Fiduciary Obligations(LAWS2385)

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


Required Reading

M.W. Bryan & V.J. Vann, Equity and Trusts in Australia (Cambridge University Press, 2012), pp. Textbook Chapter 10 ([10.24-38]).

Daly v Sydney Stock Exchange (1986) 160 CLR 371 (376-377, 384-385)

Boardman v Phipps [1967] 2 AC 46 (read the speeches of Lord Cohen and Viscount Dilhorne)


[1]A fiduciary is expected to act in the best interests of the beneficiary. Specific obligations compel performance of the ‘best interests’ standard.

  • ‘Best interests’ depends on the nature of the relationship in each case, the terms of any legally dispositive document governing the relationship and, in some cases, the course of dealings between the parties.
  • The duty of loyalty is not a specific fiduciary obligation but a policy which expresses the aim of other obligations.
  • Core specific fiduciary obligations are proscriptive, or negative, in character:
    • No conflict rule: The duty not to act in conflict between the duty a fiduciary owes a beneficiary and their own self-interest (interest-duty disputes), and the duty not to act in conflict between the interests of two or more beneficiaries (duty-duty disputes).
    • No profit rule: The fiduciary’s obligation not to make a profit at the expense of the beneficiary. A trustee must not appropriate trust property for their personal benefit or exploit a business opportunity which should have been offered to the beneficiary.
  • Breach of one obligation will often create a breach of another.
  • In addition to the core fiduciary obligations, equitable obligations are also imposed, including:
    • The duty to act in good faith.
    • The equitable duty of care (or business prudence, in the case of trustees).
    • The equitable duty of confidence.
  • The imposition of other duties depends upon the nature of the relationship, for example, trustees are also subject to a duty to comply with the trust instrument and the duty to invest trust moneys.

Authorisation and ratification

[2]Almost all fiduciary and equitable obligations can be excluded by the terms of the trust instrument, contract or other document defining the obligations of the fiduciary. A principal or beneficiary can ratify or consent to what would otherwise be a breach of obligation. The fiduciary’s obligation of good faith cannot be excluded.

Queensland Mines Ltd v Hudson[3]

Facts: The plaintiff company was initially interested in developing iron ore mining operations in Tasmania. Hudson, who was the managing director of QML, succeeded in obtaining the necessary licences to develop the mines. However, QML was in financial difficulties and unable to proceed. Hudson resigned his position and with the full knowledge of the directors of QML, successfully developed the mines. 11 years later, QML sought to hold Hudson accountable for the profits he had made on the ground that he had exploited his fiduciary position as managing director to make the profits.
Issue: Breach of fiduciary obligations.
Held: The Privy Council held that Hudson was not liable to account because QML’s rejection of the opportunity to develop to mines took the venture outside the scope of the fiduciary relationship and because Hudson had acted with full knowledge of the directors of the company, who must be taken to have consented to his activities.

How strict are fiduciary obligations?

[4]The primary goal of enforcing fiduciary obligations is deterrence. Deterrence can be both general (aimed at a class of fiduciaries) and individual (aimed at the fiduciary in question).

  • The strictness of fiduciary obligations is justified by the harm suffered by the beneficiary from a breach and because it is the nature of a fiduciary relationship that a beneficiary cannot easily monitor fiduciary activity.
  • As wrongdoing is notoriously difficult to discover until the damage has been done, equity presumes that any benefit made by the fiduciary was made from his fiduciary position.
  • Although obligations are applied stringently, the courts also do not wish to discourage economically and socially desirable behaviour and therefore apply them sensitively as well.
    • If a fiduciary is held accountable for exploiting a profit-making opportunity for personal gain and the advantage of the beneficiaries, skilful entrepreneurs will be discouraged from taking on fiduciary responsibility.

Keech v Sandford[5]

This case is the classic formulation of the strict “no conflict” and “no profit” fiduciary principles.

Facts: The defendant held the lease of the profits of a market on trust for an infant beneficiary. The landlord did not want to renew the lease to the infant and the defendant took the renewal of the lease in his own name.
Held: Chancellor King ruled that a trustee who renewed the lease, being trust property, in his own name rather than as trustee, held the lease on constructive trust for the beneficiary. It was irrelevant that the landlord had encouraged him to take the renewal and that the trustee had acted in good faith in taking the renewal.

The basis of fiduciary principles of general deterrence was noted:

“...if a trustee, on the refusal to renew, might have the lease to himself, few trust-estates would be renewed to cestui que[6] use... This may seem hard, that the trustee is the only person of all mankind who may not have the lease: but it is very proper that rule should be strictly pursued and not in the least relaxed; for it is very obvious what would be the consequences of letting trustees have the lease, on refusal to renew to cestui que use.”[7]

Boardman v Philips[8]

This is one of the most controversial decisions in the law of fiduciary obligations. Its critics argue that the majority decision applied the ‘no conflict’ and ‘no profit’ rules too harshly; a fiduciary whose skill and effort secured considerable benefits to the beneficiaries was nonetheless held accountable for breach of fiduciary obligations. The remedy of constructive trust was also controversial because it entitled the plaintiff to shares and dividends which he could not otherwise have obtained for himself.

