Fiduciary Obligations
Who owes fiduciary obligations?
1. Does the relationship fall within a presumed category? 2. OR Is there a legitimate expectation that X will act in the interests of Y? a. Is there a duty of no profit/no conflict, and a legitimate expectation that there be no profit/no conflict? b. If so, a fiduciary duty will exist within its scope and ambit (see also the factors in Breen e.g. inequality of bargaining power, undertaking, dependency, ascendancy, vulnerability etc.); and 3. If so, has the fiduciary obligation been breached? Breach will only occur if there is a recognised conflict or profit: a. Is there a 'real and sensible possibility' of conflict? b. Has the fiduciary made an unauthorised profit from his or her position as fiduciary?
Defences
- Informed consent - Contractual exclusion - Unclean hands
Core fiduciary duties
- No conflict - No profit - Breach of duty
Nocton v Lord Ashburton [1914] AC 932 , CB 11.27C
F: A consulted N (solicitor) in various financial transactions and reposed implicit confidence in his judgment and integrity. N negligently advised A to release a security over a property. A later suffered losses when it was revealed his security was insufficient to cover the debt. I: Was there a claim for breach of FD? R: · Liability for breach of FD is not dependent on proof of deceit or negligence A: · Equity imposes duties in special relationships above and beyond the min legal duties to be honest and to be careful. FD rest on the idea of trust and of conduct offensive to conscious
Bolkiah v KPMG [1999] 2 AC 222, CB 11.39C
F: Affirmed in Aus by Kallinicos v Hunt R: · Lawyer/client relationship is fiduciary · Once retainer has run out, don't owe fiduciary duty - but always owe a duty of confidentiality ○ Court will prevent you acting for new client where there is a risk of confidential info being disclosed.
Harris v Digital Pulse Pty Ltd [2003] NSWCA 10, (2003) 56 NSWLR 298
F: An employee, in defiance of an express term in his employment contract, secretly worked for the benefit of his own business and competed with his employer during the course of employment. The trial Judge ordered exemplary damages in addition to an order for equitable compensation and this was done for punitive purposes I: Does punitive compensation exist in equity? H: · Not in australia. Exemplary damages are not awarded for breach of contract. As the breach of FD is a contractual relationship, the court should not develop for the first time a remedy which is not available in the law of contract.
Breen v Williams (1996) 186 CLR 71
F: B had botched breast implantation surgery. Wanted to join US class action. Wanted medical records from Aus doctor. Doc refused access unless B indemnified him against all liability for performing the corrective surgery. B sued W in contract, property and breach of FD. I: Did W breach a positive fiduciary duty to not disclose B's med records? R: · Doc/patient is a fiduciary relationship only in the ability to effect economic interests not personal/medical interests. · Starting point: (whether a person owes fiduciary obligations?) ○ On all the facts would it be expected that the no profit and no conflict rules apply? A: Dawson and Toohey JJ: · Docs are simply obliged to exercise professional responsibility · Law of negligence and contract which governs the duty of a doc towards a patient. · FDs could be superimposed upon contractual obligations (eg. if a doc has a conflict of interest by having a financial interest in the hospital) but not relevant here Gaudron and Dean JJ: · Doc/patient relationship does bear some characteristics of fiduciary relationship. Characterised by inequality of bargaining power (doc has power and knowledge upon whom the patient is dependent on for advice - vulnerable) · The whole relationship is not fiduciary. Fiduciary aspects would be diagnosis, advice and treatment but not the whole relationship Gummow J · Doc/patient is fiduciary ○ Patient has delegated control to doc ○ Patient must often reveal confidential and intimate info ○ Efforts of docs may have significant impact on economic and personal interests of patient ○ Patient is vulnerable · However, disclosure of records does not fall within this scope as there is no conflict or misuse of position. · Doc's fiduciary duties extend only to not profiting from their position and not conflicting with their patients' interests.
