(A)    Fiduciary Obligations
What is a fiduciary relationship?

The problem of definition:

A fiduciary relationship arises where one party reposes trust and confidence in another, who is expected to act in the interests of the former party rather than the interests of the latter. The fiduciary may not act in their own self-interest. Their principle duty is to look out for the interests of another. It is an obligation of loyalty.

•    A fiduciary cannot use his or her position, knowledge or opportunity to the fiduciary’s own advantage, or have a personal interest in, or inconsistent engagement with, a third party, unless fully informed and free consent is given: Chan v Zacharia
•    This is the “no conflicts” rule

•    Persons subject to a fiduciary duty are not permitted to profit from their positions (other than where expressly permitted): Hospital Products v USSC
•    This is the “no profits” rule

•    In acting for or in the interests of the other, the fiduciary acts in a representative capacity: Hospital Products v USSC

•    Status-based categories of fiduciary relationships:
o    Trustee/beneficiary
o    Solicitor/client
o    Agent/principal
o    Director/company
o    Employee/employer (“servant/master”)
o    Partners and some other commercial relationships of “utmost good faith”

•    Features in common with trustees:
o    The fiduciary often has control or management of property
o    The fiduciary’s title to the property is limited by the interests of the beneficiary
o    The fiduciary undertakes to act in the interests of the beneficiary

•    The categories of fiduciary relationships are not closed: Hospital Products v USSC

•    “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 interests of that other person in a legal or practical sense. The relationship between the parties is therefore one which gives the fiduciary a special opportunity to exercise the power or discretion to the detriment of that other person, who is accordingly vulnerable to abuse by the fiduciary of his position” (per Mason J in Hospital Products v USSC)

•    From this statement, we can see that three critical factors relevant to determining whether there is a fiduciary relationship are
i)    An undertaking on the part of the fiduciary to act in the interests of another person
ii)    The power or discretion on the part of the fiduciary to affect the interests of the other person
iii)    The person to whom the fiduciary duty is owed is vulnerable to the fiduciary’s abuse of his or her position

Note: It is possible that a person may be held to owe fiduciary duties, even where they have given no explicit undertaking. For example, a person held to be a constructive trustee because he or she has fraudulently come into possession of someone else’s property will be held to owe fiduciary duties in respect of that property to the person who has been defrauded. We consider this issue when we deal with constructive trusts.

•    Hospital Products v USSC (1984) 156 CLR 41
Facts: A US company (USSC) made surgical instruments. These products were sold in Australia under an exclusive distribution agreement with HPI. HPI terminated the agreement (breach of contract). HPI began manufacturing and supplying products assembled in Australia from its own manufacture. HPL took over HPI. USSC sued in equity for an account of profits (they wanted a constructive trust to be found, so that HPL owns the new business, but they hold that business on trust for USSC).

Held: The majority found that HPI did not owe any fiduciary duty to USSC, so there was no right to equitable relief against either HPI or HLP based on breach of fiduciary duty.

Here, the agreement was purely contractual and did not give rise to a fiduciary relationship.
This was a typical commercial relationship defined by the parties’ own agreement.

•    Hence, it is necessary to look at the relationship of the parties in its own factual matrix to determine whether there is a fiduciary relationship
•    It is necessary to look at the nature of the agreement between the parties and seek to find an undertaking to act in the interests of the other party

The nature and content of the fiduciary duty
The “no conflicts” rule

•    The fiduciary must not place themselves in a position of conflict between their duty and personal interest
•    The fiduciary must not place themselves in a position of conflict between duties owed to different parties

(see the position of solicitors: Maguire v Makaronis)

The “no profits” rule

•    The fiduciary is not permitted to profit from their position of trust (other than any agreed remuneration)

•    Consider the strict application of the rule (especially for trustees) in Boardman v Phipps and Keech v Sandford

•    Boardman v Phipps [1967] 2 AC 46
Facts:    Boardman was the solicitor to the trustees of a will (together, the appellants). The trust held a minority shareholding in a company. The trust deed disallowed the trust from launching a takeover of the company. Boardman bought extra shares, and together with the trustees, launched a successful takeover of the company on behalf of the trust. As a result of the takeover, the shareholders of the company (including the trust) received substantial profits. There was no ‘informed consent’ to the takeover from the beneficiaries.

Held:    The court held that there was a fiduciary relationship that had been breached. Despite acting in the best interests of the trust, the fiduciary (Boardman) was liable to account for profits.

The information and knowledge which caused Boardman to launch a takeover of the company had come to him in his position as a fiduciary.

The court held that the appellants were liable as constructive trustees of the profits they had made.

The court ordered an account of profits, but with an allowance for the ‘work and skill’ of the appellants in obtaining the shares and profits.

•    How ready should equity be to find fiduciary obligations between parties to commercial contracts?

•    We have already seen Hospital Products v USSC. Consider also the following cases:

•    United Dominions Corporation v Brian (1985) 157 CLR 1
Facts:    Three companies entered into a joint venture in a land development project. Two of the companies entered into an agreement, but had not told Brian about it. Brian argued that they owed him a duty of disclosure.

Held:    The court held that there was a fiduciary duty in this case, and it involved disclosure. UDC was in a position of trust and confidence with Brian with respect to the joint venture.
    
