The source of Fiduciary duties
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
• 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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4.4 Breach of Duty: “Conflict of interest” and “improper gain”
• The Doctrine in Keech v Sandford
There is a strict duty to avoid conflict of interest between fiduciary and principal.
Fiduciary is accountable for any benefit acquired by virtue of his position.
Keech v Sandford
Facts: A lease had been held upon trust, but a lessor refused to renew the lease to the trust, because the beneficiaries were infants, and the lessor had concerns about their ability to comply with the terms of the lease. The trustee sought and was granted a renewal of the lease in his own name.
Issue: Was the trustee entitled to hold the lease personally, or was his renewal of the lease a breach of the conflicts rule?
Decision: The trustee held the new lease upon trust for his beneficiary. Despite the rigour of the rule, Lord Chancellor King said that it was better that the lease be allowed to run out than to allow a trustee to take such a benefit for himself or herself.
The rule is said to apply to the renewal of a lease by anyone who has occupied a fiduciary position: Re Biss [1903] The rule is confined in its operation to cases involving leases.
Once a fiduciary relationship has been established, the next question is whether the fiduciary is n breach of their duty which is established by the scope of the duty involved.
Two circumstances in which a fiduciary could be in breach of his or her duty is outlined in Chan v Zacharia
Facts: Two doctors previously in partnership in suburbs of Adelaide. Partnership terminated. Carried on in different practices in different suburbs. Lease in one suburb was about to run out. The option to renew was in the name of the two doctors. Dr Chan approached landlord – without telling Dr Zacharia – and obtained the lease in his name.
Held: Chan was a constructive trustee for himself and Zacharia of the new lease which was an asset of the partnership. Dean J said that the general principle of equity requiring a fiduciary to account for personal benefit or gain embodied two themes:
1. appropriated for the principal any benefit or gain obtained or received by the fiduciary in circumstances where there existed a conflict of personal interest and fiduciary duty, or a significant possibility of such conflict;
2. required the fiduciary to account for any benefit or gain obtained or received by reason of or by use of his or her fiduciary position, or of some opportunity or knowledge resulting from it.
Rule in Keech v Sandford was applied.
Clay v Clay [2001]
Facts: Stepmother bought house from dead husband’s estate for market value. Stepmother was guardian for all stepchildren. Later three children from husband’s first marriage and then current trustee tried to have sale set aside or to get 3/4ths of house to be in trust for step-children.
Held: NO; There was no conflict between duty as guardian and that of buying house in her own name. Market price helped greatly.
Also the then trustee had a power of sale. Mrs Clay did not deal in property or with her wards. She dealt in good faith in trying to be a good mother and provide shelter for children.
4.5 Defences: The Duty of Disclosure and Informed Consent
The ONLY way for a fiduciary to enter into an arrangement where there might be a conflict of interest and duty or some benefit arrived at through the fiduciary position is with the informed consent of the principal/s. This placed heavy emphasis on the need for disclosure.
- Informed consent;
- Full and relevant disclosure of all information pertinent to the transaction and, if need be, to provide some adequate explanation of that information.
- Duty of disclosure does not extend to facts the fiduciary is unaware of. Even though enquiry might reveal such.
BLB Corporation of Australia v Jacobsen (1974)
Facts: The director of a company supplying yarn was also manager of Bel-Knit, a customer of the company. He allowed Bel-Knit to purchase a large amount of yarn from the defendant on credit at a time when Bel-knit was insolvent. The accounts of Bel-Knit were not prepared until the end of the year and he had not known of the substantial trading loss incurred at the relevant time. He had advised the company of BK debts and that it was struggling to establish itself in the market.
Held: This was a sufficient discharge of duty and his duty had not been breached.
There is some suggestion that disclosure will not be necessary where the information which would otherwise have been provided would not have effected the result: Walden Properties Ltd v Beaver Properties Ltd [1973].
It is no defence to show that the fiduciary has acted honestly or with good faith in the transaction: Boardman v Phipps where their Lordships were anxious to stress Boardman’s integrity.
Brickenden v London Loan and Savings Co [1934]
Facts: Bickenden, a solicitor for a finance company, benefited by a loan made by the finance company to a Mr Biggs, by receiving from the moneys loaned payment out of several mortgages given to him by Biggs, together with certain commissions and fees in connection with the mortgages. Bickenden failed to disclose to the finance company.
Held: Bickenden had breached his fiduciary duty to the finance company by that non-disclosure. Their Lordships also said that, once the undisclosed facts were found to be material, the question of what the principal might have done had the facts been disclosed were mere speculation and irrelevant. Applied in Gemstone Corporation v Grasso.
4.6 Remedies for breaches of fiduciary duty
A fiduciary will be held to be accountable far any benefit or gain acquired through breach of his or her duty, but the nature of the remedy awarded will vary according to the circumstances of the case.
