiduciary: A fiduciary relationship will arise where one party undertakes to act on behalf of another.

In Hospital Products v United States Surgical Corp,[18] Mason J stated his view on the approach to be taken in determining whether a relationship is fiduciary:

  • The fiduciary undertakes or agrees to act in the interests of the other person in a legal or practical sense.
    • In doing so, s/he adopts a ‘representative’ character.
    • This sort of relationship allows the fiduciary to abuse that position to the detriment of the principal. It is therefore protected by equity.
    • Often, a contractual relationship can give rise to a fiduciary relationship. Here, the fiduciary relationship must ‘accommodate itself to the terms of that contract’ so it is consistent with them. It must give effect to the contract’s intention on its true construction.

In Pavan v Ratnam,[19] the court considered the identification of a fiduciary relationship with the use of indications and tests:

  • Facts: Ratnam was Pavan's accountant. On Ratnam’s advice, Pavan made an investment and lost money.
  • Held: no fiduciary obligations.
    • Elements such as trust, loyalty, vulnerability and confidentiality do not definitively mean that a fiduciary relationship exists. They do, however, provide some indication.
    • It may be of further assistance to consider:
      1. The effects which the imposition of fiduciary duties would produce (ie, the fiduciary can't be in conflict and can't profit from position)
      2. Whether it would be inequitable in that case to allow a fiduciary to occupy a position of such conflict or to derive benefit from it, or to profit from the position in which he has been placed.
      3. Whether the fiduciary has been in a position of conflict or derived a benefit from it or has derived a profit from his position.

The following definition, offered by an academic named Finn, has been accepted by courts:[20]

  • A fiduciary relationship can be found where, in the actual circumstances of the relationship, the principal can expect the fiduciary to act in his (the principal's) interests in the relationship in a fiduciary manner.
  • Ascendancy, influence, trust, vulnerability, confidence or dependence all are relevant, but are only evidence which support or suggest that a relationship exists, rather than definite indicators.
  • The critical matter is the role of the fiduciary. This role must be so closely aligned with the principal’s interests that the principal can expect a ‘fiduciary expectation’.
  • Uni Study Guide notes: this is probably the best definition, use this for the exam.

This continuing debate was revisited in John Alexander’s Clubs v White City Tennis Club:

  • The fact that there was no vitiating factors, unequal bargaining power or concealment and that the Plaintiff was experienced in business and legally advised when it signed the contract means the circumstances did not justify converting the relationship from contractual to fiduciary.

The Element of Vulnerability

[21] It is tempting to couch a fiduciary relationship in the simplistic requirement of ‘vulnerability’ on the part of the principal, as was done in LAC Minerals (above). However, vulnerability is not in itself a defining feature of fiduciary relationships.

  • There are many relationships of vulnerability which are not fiduciary in nature, such as those of doctor/patient, priest/penitent, police officer/citizen.
  • The ‘vulnerability’ test was questioned in Hospital Products Case,[22] and rejected outright in John Alexander’s Clubs.[23]
  • The critical question remains whether the alleged fiduciary is obliged to place the interests of the principal ahead of his or her own, and thus to avoid any situation of conflict between personal interest and duty.

The Scope of the Fiduciary Relationship

[24] Identifying whether a fiduciary relationship exists is the first step in the process. Then, one must consider the scope, or extent, of the relationship.

  • The fiduciary must be obliged to the principal in a ‘defined area of conduct’, and exempt in all other respects. Outside the defined area, the fiduciary retains their ‘economic liberty’. [25]
    • For example, in NZ Netherlands Society ‘Oranje’ v Kuys,[26] the respondent was held to be under a fiduciary obligation in a particular position he held as secretary in the appellant society. However, this obligation did not extend to his operation of a newspaper to which the society subscribed.

In determining the extent of a fiduciary obligation, it is necessary to:

  1. Examine the terms of any arrangement or contract between the parties; and
  2. The actual conduct of the parties – particularly their dealings concerning the particular relationship or transaction.[27]

The issue of the scope of the fiduciary duty was a critical matter in Farah Constructions v Say-Dee:

  • Information that is obtained whilst in a fiduciary capacity must be disclosed to the principal, and cannot be exploited without the principal's consent.
  • To exploit such information would place the fiduciary in conflict with its duty towards the principal.

The scope of a fiduciary relationship (in this case, a solicitor/client relationship) was also discussed in Boardman v Phipps:

  • When acting in a fiduciary capacity, any knowledge that is obtained becomes the property of the principal.
  • One can only profit of such knowledge with express consent of the principal, regardless of whether the principal itself is unable to profit from it in any way or if the principal is going to benefit from it as well.

Boardman v Phipps was endorsed in Australia in Warman International v Dwyer.[28] It is authority in Australia for the propositions that

  • The scope of a fiduciary obligation depends on the circumstances of each case.
  • The fiduciary is not accountable for profits derived outside the scope of the relationship.
  • A partner is not accountable for profits derived outside his partnership.