United Dominions Corporation v Brian (1985) 157 CLR 1,
F: B, UDC and SPL were joint ventures in a land development project mostly financed by borrowings from UDS. Made a big profit and UDC retained them all by relying on a mortgage clause given to it by SPL before the execution of the JV agreement. B did not know about the clause I: Was creation of the clause in breach of UDC (and SPL's) fiduciary duty towards Brian at the time of negotiation (before the contract was formalised)? R: · Joint ventures are a presumed fiduciary relationship A: · Fiduciary arrangement from time when formal agreement was executed ○ Profits were to be shared ○ Joint venture property was held on trust ○ Policy of the joint enterprise was ultimately a matter for joint decision ○ Did not matter that it was confined to one joint undertaking rather than a continuing relationship · Duty can arise before formal agreement ○ While concluded agreement gives rise to obligations, it is the relationship that creates the obligations. ○ Relationship can arise from circumstances leading up to the final agreement ○ FD arose at the time when the first of the mortgages was given and accepted § Each party under FD to refrain from pursuing or obtaining for itself any collateral advantage in relation to the proposed project without the knowledge and informed assent of other participants § In combining to apply the property to their own collateral purposes (UDC and SPL) and in giving and obtaining those collateral advantages without knowledge or consent of B, they were in breach of FD ○ UDC precluded from relying on clause to secure debts owing by SPL
Canson Enterprises v Boughton [1991] 3 SCR 534, (1991) 85 DLR (4th) 129
F: C sued B (solicitor) for full extent of land losses. First for overpaid value of the land and then redevelopment losses. Argued that by failing to disclose to the buyer that land was not being sold by vendors directly, had committed a breach of FD H: · Solicitor's actions were a breach of FD ○ This is a Canadian case ○ In Aus, would sue the solicitor from breach of contract/neg but not FD as not tainted by conflict or unauthorised profit. · Could recover whole loss from the solicitor, even though it was mainly caused by engineers (redevelopment losses) ○ CL remoteness applies to breach of FD ○ Plaintiff is required to prove that the loss flows from the breach of the duty. · McLauchlin J (dissent) ○ where P fails to take most obvious steps to alleviate loss, P is 'author of his own misfortune:'
Chan v Zacharia (1984) 154 CLR 178, CB 11.3C
F: C&Z conducted a medical practice in partnership at premises of which they held a lease for a 3yr term with an option of renewal for a further 2 years by notice no later than 3 months before end of the term. During the 3rd yr the partnership was set to be wound up. C&Z could not agree to the joint exercise of the option of renewal. C, within the option period, sought a renewal for himself and he was granted a lease for 2 years on payment of a premium. I: Was C bound to account in the winding up of the partnership as a constructive trustee for any benefit he received from the new lease? R: · Person who is under a fiduciary obligation must account to the person to whom the obligation is owed for any benefit or gain: 1. Obtained in circumstances where a conflict or significant possibility of conflict existed between his fiduciary duty and person interest in pursuit of the benefit or gain 2. Obtained or received by use or reason of his position or of opportunity or knowledge resulting from it. · Question: When is a gain attributable to the fiduciary relationship and when is it not? · Presumed fiduciary relationship of partner/partner exists until the assets of the partnership have been fully wound up. A: · As the partnership was solvent on dissolution: ○ C&Z held undivided beneficial interest in the totality of the general assets of the partnership ○ After dissolution, C&Z held legal rights under lease + option as trustees for those entitled to share in the proceeds of the realisation of the partnership assets. ○ C's roles as trustee and former partner are fiduciary. Each role involved fiduciary obligations to act in the interests of the dissolved partnership and beneficial realisation of its assets. · Whilst it could be argued that Z had suffered no loss, the right to renew the lease was obtained by virtue of the interest under the prior lease (ie. he had taken personal advantage of an opportunity that he acquired by virture of his fiduciary position)
Maguire v Makaronis (1997) 188 CLR 449
F: Clients of solicitors executed a mortgage in favour of solicitors to secure finance for a poultry farm. High interest rate. Solicitors did not draw clients' attention to the fact that the solicitors were to be the mortgagees and nor did they tell them to seek independent legal advice I: Was there a breach of FD? R: · Can get rescission for breach of FD A: · Breach of FD due to lack of fully informed consent. Appropriate remedy is rescission. · M succeeded in rescinding the mortgage (no longer tied to repaying the high rate)
Warman International Ltd v Dwyer (1995) 182 CLR 544
F: D was senior manager of W in Qld. Responsible for the agency which W had to market within Aus gearboxes manufactured by B. D had dishonestly abused his position as W's manager to sabotage the commercial relationship between it and B. I: W sued D for account of profits, alleging he owed a FD as senior manager. R: · Can have account of profits as breach of FD A: · Relevant question was whether the gain was made from breach of FD · Here some of the gain was in breach of FD but not all · Result was that W awarded profits for first two years of the business but not the following years. Would be punitive to award in perpetuity.