1. Constructive trust
High Court is reluctant to find a constructive trust exists. They will only do so in particular circumstances and when there is no other appropriate remedy.
A constructive trust declares the wrongdoer as holding the wrongfully obtained assets in trust for the principal.
This remedy will usually clean out the wrongdoer – sometimes a fair result.
This remedy was applied in Timber Engineering Co Pty Ltd v Anderson against two officers of a company who had set up another business in competition to that of their employer.
A constructive trust may be imposed where the fiduciary has acted dishonestly, as in Timber Engineering, or honestly, as in Boardman v Phipps, provided a breach of duty can be shown. This remedy is discretionary.
2. An Account of Profits
Courts may award a lesser relief, such as an account of profits covering a certain period.
This was the approach used in Hospital Products at first instance in the HC, his honour preferring an account of profits to a constructive trust because of the narrower scope of the appellant’s fiduciary obligation, and because he felt some allowance should be made for the appellant’s diligence in building up the Australian business.
An approach which was approved in Warman International Ltd v Dwyer, in the case of a business it may well be inappropriate and inequitable to compel an errant fiduciary to account for the whole of the profit of his conduct of the business or his exploitation of his principal’s goodwill over an indefinite period of time. It may be appropriate to allow the fiduciary a proportion of the profits, depending upon the particular circumstances. This may well be the case when it appears that a significant proportion of the profits has been generated by the skill, efforts, property and resources of the fiduciary, the capital which was introduced and the risks he has taken, so long as they are not risks to which the principal’s property has been exposed.
In Chan v Zacharia it is outlined that, the liability to account for a personal benefit or gain obtained or received by use of or by reason of fiduciary position, opportunity or knowledge will not arise in circumstances where it would be unconscientious to assert it…
The fiduciary will be ordered to render an account of the profits made within the scope and ambit of his or her duty. If the loss suffered by the plaintiff exceeds the profit made by the fiduciary, the plaintiff may elect to have a compensatory remedy against the fiduciary.
3. Damages or equitable compensation
Warman International Ltd v Dwyer
Facts: Dwyer was general manager of the qld branch of Warman International Ltd whose business included distribution of gearboxes and other products manufactured by the Bonfiglioli group. Bongiglioli wanted to set up a joint venture with Warman for the assembly of B products in Australia. Warman’s made it clear that they would not be interested. Dwyer entered into a secret negotiation with B and arranged for two companied to be formed: BTA, in which Dwyer, his wife and B interests held shares and ETA, which was wholly owned by Dwyer and his wife.
Later B terminated its agency with Warman and Dwyer left Warman. BTA and B entered into a joint venture which provided for the assembly and distribution of B gearboxes in Australia. ETA also did so in conjunction with the joint venture. BTA took over agency business in Australia which was very successful over the 4 years proceeding the trial. Warman commenced proceedings against Dwyer seeking relief including an account of profits.
Dwyer was found to have breached his fiduciary duty to Warman by effectively appropriating the agency business previously conducted by Warman. The trial judge held that Warman was entitled to ‘equitable damages’ for the loss of the Warman’s chance of retaining the agencies business, even though the agencies were likely to be lost.
Held: The court of Appeal upheld the finding of breach of fiduciary duty but, by a majority, held that Warman was not entitled to an account of profits but only to its losses flowing from its breach of duty. HC preferred that an account of profit’s was the appropriate remedy. They had to account for the entirety of the net profits of the businesses before tax over the first two years of their operation, less an appropriate allowance for expenses, skill, expertise, effort and resources contributed by them.
A fiduciary in breach may be ordered to pay equitable compensation by way of restitution to the principal where the principal has suffered a loss as a result of the fiduciary’s breach, even though the fiduciary has not received any corresponding profit or gain.
A fiduciary in breach may be ordered to pay equitable compensation by way of restitution to the principal where the principal has suffered a loss as a result of the fiduciary’s breach, even though the fiduciary has not received any corresponding profit or gain.
In Gemstone Corporation of Australia Ltd v Grasso (1994), it was held Grasso a director had breached his fiduciary duty by not making proper disclosure to the board. Grasso was liable to make good the loss which flowed from that breach. The court held that accountability for breach of fiduciary duty arises immediately upon breach; that is, immediately the fiduciary enters into an engagement in which there is a possibility of a conflict of interest. It was held that it is irrelevant speculation to inquire into what might have been the outcome had there been appropriate disclosure of the true situation when the issue of partly paid shares was mooted.