The case is also accepted as a correct application of the Keech v Sandford principle.[29]

The Recognised Categories

This section deals with categories of relationship in which fiduciary obligations usually arise.

  • Relationships of solicitor and client, director and company, trustee and beneficiary, partners, and guardian and ward all automatically give rise to a fiduciary relationship.
  • Relationships of agent and client, joint-venturers, and employer and employee all usually give rise to a fiduciary relationship, but not automatically.
    • This means that the court will still need to look at the actual facts and determine whether the relationship is such that the principal can expect the fiduciary to act in his (the principal's) interests in the relationship in a fiduciary manner.

Solicitor and Client

[30] A solicitor owes fiduciary duties to the client, and cannot let a conflict of interest occur. Examples include:

  • In Maguire v Makaronis,[31] two solicitors were held to have breached their fiduciary duty when they loaned money to their clients, and made a profit of it. A conflict of interest arose between the solicitor's itnerest of personal gain and their fiduciary obligation to protect their clients.
  • In Maher v Millennium Markets Pty Ltd,[32] a solicitor was held to have breached his fiduciary duty in pocketing a $150,000 commission for rescuing his client from debts – even though the clients benefited from his actions. Again, personal interest conflicting with interest to protect their clients.

It is important to note that whilst a fiduciary relationship automatically arises in a solicitor/client relationship, it is important to note two things:

  1. The duty has a limited scope, usually concerning only the matters the solicitor was hired to deal with.
    • For example, a solicitor retained as a conveyancor will not have a fiduciary obligation beyond that matter.
  2. The duty applies only when the solicitor is acting as a solicitor, and not other capacities.
    • For example, if s/he is acting as a businessperson, the same obligations do not arise.[33]

Director and Company

[34] Directors have an automatic fiduciary duty to their companies.

  • When a person is a director of more than one company, resolving competition between a person’s various duties has been held to warrant a ‘sensible approach’. [35]
  • Duties are owed to the company as an entity, not to individual shareholders.[36]
    • There have been incidents where there were exceptions to the rule, but they have been very unusual.[37]

Directors' fiduciary obligations were discussed in Regal (Hastings) Ltd v Gulliver:

  • If a director has any property acquired as a result of his position as a fiduciary, he must account it to the principal.
  • Honesty and good faith makes no difference here - profits made as a fiduciary must be accounted for.

The strict approach of Regal has been often criticised since it means that acting in good faith and honesty is not enough to escape liability. It can be contrasted against decisions in Canada,[38] and the Australian decision in Queensland Mines v Hudson (where the fiduciary escaped liability because the company assented to his actions).[39] However, Regal remains the law.

Trustee and Beneficiary

[40] The trustee is the classic fiduciary.

  • Every trust involves a fiduciary relationship, but not every fiduciary relationship involves a trust.
  • Fiduciary duties are sometimes stricter for trustees than for any other category.[41]

The fiduciary obligations on the trustee will be limited to matters relating to the trust.

Partners

[42] Partners owe fiduciary duties to each other.[43] The scope of the obligations is determined by the character of the undertaking for which the partnership exists; which may be ascertained from any express agreement or course of dealing.[44]

  • A fiduciary relationship will start before a formal partnership agreement (ie, 'prospective partners' negotiating a partnership),[45] and will continue after the official termination of the partnership until all matters are resolved.[46]

Joint Venturers

[47] While partnerships are implied to be fiduciary, not all joint ventures are.

  • The question of fiduciary duty will depend on the terms of the contract, and any collateral arrangements between the venturers.
  • The difference between a ‘joint venture’ and a partnership is essentially that a joint venture refers to every joint undertaking that is not undertaken in a partnership. This includes a company, trust, agency or joint ownership.[48]
  • The difference between a joint venture and a mere contractual relationship is harder to define. It is definitely a stricter relationship than the ordinary usage or the term implies.[49] It depends upon the type of venture and obligations flowing therefrom.[50]

Agent and Principal

[51] Usually, an agent owes a fiduciary duty to a principal. However, this isn't always the case and the court conduct the usual inquiry of whether the agent is bound to place the principal’s interests before his/her own, or whether the agent can pursue his/her own interests.[52] Examples include

Employee and Employer

[53] Employees may owe fiduciary duties if they are:

  • In positions of trust and confidence; and
  • Given particular powers of discretion; such that
  • The employer is vulnerable if those powers are abused.[54]

The employee/employer relationship is included in lists of accepted fiduciary categories.

Guardian and Ward

[55] A guardian will always owe fiduciary duties to a ward.[56] However, it should not be viewed as a trust relationship.

Non-Presumptive Relationships

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End

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References

Property Textbook refers to Edgeworth et all, Sackville and Neave's Property Law Cases and Materials, 8th edition, Lexis Nexis, 2008.

