Fiduciary Relationships

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

Contents

Required Reading

M.W. Bryan & V.J. Vann, Equity and Trusts in Australia (Cambridge University Press, 2012), pp. Textbook Chapter 10 (up to 10.23).

ASIC v Citibank [2007] FCA 963, [270]-[321]

John Alexander’s Clubs Pty Limited v White City Tennis Club Ltd (2010) 241 CLR 1 ([85]-[93]).

Breen v Williams (1995) 186 CLR 71(106-114)

Pilmer v Duke Group Limited (2001) 207 CLR 165, ([116]-[136]) per Kirby J].

Introduction

[1]Relationships which equity protects are known as fiduciary relationships. A relationship will be recognised as fiduciary where it arises from F undertaking to act in the interests of B in a manner which confers a discretion on F, and the exercise of discretion affects B’s economic interests.

  • A fiduciary must act exclusively in the interests of the beneficiary.
  • Fiduciary obligations regulate managers’ behaviour where their activities cannot be properly supervised.
  • Obligations are imposed which limit their pursuit of self-interest.

Fiduciary Relationships

Recognised fiduciary relationships

[2]Some legal relationships have long been recognised as fiduciary relationships and are therefore described as the “first circle” of fiduciary relationships. In each the first party owes fiduciary obligations to the second. They are:

  • Trustee-Beneficiary
  • Solicitor-Client
  • Director-Company
  • Employee-Employer
  • Agent-Principal
  • Partner-Co-Partner
  • Executor-Beneficiaries of a deceased’s estate

This is not a closed list and other relationships may be added. A prime candidate would be advisor and client. The Canadian Supreme Court has held that the relationship between parent and child is “intuitively fiduciary”.

The more closely a legal relationship approximates that of a vendor and purchaser, the less likely it is to be fiduciary.

“Vertical” relationships

[3]Other relationships outside the recognised ones will be held to be fiduciary, wholly or in part, where there is a reasonable expectation that one party should subordinate his interests in a particular matter to the interests of another.

In News Ltd v Australian Rugby League Ltd,[4] Gummow J identified vertical fiduciary relationships as ones where one party has greater access to resources, skill or information and horizontal fiduciary relationships as where resources, skills and information are shared for the purposes of achieving a common goal.

  • Trust and agency relationships = vertical
  • Professional or business partnerships = horizontal

The “undertaking” test of a fiduciary relationship was identified in Hospital Products Ltd v United States Surgical Corporation:[5]

“The critical feature of these relationships is that the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interest of that person in a legal or practical sense.”

Hospital Products Ltd v United States Surgical Corporation[6]

Facts: USSC manufactured surgical stapling products. Blackman realised that USSC’s products were not patented in Australia and offered to become its distributor. He obtained exclusive distribution rights in Australia and then established his own company, Hospital Products, which competed with USSC by repackaging USSC’s products and selling them as its own and by reverse engineering USSC’s products to enable competing products to be developed. This was so successful that Hospital Products began competing with USSC in the USA as well. USSC terminated the contract with Blackman and sued him and Hospital Products for breach of contract and breach of fiduciary obligation.
Issue: Does a fiduciary relationship exist? Or is it purely commercial?
Held: The High Court unanimously held that Blackman had breached his contract. The majority held that he did not owe fiduciary obligations to USSC.
  • Mason J dissented on the ground that the defendants were under a limited fiduciary obligation to protect USSC’s Australian product goodwill.
  • All factors indicated that the defendants were free to promote their own commercial interests and had not exclusively agreed to act in the interest of the USSC.

Commonwealth Bank of Australia v Smith[7]

Facts: The plaintiffs were longstanding customers of the bank and often relied on their advice in business dealings. They sought the advice of the bank in buying the lease of a hotel from another of the bank’s customers. The bank was also interested in arranging the sale of the hotel so that the loans it had made were repaid. The branch manager told the plaintiffs that the hotel was a ‘good buy’ even though the bank’s mortgage evaluation was less worth less than the price the plaintiffs had agreed to pay. The bank also represented that the lease would be renewed despite having no grounds for making the representation. The plaintiffs bought the hotel and lost considerable money operating it. The landlord refused to renew the lease.
Issue: Does a fiduciary relationship exist? Or is it purely commercial?
Held: The court held that the bank had so identified its interests with those of the plaintiff’s that it owed the plaintiffs fiduciary obligations – it had undertaken to act exclusively in their interests in advising them on the purchase. It had breached fiduciary obligations by placing itself in a position of conflict and despite making no profit from the conflict, it was ordered to pay the plaintiffs equitable compensation for their losses.

“Horizontal” relationships

[8]As, for example, all partners undertake to act in the interests of the partnership, the Hospital Products test is not apt to determine whether a partnership or other potential horizontal fiduciary relationship imposes fiduciary obligations.

The question will be whether the parties have placed a high degree of mutual trust and confidence in each other in the pursuit of their common goals. Generally the degree of trust that one partner expects of another will also be expected in any horizontal commercial relationship alleged to be fiduciary.

United Dominions Corp Ltd v Brian Pty Ltd[9]

Facts: Brian entered into an agreement described as a joint venture, with UDC and SPL to construct a shopping centre. Although the centre was successfully developed, Brian was neither repaid his financial contribution nor paid a share of the profits. Unknown to Brian, UDC had taken a mortgage over SPC’s land (which the centre was built on) and claimed payment of the profits under a collateralisation clause in the mortgage.
Held: The joint venture was in substance a partnership even though it was not labelled as such in the documentation.
  • The collateralisation clause was unenforceable against Brian to the extent that it deprived him of its share of the profits.
  • The relationship was fiduciary because the willingness of the parties to proceed with the project prior to executing the agreement, demonstrated a high degree of mutual trust and confidence.
  • The parties owed each other fiduciary obligations so that UDC could not obtain for itself a collateral advantage without the knowledge and consent of the other parties.