Where a fiduciary enters into some contract or other engagement, particularly one with his or her principal, in circumstances where there is an actual or potential conflict between the fiduciary’s personal interest and his or her duty to the principal, the appropriate remedy may be rescission of the contract or other engagement. But an equit entitling the principal to rescission means rescission with restitution, it does not exempt the principal from all obligations under the arrangement as demonstrated in Maguire v Makaronis (1997)
Facts: Maguire was a solicitor and partner to the second appellant, Tansey. The respondants Mr and Mrs Makaronis, were former clients of the appellants. The respondants purchased a poultry business. The appellants were retained to act for the respondants on the purchase of the business and freehold of the farm property on which the business was conducted. The respondents borrowed $250,000 by way of bridging finance which was borrowed by the appellants from the Commonwealth bank and on-lent to the respondents. The loan was secured by a mortgage over the repondent’s property at reservoir and by an executed assignment of Mr Makaronis’ superannuation entitlements.
The poultry business folded and the appellants commenced proceedings seeking to recover the moneys advanced. The respondents counter-claim pleading was breach of fiduciary duty by the appellants. In particular, it was alleged that, by acting for themselves as mortgagees while also acting for the respondents as mortgagors, the appellants had placed themselves in a position of actual or potential conflict of interest.
Held: The HC found that there was a breach of fiduciary duty. It was considered that granting the remedy of rescission should be conditional upon repayment of the moneys advanced plus interest. HC agreed that the whole transaction should be rescinded so far as possible, the parties remitted to their original position. An order was made setting aside the mortgage, conditional upon the respondants paying the money due under the mortgage, plus interest calculated at the rate set by the Supreme Court. In default of such payment, judgement was to be entered for the appellants for the possession of the reservoir property.
4.7 Secret commission and Equitable Debt
An employee who receives a secret commission or ‘kickback’ from a third party in return for carrying out his or her job in a certain way, will be liable in equity to the employer. It is a breach of the employee’s duty of fidelity and in some cases fiduciary duty.
The rule in these circumstances as outlined in the leading case Lister v Stubbs, where kickbacks were paid by suppliers of materials used in the plaintiff’s business to the employee responsible for ordering those materials, is the employee is held liable but only for the sum received.
Also outlined in Metropolitan Bank v Heiron, a director of a bank accepted payment from a debtor to the bank in return for using his influence to secure an arrangement between the bank and the debtor which was favourable to the debtor. The director was held liable, but only for the sum received.
The view in these cases is that while the employer was entitled to be paid the bribe received by the employee in each case, its rights were those of a creditor against a debtor, not of a cestui que trust, as the money was never ‘money of the company’. This is criticized by the NSW court of Appeal being described as anomalous and not to be extended beyond its own facts: DPC Estates Pty Ltd v Grey [1974].
This principle appears to rest on the notion that a constructive trust is only available where assets of the principal can be traced into the hands of the fiduciary or some third party, however, that proposition is contrary to the view in Re Stephenson Nominees (1987) where the judgement stated that the constructive trust may be imposed as a cautionary or deterrent remedy even where there has been no unjust enrichment of the defendant at the expense of the plaintiff and no assets of the plaintiff can be traced into the defendants hands.
It is strongly arguable that Lister v Stubbs is no longer good law. The Privy Council rejected it in A-G (Hong Kong) v Reid [1994].
Facts: The case involved the receipt of bribes by an employee in connection with his employment. The employee in question was a lawyer working for the Crown in Hong Kong. He accepted bribes in return for obstructing criminal prosecution. He allegedly purchased real estate in NZ with the bribe. Caveats placed on these properties by the Crown were challenged on the ground that the Crown had no equitable interest in the properties.
Held: “When a bribe is accepted by a fiduciary in breach of his duty then he holds that bribe in trust for the person to whom the duty is owed. If the property representing the bribe decreases in value the fiduciary must pay the difference between that value and the initial amount of the bribe because he should not have accepted the bribe or incurred the risk of loss. If the property increases in value, the fiduciary is not entitled to any surplus in excess of the initial value of the bribe because he is not allowed by any means to make a profit out of the breach of duty.”
Reading v AG [1951] adopted the Lister v Stubbs approach.
Facts: R was a Sergeant in British Army in WWII in Egypt. Was into smuggling contraband into Egypt. Caught, prosecuted and loot confiscated. After war he sued the Crown to recover his ill-gotten money.
Held: He failed. Court said R owed fiduciary duties to the crown whilst in uniform and breached that duty in conducting illegal smuggling operations. Held that an employee receiving a secret profit was liable to the extent of the secret profit.
Jirna Ltd v Mister Donut of Canada Ltd (1973)
Facts: Jirna was a franchisee of MrD. Had to buy supplies from particular suppliers. Suppliers paid a commission to MrD. Jirna claimed these were wrongful commissions.
Held: At first instance the court found little of worth in Jirna’s arguments holding that these were purely commercial arrangements.