Equity Textbook refers to Evans, Equity and Trusts, 3rd edition, Lexis Nexis, 2012.

  1. Bristol and West Building Society v Mothew [1998] Ch 1, 19
  2. (1996) 186 CLR 71, 113
  3. News Ltd v Australian Rugby Football League (1996) 64 FCR 410, 541; Australian Securities and Investments Commission v Citigroup (No 4) (2007) 160 FCR 35, 76.
  4. Equity Textbook, pp. 122-3 [12.1]
  5. Bristol and West Building Society v Mothew [1998] Ch 1, 19
  6. ‘Arm’s length’ refers to the relationship which exists between parties who are strangers to each other and who bear no special duty, obligation, or relation to each other.
  7. Hospital Products v United States Surgical Corp (1984) 156 CLR 41, 69
  8. Chan v Zacharia (1984) 154 CLR 178, 198-9
  9. Equity Property, p. 123 [12.2]
  10. Breen v Williams (1996) 186 CLR 71, 113
  11. Breen v Williams (1996) 186 CLR 71, 113
  12. The Canadian formulation, for example, includes a positive obligation for the fiduciary to act solely in the interests of the principal: J(LA) v J(H) (1993) 102 DLR (4th) 177
  13. Equity Textbook, p. 124-5 [12.3-12.6]
  14. United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1, 11-12
  15. (1989) 61 DLR (4th) 14
  16. (2001) 207 CLR 165
  17. Equity Textbook, pp. 128-9 [12.14-12.5].
  18. (1984) 156 CLR 41.
  19. (1996) 23 ACSR 214.
  20. News Ltd v Australian Rugby Football League (1996) 64 FCR 410, 541; Australian Securities and Investments Commission v Citigroup (No 4) (2007) 160 FCR 35, 76.
  21. Textbook, pp. 134-5 [12.24-12.26].
  22. [1983] 2 NSWLR 157, 207; although it is interesting that Dawson J seemed to support it, and Sopinka J expressly accepted his dicta in LAC Minerals.
  23. (2010) 241 CLR 1, [83].
  24. Textbook, pp. 135-141 [12.27-12.36].
  25. Noranda Australia v Lachlan Resources NL (1988) 14 NSWLR 1, 15 (Bryson J).
  26. [1973] 2 All ER 1222.
  27. Birtchnell v Equity Trustees Executors and Agencies (1929) 42 CLR 384, 408 (Dixon J).
  28. (1995) 182 CLR 554, 558.
  29. From Keech v Sandford (1726) 25 ER 223, which states that where a party acquires a property in some representative capacity (or where the acquiring party cannot deny an interest claimed by another), equity will deem the property to have been acquired for the plaintiff or true purchaser.
  30. Textbook, pp. 141-2 [12.37-12.38].
  31. (1997) 188 CLR 149.
  32. [2004] VSC 174.
  33. Schipp v Cameron [1998] NSWSC 997, affirmed in Harrison v Schipp (2002) 54 NSWLR 612.
  34. Textbook, pp. 142-7 [12.39-12.50].
  35. BLB Corporation of Australia v Jacobsen (1974) 48 ALJR 372.
  36. Percival v Wright [1902] 2 Ch 421.
  37. Galvanics v Brunninghausen (1996) 19 ACSR 201.
  38. Peso Silver Mines Ltd (NPL) v Cropper (1966) 58 DLR (2nd) 1; Canadian Aero Services v O’Malley (1973) 40 DLR (3rd) 371.
  39. (1978) 18 ALR 1.
  40. Equity Textbook, pp. 147-8 [12.51-12.52].
  41. Chan v Zacharia (1984) 154 CLR 178, 201.
  42. Equity Textbook, pp. 148-9 [12.53-12.55].
  43. Hospital Products Case (1984) 156 CLR 41
  44. Birtchnell v Equity Trustees, Executors & Agency (1929) 42 CLR 384, 407-8 (Dixon J).
  45. Edmiston v AGT (Qld) Pty Ltd [1988] 2 Qld R 1, which determined that the principle that prospective joint venturers owe each other fiduciary duties (from United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1, 12) also applies to prospective partners.
  46. Chan v Zacharia (1984) 154 CLR 178.
  47. Equity Textbook, pp. 150-1 [12.56-12.58].
  48. United Corporations v Brian (1985) 157 CLR 1, 10-11.
  49. Meinhard v Salmon (1928) 164 NE 545, 546.
  50. United Corporations v Brian (1985) 157 CLR 1, 10-11.
  51. Equity Textbook, pp. 151-2 [12.59-12.60].
  52. Hospital Products Case (1984) 156 CLR 41.
  53. Equity Textbook, pp. 152-4 [12.61-12.65].
  54. Hospital Products Case (1984) 156 CLR 41.
  55. Equity Textbook, pp. 154-5 [12.66].
  56. Clay v Clay (2001) 202 CLR 410.
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