4.1 The source of Fiduciary duties

Fiduciary duties are the obligations of trust and confidence that equity imposes on a person in circumstances where that person, the fiduciary is bound to act for the benefit of another, the principal. Fiduciary cannot allow personal interest to conflict with the duty to the principal.

Hospital Products Ltd v United States Surgical Corp (1984) – A common theme in Fiduciary relationships is the representative role of the Fiduciary.
Mason J: “The critical feature of these relationships is that the Fiduciary undertakes or agrees to act for or on behalf of or in the interest of another person in the exercise of a power or discretion which will effect the interest of that other in a legal or practical sense…The essence of the Fiduciary relationship can thus be seen in the power the Fiduciary holds to influence the affairs of the principal for good or ill and the trust which the principal places in the Fiduciary to use the power for the principal’s benefit.”

The specific characteristics recognized by his honour are:
•    relationship of trust and confidence;
•    an undertaking;
•    power to affect the principal’s interests;
•    vulnerability;
•    property holding (frequently a characteristic that is added to the list).

Aberdeen Railway Co v Blaikie Bros – one element will always be found in any relationship property described as Fiduciary: equity will not allow a person owing Fiduciary duties to enter into any engagement in which the Fiduciary has, or could have, a personal interest conflicting with that of the principal,
Chan v Zacharia – nor will it allow the Fiduciary to retain any benefit or gain some opportunity or knowledge resulting from it.

Lac Minerals Ltd v International Corona Resources Ltd – The fundamental principles on which a Fiduciary obligation is based is unclear.

The verbal formulae should be concentrated on, the precise terms, actual or implied, of the relationship in question and the obligations that arise from the facts and circumstances of the of the particular case.

•    Identification of the Fiduciary relationship

The fact that one person undertakes to act on behalf of another will not be decisive unless the circumstances are such that the ‘representative’ is bound to place the interests of the principal first and is not free to have regard to his or her own interests. In Hospital Products Ltd v United States Surgical Corporation, HC found that the relationship in that case, one of manufacturer and distributor, gave Hospital Products, the distributor, scope to look after its own interests, if need be in advance of those of United States Surgical Corporation, the manufacturer.
There are certain relationships where the law imposes Fiduciary obligations, almost as a matter of course, beyond this Fiduciary duties may be found in relationships not normally considered to be Fiduciary only if there are special circumstances warranting such a finding.

This is demonstrated in Hospital Products where it was found that the contract between hospital products and the USSC contained an implied term that the distributor would not do any act inimical to the market for USSC products in Australia. Majority in HC rejected the implied term and the finding of a Fiduciary relationship fell away with it.

Recognition of the relationship as Fiduciary due to the recognized categories or the special circumstances of the relationship is only part of the process. MUST IDENTIFY THE SCOPE of the relationship in order to determine whether the matter in issue between the parties falls within the Fiduciary’s duties or not.

o    Vulnerability
The view taken by the majority in Lac Minerals Ltd v International Corona Resources Ltd is that an essential feature of a Fiduciary relationship is vulnerability of the principle in the hands of the Fiduciary.

However, in Hospital Products, the court of appeal when discussing the power exercisable by the supposed Fiduciary to affect the interest of the principal in a legal or practical sense such that the principal was vulnerable to the abuse of that power state: “…There are many examples of legal relationships not regarded as Fiduciary in which such a power may be found…It seems to us that it is always necessary first to find [the Fiduciary’s] undertaking to act for or on behalf of [the principal].”
e.g. A patient will be ‘vulnerable’ to his or her doctor, but that does not make the relationship of doctor and patient Fiduciary. Also, any party to a contract may damage the interest of the other party by committing a breach of the contract, but that does not convert the common law duty to comply with the terms of the contract into a Fiduciary obligation.

•    The scope of the Fiduciary relationship

N Z Netherlands Society ‘Oranje’ v Kuys
Facts: Kuys who was a member of a Dutch society in NZ purchased a Dutch newspaper and called it The Windmill Post. NZNS was a new Dutch society which was later formed, which agreed to produce a newspaper by the same name which will be Kuys property while they had the right to publish the society’s news. Society guaranteed for 6 months to purchase the new paper at 1s per copy for each of the society’s 2000 members. Kuys was the unpaid secretary of NZNS and a member of the committee. Kuys and the society later fell out and the society made plans to publish a rival paper under the same name. Kuys obtained an injunction restraining them form using that name. NZNS claimed that Kuys was in a Fiduciary position in relationship to it and could not restrain ownership of the paper without accountability to the society.
Issue: Was Kuys under a Fiduciary obligation with respect to his ownership of the newspaper?
Decision: A person may be in a Fiduciary position quoad (that is to the extent of) a part of his or her activities and not quoad another part and, while Kuys’ position as an officer of society cast duties upon him not to profit from his position of trust, no part of his activities relating to the operation of The Windmill Post placed him in a Fiduciary position in relation to the society. The society’s only commitment to the paper was to purchase 2000 copies at 1s each for 6 months. Kuys had to cover all outgoings and expenses from his own pocket and could not come to the society for any losses.

4.2 The recognized categories of Fiduciary relationships

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Solicitor and Client
A solicitor owes Fiduciary duties to his or her client, and must not enter into some engagement in which there is or may be some conflict between that duty and the solicitor’s personal interest.