Facts: A trust held a minority holding of shares in a poorly managed textiles company. Boardman, the solicitor to the trustees, together with one of the beneficiaries, Tom Phipps, developed a plan for gaining control of the company. They attended company meetings, purporting to represent the trust (although they had not been given formal authority to do so) and obtained a great deal of information about the company. The trust was unable to purchase more shares in the company because it had no money to do so and it would have been imprudent anyway.
Boardman and Tom Phipps used the information they had gathered on the company to make an offer, which was accepted, to buy the shares of the directors with their own money. The purchase meant that between them and the trust, they had a majority shareholding, which they used to sell off loss-making assets and reorganise the company – ultimately making it profitable. The shareholders, Boardman, Phipps and the beneficiaries all made considerable profits.
Boardman and Tom Phipps did not obtain the trustee’s consent to their course of action. Two of the trustees were aware of their plans but one trustee, the testator’s widow, was senile and not legally competent to consent. One beneficiary, John Phipps, sued Boardman and Tom Phipps for breach of fiduciary duty, even though he had benefited from the reorganisation of the company.
Held: The majority held that the defendants had acted in breach of fiduciary duty although they also directed that Boardman be ‘liberally remunerated’ for the work he had done.
  • According to the majority, a fiduciary acts in breach of obligation if there is the slightest possibility of conflict between self-interest and the duty owed to beneficiaries.
  • In dissent, Lord Upjohn held that the ‘no conflict’ rule only applied if there was a real sensible possibility of conflict, rather than the hypothetical conflict of interest identified by the majority (that Boardman could be asked to advise the trustees about the trust purchasing additional shares). This is now recognised as an accurate statement of the ‘no conflict’ principle.
  • The majority held that the defendants had not obtained the fully informed consent of the trustees or beneficiaries and in particular, should have applied to the court to dispense with the consent of the senile widow.
  • Boardman’s efforts on behalf of the trust went far beyond his retainer as a solicitor to the trustees and he had committed an honest breach of trust. In later cases, even a dishonest fiduciary has been held to be entitled to an allowance provided that he can demonstrate his special skill, resources and effort were responsible for the profit.

Considering the remuneration given to Boardman, it the decision in Boardman v Phipps could be regarded as a reasonable compromise between the deterrent rationale of the law of fiduciary obligations and promoting socially valuable fiduciary behaviour.

Chan v Zacharia[9]

The High Court decision in Chan v Zacharia applied Keech v Sandford to a professional partnership.

Facts: The plaintiff and defendant were doctors who worked as partners. They rented premises as joint tenants under a three-year lease with an option to renew for a further two-year term. At the end of the three-year term the doctors agreed to dissolve the partnership. The defendant, Dr Chan, was invited to join with the plaintiff in exercising the option to renew but declined to do so. Shortly afterwards, Chan obtained a new lease of the premises, in his name only, in return for paying the landlord a premium of $10,000.
Held: A majority of the Court held that in obtaining the new lease the defendant had exploited his fiduciary position as co-partner of the plaintiff. He was ordered to hold the lease on constructive trust for both parties.

Where a trustee obtains renewal of a lease himself, the lease being trust property, it is irrebuttably presumed that the trustee has obtained renewal by use of his position as a trustee. (Dr Chan was also a co-trustee).

  • Where other fiduciaries, including partners, obtain renewal of a lease for themselves, the lease being the subject-matter of the fiduciary relationship, it is rebuttably presumed that the renewal was obtained by use of the fiduciary position.
  • In the case of fiduciaries other than trustees, the onus rests on the fiduciary to show that he did not obtain renewal of the lease by exploiting his fiduciary position.

Informed consent as a defence to an action for breach of fiduciary obligation

[10]Claims for breach of fiduciary obligation can be defeated on a number of grounds:

a) The equitable bars to relief, such as laches, unclean hands and hardship, which apply to all equitable claims.
b) Statutory defences to breaches of trust only available to trustees under trustee legislation.
c) The beneficiary can give informed consent for a breach of obligation prior to the transaction (authorisation) or subsequently (ratification). This is technically not a defence as it prevents a breach from actually occurring or removes trustee liability for a breach.

In Boardman v Phipps, Boardman had not adequately explained the reasons for purchase to the beneficiaries and had not consulted one of the trustees (the senile widow).

In order to obtain the beneficiary’s consent, the fiduciary must have made full disclosure of all the facts to the beneficiary. This depends on the sophistication and intelligence of the persons to whom the disclosure must be made.

Farah Constructions Pty Ltd v Say-Dee Pty Ltd[11]

Facts: The plaintiff and the defendant entered into a joint venture agreement to redevelop a property. The defendant was informed by the council that only a plan to redevelop the property in amalgamation with some adjoining properties would be approved. The defendant also received some information that some adjoining properties were for available for purchase. The defendant disclosed the information to the plaintiff at different times and in different ways, including by mailing the council’s notice of refusal for initial planning permission to the plaintiff.
Issue: The sophistication and intelligence of the persons to whom the disclosure must be made.
Held: Since the plaintiff had considerable business experience, the disclosure had been sufficient.


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

  1. Textbook, pp 162-4.
  2. Textbook, pp 164-5.
  3. (1978) 52 ALJR 399.
  4. Textbook, pp 165-70.
  5. (1726) Sel Cas T King 61.
  6. Beneficiary.
  7. (1726) Sel Cas T King 61, at 62.
  8. [1967] 2 AC 46.
  9. (1984) 154 CLR 178.
  10. Textbook, pp 170-1.
  11. (2007) 230 CLR 89.
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