Attorney-General (Hong Kong) v Reid [1994] 1 AC 324, CB 11.30C
F: R is a senior prosecutor who took bribes. Used bribe money to buy farms in NZ. HK govt pursued him and placed caveat over the NZ farm. R: · Civil servant/crown is a presumed fiduciary relationship · Where the property is still clearly identifiable, the beneficiary/principal can ask for a constructive trust A: · The caveat was valid as there was a FD · A CT arose as a secret benefit, which may be a bribe, is a benefit which the fiduciary derives from trust property or obtains from knowledge which he acquires in the course of acting as fiduciary. · As soon as the bribe was received, it was held on constructive trust for the HK govt. · If the property representing the bribe increases in value and exceeds the original bribe in value, he cannot retain the benefit if it is held on CT for the principle · If it goes down in value, fiduciary remains a debtor. · If fiduciary becomes insolvent, unsecured creditors will lose out to the principal.
Boardman v Phipps [1967] 2 AC 46, CB 11.25C
F: There was a will which left property on trust. Three trustees and 4 beneficiaries. Solicitor of trust was B. Part of trust was textile company. B and one beneficiary used their own money to buy a controlling shareholding in the company. Then made a successful takeover bid for another bid for another company. As a result of the takeover, all shareholders (including trust) received substantial dividends. P sought account of profits from B and the other guy for breach of duty. I: Were B and Tom in breach of fiduciary duty such that they were accountable for the additional profit they made? R: · Breach of fiduciary duty may arise even though the principle (here the trustees) would not, or could not have sought the benefit which the fiduciary (B and Tom) has obtained. · Relevant information must be 'special'. (eg. confidential info) A: · Why could beneficiaries sue Boardman? ○ The confidential info (which they received at a time when B was admittedly holding himself out as a solicitor for the trustees) was obtained by him representing the trustees. · Grounds: ○ B obtained the knowledge by means of his fiduciary relationship. (acting as agents for trustee). ○ Information was 'special' as was confidential info and not publically available. ○ Profits made § Nothing short of fully informed consent could enable B and Tom in this situation to make a profit for themselves § Here, may have obtained consent of trustees, but could not argue they got consent from the beneficiaries. · Remedy was that B held shares on constructive trust for beneficiaries of trust
Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41,
F: USSC appointed HPI as its distributer in Aus. HPI developed the capacity to manufacture the same products locally. USSC is not aware of this and eventually terminates the agreement. HPI then fulfilled the pre-existing orders from its own stock and began competing with USSC in Aus. I: Did HPI owe a fiduciary duty to USSC? (fiduciary duty will garner better remedies) R: · If no established/presumed relationship, look at the obligations. ○ If the obligations are owed, then you are a fiduciary. · Can only look at descriptions/characteristics of fiduciaries (eg. power/vulnerability, trust/confidence) · You are a fiduciary if you are in such a position as it is reasonably that you would owe fiduciary obligations ○ Ie. are the characteristics of that relationship such that we could legitimately expect X not to put themselves in a position of conflict A: · Not a fiduciary relationship ○ Their arrangement was commercial § Parties were free to include terms to protect their position (no vulnerability) § Transaction was conducted at arms length and on equal footing (no inequality) ○ Whole purpose of the transaction was that HPI should make a profit. · HPI only had an obligation to act reasonably which falls short of a fiduciary obligations · Transaction was a commercial and contractually regulated one. · Breach of contract and damages for fraud are available and sufficient.
Why do you want to prove a fiduciary relationship?
Why do you want to prove a fiduciary relationship · 1) Allows access to gain-based relief: Murad. o In Murad could have sued for equitable compensation - but would only have won the difference between profit they did get and ought to have got. By arguing for gain, got all of the profits. · 2) Gain based relief may be proprietary relief - AG HK v Relief o Particularly relevant in bankruptcy/fraud cases. · 3) Used to be a looser limitation regime for FDs than normal negligence claim.
Remedies for breach of fiduciary obligation
· Can argue for both gain-based and loss based relief, but court will elect between them on judgment (to award both would remedy the same harm). · Remedies available: o 1) Rescission o 2) Gain based: § Constructive trust § Account of profits o 3) Loss based § Equitable compensation o 4) Proprietary remedies o 5) Injunction
Pilmer v Duke Group Ltd [2001] HCA 31, (2001) 207 CLR 165,
· Kia was taking over WU and many directors of Kia had interest in WU · Report by 'independent qualified persons' for the information of shareholders whose approval was ultimately required at a general meeting · Accountants (NW) engaged by Kia had long dealing with both Kia and WU and report asserted price paid for fair and reasonable, even though not the case · HCA found accountant owed no relevant duty to Kia as no prior engagement or undertaking which presented actual conflict or real possibility of conflict in acceptance/performance of retainer by provision of the report · A: · Australia follows a proscriptive (rather than prescriptive) approach: duties not to profit or create a conflict. Here, in the absence of ascendency, influence, dependence upon or trust of the accountants, it cannot be said that there was a fiduciary duty.