In Maguire v Makaronis solicitors who loaned money on mortgage to their clients to assist with a purchase were held to have breached this duty. Their duty to protect their clients in the circumstances was in conflict with their personal interest in getting the best deal they could as mortgagees in terms of interest rates and security.

Must look at scope of the relationship

In Boardman v Phipps the issue which arose was, where the defendants liable to account to the trust for the profit they made?

Decision: Boardman and Tom Phipps had placed themselves in a special position, which was fiduciary in character, in negotiating with the directors of L&H, and out of that opportunity they had obtained an opportunity to make a profit and knowledge that there was a profit to be made. That profit was made and they were liable accordingly. While the two acted honestly they were both fiduciaries: Boardman because of his position as solicitor to the trust and his actions in that capacity on behalf of the trust in negotiations with the company; and Phipps as agent of the trust and because he did not seek to be treated in a different way from Boardman. Both had received confidential information while acting as agents for the trust. The only way they could escape liability for their actions was through the informed consent of the principals.
Viscount Dilhorne dissented on the ground that, although the appellants’ relationship with the trust was Fiduciary, but because the information they acquired was property to the trust and because the trust did not contemplate purchasing further shares at any stage, no conflict between duty and interest arose when the appellants acquired shares in their own names.

Principles:
1.    The solicitor was liable because of his position as solicitor to the trust and his action in that capacity on behalf of the trust in the subsequent negotiations;
2.    There was a possible conflict of interest between those of the trust and his own personal interests when taking advantage of knowledge gained in negotiations to make a personal profit;
3.    Majority Trustee approval does not operate to give approval when unanimous approval is needed.
4.    Approval sought from beneficiaries must be very detailed to be found acceptable to the court.

Qld Mines Ltd v Hudson: where a party acquires a property in some representative capacity, or otherwise in circumstances where the party acquiring the property cannot, in conscience, deny an interest claimed in it by another, equity will properly deem the property to have been acquired for the plaintiff or true purchaser.

•    Director and company
While this is an easily recognizable category it is important to remember that a director does not owe a duty to the company in everything the director does.
The duty is owed to the company. The duty is NOT owed to the shareholders.

Mills v Mills: ‘Directors of a company are fiduciary agents, and a power conferred upon them cannot be exercised in order to obtain some private advantage or for any purpose foreign to the power. It is only one application of the general doctrine expressed by Lord Northington in Aleyn v. Belchier(1): "No point is better established than that, a person having a power, must execute it bona fide for the end designed, otherwise it is corrupt and void."

Key Case – Regal (Hastings) Ltd v Gulliver :
Facts: Regal was a business that operated cinemas. The directors of Regal formed a subsidiary, HAC. HAC acquired 2 new cinemas and 2 weeks later the company was sold producing profits per share. Regal took proceedings, under its new management, against the ex-directors, seeking an account on the profits they had made on the sale of their shares in the HAC. House of Lords held that the ex-directors were liable to Regal for these profits on the ground that they had obtained their shares by reason of their position as directors of Regal and in the course of office as directors.
 
Sankey stated the rule in these terms:“The general rule of equity is that no one who has duties of a fiduciary nature to perform is allowed to enter into engagements in which he has or can have a personal interest conflicting with the interests of those whom he is bound to protect. If he holds any property so acquired as trustee, he is bound to account for it to his cestui que trust.”

Lord Russell set out his version: “The liability arises from the mere fact of a profit having, in the stated circumstances, been made. The profiteer, however honest and well-intentioned, cannot escape the risk of being called upon to account.”
Note : - As in Boardman v Phipps this seems a harsh if strict decision. If the directors had not put up the money they did, Regal would never have enjoyed the large profit it made and if the subsidiary had been sold at a loss then Regal would certainly not have indemnified the directors or made good the loss.
The decision in Regal was later approved in Warman International v Dwyer.

Exceptions to Regal:
Peso Siver Mines Ltd v Cropper: Almost identical facts to Regal. Director of a mining company was held not to have breached his Fiduciary duty by taking up some mineral claims which were offered to him after the company had rejected them, after a bona fide consideration of the matter by the Board of Directors. 

The narrowness of Regal has also been criticised with the suggestion that the better test would be the ‘line of business’ test proposed by Austin: that a director may not take up an opportunity for profit if it is within the scope of the business which the company carries on or plans to carry on’.  it must not be any opportunity which he came across through a position as director but must be in the ‘line of business’.

In Queensland Mines v Hudson the Privy council held that the director was not in breach of duty where he took up an opportunity which had been previously put to the company and rejected by it and where the company had assented to him to take up the venture.
The court must satisfy itself that the matters complained of fall within the scope of the Fiduciary’s and that the conduct of the Fiduciary constituted a breach of duty.

•    Trustee and Beneficiary

As in the above relationships, the Fiduciary obligations cast on the trustee will be limited to matters pertinent to the trust.

The duty of the trustee is very strict, and in some circumstances, stricter than that of other fudiciaries: Chan v Zacharia (1984) This relationship also illustrates the point that Fiduciary obligations do not arise only in situations involving some personal undertaking given by the Fiduciary to his or her principal. In many cases there will be no personal relationship or contact between trustee and beneficiary and the trustee will still owe Fiduciary duties to the beneficiary.

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