Concurrent contractual and fiduciary relationships

[10]Many fiduciary relationships are created by contract, for example, solicitor-client relationships. Alternatively, they may evolve from a relationship which was initially a contract permitting the pursuit of self-interest but which over time became a relationship of trust and confidence.

  • Fiduciary obligations can be modified or excluded by the terms of a contract. (ASIC v Citibank).[11]
  • “The fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according to its true construction.”(Hospital Products)[12]
  • Not every breach of duty committed by a fiduciary amounts to a breach of fiduciary obligation. The breach may constitute a breach of contract or a tort without necessarily involving any fiduciary failure.
    • Only if the breach constitutes unauthorised conflict of interest or profit-making, will it be a breach of fiduciary duty.

Farrington v Rowe McBride & Partners[13]

Facts: Solicitors acted for the plaintiff in a personal injury claim. The plaintiff recovered damages and sought the firm’s advice on investment of the damages. The firm had a major corporate client which was in financial difficulties and the solicitor advising the plaintiff had a financial interest in the corporation; he persuaded the plaintiff to invest in the corporation. Two years later, the corporation went into liquidation.
Issue: Conflict between fiduciary duties to two principals.
Held: The New Zealand Court of Appeal held that the solicitors had placed themselves in a position of conflict and had therefore committed a breach of fiduciary obligation. The firm was ordered to compensate the plaintiff for his lost investment.

Farrington v Rowe McBride & Partners is distinguishable from the following case:

Hill v Van Erp[14]

Facts: A solicitor negligently failed to ensure that a will complied with statutory formalities, with the result that the plaintiff failed to recover the legacy she expected.
Issue: Breach of duty does not necessarily amount to breach of fiduciary obligation.
Held: The solicitor had acted in breach of duty of care and was liable in tort. She was also in breach of the contractual duty of care and skill she owed to her client’s estate. She was not, however, liable for breach of fiduciary obligation because she owed no duty to the plaintiff to protect her interests and there was no element of conflict of interest or unauthorised profit-making in her negligent conduct.

Distortion of the fiduciary concept

[15]The fiduciary concept is sometimes at risk of being distorted in cases where the plaintiff is considered to deserve an award of a remedy for breach of fiduciary obligation (such as an account of profits or a constructive trust) but where the requirements for a fiduciary relationship are not met. In these cases, courts may impermissibly ‘read equity backwards’ by artificially finding the existence of a fiduciary relationship.

Chase Manhattan Bank NA v Israel-British Bank (London) Ltd[16]

Facts: An employee of the plaintiff bank mistakenly made a double payment of $2 million to the defendant bank. A mistaken payment can be recovered, however, this is a personal claim which means that if the payee is insolvent, the payer will be an unsecured creditor in the payee’s insolvency. The defendant bank was in liquidation.
Issue: Artificially finding the existence of a fiduciary relationship to provide the preferred remedy.
Held: The payer successfully argued that the payee owed a fiduciary duty to repay the mistaken payment and therefore hold the payment on constructive trust for the payer.
  • The practical effect was that the plaintiff became the equitable owner of the payment and was entitled to keep the money in priority to the defendant’s unsecured creditors.
  • There was no pre-existing fiduciary relationship and neither the ‘undertaking’, nor the ‘mutual trust and confidence’ test were satisfied.
  • A duty to return the payment was recognised because the court considered that the defendant’s insolvency should not prevent the plaintiff from recovering its money.

Scope of the fiduciary relationship

[17]Fiduciaries only owe duties in respect of their undertaking, which means that it is important to distinguish between aspects of the parties’ relationship which are fiduciary and those which are not. This is done by reference to the scope of the relationship.

Courts determine the scope of the fiduciary relationship by reference to the fiduciary’s undertaking and do not impose obligations outside of that undertaking. However, equity is not limited to any written record of the agreement (if one exists) and can consider the conduct of the parties in full. Questions of scope usually only arise in cases involving recognised categories of fiduciary relationships.

Birtchnell v Equity Trustees Executors and Agency Co Ltd[18]

Facts: The deceased was in a real estate partnership with others. A partnership client introduced a land development opportunity to the partner, which he took up personally, not informing the co-partners of it. After his death the other partners alleged a breach of fiduciary duty.
Issue: Scope of fiduciary obligations and conduct of parties.
Held: From the written agreement between the partners it appeared that the partners were entitled to pursue such opportunities personally, however, when the course of conduct of the partners over the years was considered, it appeared that the partners had in fact regarded themselves as bound to offer such opportunities to the partnership. The opportunity was therefore within the scope of the partnership.


End

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References

Textbook refers to M.W. Bryan & V.J. Vann, Equity and Trusts in Australia (Cambridge University Press, 2012).

  1. Textbook, pp 153.
  2. Textbook, pp 154-5.
  3. Textbook, pp 155-8.
  4. (1996) 64 FCR 410.
  5. (1984) 156 CLR 41.
  6. (1984) 156 CLR 41.
  7. (1991) 102 ALR 453.
  8. Textbook, pp 158-9.
  9. (1985) 157 CLR 1.
  10. Textbook, pp 159-61.
  11. [2007] FCA 963.
  12. Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41, at 97.
  13. [1985] 1 NZLR 83.
  14. [1997] HCA 9.
  15. Textbook, pp 161.
  16. [1981] Ch 105.
  17. Textbook, pp 161-2.
  18. (1929) 42 CLR 384.
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