The court held that a fiduciary relationship can exist even before a partnership has been formed.
Here, a fiduciary relationship existed (even though the precise terms of the partnership were not agreed) since the conduct of the partnership had been embarked upon.

•    LAC Minerals (1989) 61 DLR (4th) 14
Facts:    The plaintiff was the owner of certain mining rights in Ontario and revealed to the defendant, with whom it was considering a joint venture project, the results of exploratory drilling. These showed that adjacent land was likely to be rich in minerals. The defendant outbid the plaintiff for those adjacent rights and developed its own mine.

Held:    The court held that there was no fiduciary relationship between the parties, but that the defendant had broken an equitable obligation of confidence to use the information only to decide whether to go into the joint venture using the plaintiff’s mining rights.

•    Consider a bank manager who also gives personal financial advice: Commonwealth Bank of Australia v Smith (1991) 102 ALR 453

•    Commonwealth Bank of Australia v Smith (1991) 102 ALR 453
Facts:    A bank manager gave personal financial advice to a long-standing customer (Smith) who wanted to buy a hotel from a vendor (who had a large overdraft with the Bank). The bank manager introduced Smith to the vendor and revealed that the vendor was a customer of the bank, but would not reveal confidential information. He discouraged Smith from getting independent legal advice. He wanted the vendor to sell the hotel in order to pay off the overdraft. The price paid by Smith was too high and he lost money.

Held:    The court held that the bank manager owed a fiduciary duty to Smith.

Normally, a bank can be expected to act in its own interests in ensuring security of its position as lender. However, it may have created in a customer an expectation that it would give advice in the customer’s interests as to the wisdom of investment. In this way, the bank became a fiduciary.
    
This is an example where an otherwise commercial relationship can be identified as fiduciary.

The scope of the relationship and the extent of the duty

•    Should all fiduciaries be subject to the same strict application of the “no conflicts” and “no profits” rules?
•    Consider the dissenting judgment of Lord Upjohn in Boardman v Phipps
•    He held that the scope or extent of the “no conflicts” rule was a “real sensible possibility of conflict”

•    See Chan v Zacharia (1984) 154 CLR 178 per Deane J:

“…the liability to account for a personal benefit or gain obtained or received by use or by reason of a fiduciary position, opportunity or knowledge will not arise in any circumstances where it would be unconscionable to assert it or in which…there is no possible conflict between personal interest and fiduciary duty and it is plainly in the interest of the person to whom the fiduciary duty is owed that the fiduciary obtain for himself rights or benefits which he is absolutely precluded from seeking or obtaining for the person to whom the fiduciary duty is owed.”

•    This quote indicates that where there is no conflict between personal interest and fiduciary duty, and the fiduciary obtains profit while furthering the interests of the plaintiff, there will be no need to account for profits

•    Chan v Zacharia (1984) 154 CLR 178
Facts:    There was a partnership between two doctors on leased premises. The partnership dissolved and the lease expired. One of the doctors (Chan) took up the new lease for his own benefit.

Held:    The lease was an asset of the partnership. Chan held the new lease on constructive trust for the partnership. Even though the partnership had been dissolved, it was not yet wound up. Fiduciary obligations of partners continue during the winding up of partnership.

In seeking to obtain the option personally, Chan had put himself in conflict with his fiduciary obligation to the partnership.

•    See also the former employee cases:

•    Green & Clara v Bestobell Industries [1982] WAR 1
Facts:    Green was the manager of BI, which installed ceilings. His job was to draw up tenders. In the course of his job, he found out tenders were being invited for a project in WA. He set up his own company, put in a tender below BI’s (knowing how BI would calculate their tender), and then resigned. He won the tender.

Held:    The court held that this was a breach of the “no conflict” and “no profit” rules. The placing of a competing tender breached the conflict rule, and the use of confidential information in a manner within the scope of his fiduciary duty to make profit breached the profit rule.

•    Warman v Dwyer (1995) 182 CLR 544
Facts:    Dwyer was the manager of Warman, which distributed gear boxes made by a manufacturer in Italy. The Italian company suggested that Warman enter into a joint venture to assemble gear boxes in Australia. Warman rejected this. Dwyer set up his own company. The Italian manufacturer terminated the agency agreement with Warman and went into business with Dwyer’s company.

Held:    The court held that the creation of a new business by Dwyer was a breach of fiduciary duty.

•    Prince Jefri Bolkiah v KPMG [1999] 2 AC 222
Facts:    The Prince employed KPMG. Some years later, the Brunei government appointed KPMG to investigate the Prince’s affairs. KPMG had confidential information, and the Prince did not want them involved.

Held:    The court held that a breach of fiduciary duty will only occur where the breach is simultaneous with the existence of the relationship.
As KPMG was no longer retained by the Prince, they no longer owed him a fiduciary duty, and hence could not breach it.

Remedies for breach of fiduciary duty

•    Rescission of a contract: see Maguire v Makaronis

•    Account of profits
o    Note that courts will sometimes make allowances for skill, effort or financial contributions of the fiduciaries or others
o    Consider Warman v Dwyer

•    Compensation for loss: Nocton v Ashburton

•    Proprietary remedies: constructive trusts, equitable charges, tracing (all of which will be covered later in the course)

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