Equity Assignment PDF

Preview

Summary

Equity Assignment on fiduciary duties. ...

Description

LAW2212 – Equity

PORT LAWYERS INTEROFFICE MEMOR AND UM TO:

SIMON BENSTON SENIOR PARTNER

FROM:

JEN BRADSHAW

SUBJECT:

PL/2020/05/08 JANE WRIGHT

DATE:

28/04/2020

BREIF BACKGROUND Our client, Jane Wright, has worked as a clerk for a law firm for over 10 years and has made unsolicited financial contributions in the form of bank deposits to the firm’s bank account in this time. The firm had not been aware of Jane’s contribution. Robert Wright, the founding and senior partner of the firm is Jane’s uncle. Tom Simple and Peter Knot are the other two members of the law partnership, they are unrelated to Jane. Jane, as office manager became aware of mounting liabilities and a negligence suit against Robert. Robert lost the suit against him, declared bankruptcy and committed suicide. For the purposes of answering this question, I am going to assume that the remaining partners became aware of the money that Jane had contributed at this time. The partners began to engage in unethical practices involving client’s money, Jane became aware of this behaviour and now wishes to sue Simple and Knot on the grounds of a breach of fiduciary duty, as she considers herself a “de facto” partner. Jane would like to recover the money she has contributed to the firm.

ISSUE The issue in this case, is whether a fiduciary relationship between Jane Wright and the two remaining partners of the firm exists? If I establish a relationship exists, has there been a breach of fiduciary duty or duties, and what possible remedies would Jane be able to pursue? FIDUCIARY RELATIONSHIP It is clear, from the facts, the Jane has been a long employee of the firm and the employeremployee relationship is not an accepted fiduciary relationship and therefore is not one of a presumed status based fiduciary relationship , so it is important that we examine the facts of this case and apply the Indicia characteristics in view of establishing a non-presumptive relationship. There have been some non-presumptive categories established in the past, but it is important that we remember that the groups are not fixed and can be reversed. The indicia are characteristics and behaviors that were articulated by Mason J (in dissention) in Hospital Products1 to identify a fiducial relationship; and we only need to satisfy one of the following; •

Loyalty:

‘The hallmark of fiduciary is a single minded duty of loyalty’ Lewison LJ said in Ranson v Customer Systems plc2, ’The duty of loyalty in that context has a precise meaning: ‘namely the duty to act in the interests of another’…’3 Although the relationship of employer to employee is not recognised as one of a fiduciary nature, there are many who oppose this notion. It could be argued that employment does not require that degree of loyalty and that it is not expected to

1

Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 [2012] EWCA Civ 841 at [41] taken from Principles of Equity and Trusts 3 Ibid 2

subdue one’s own interests. Nevertheless, there is instances where that loyalty is expected by an employer and where it is given by an employee without that expectation. Jane has displayed a level of loyalty in time and financially to the firm that has put the interests of the firm before hers. •

Vulnerability/dependency:

Vulnerability is an essential, but not the penultimate, element of a fiduciary relationship. LAC4 suggests it is essential compared to C-Shirt Pty Ltd5 in the Australian Court system that notes that this is a characteristic of a fiduciary relationship, it is not the ultimate test for the existence of a relationship. When looking at vulnerability we must consider the fact that Jane had not received the same level of education as the two remaining partners and that she relied on them to exercise their positions of power in a responsible manner. Jane displayed dependency like we saw in Farah v Say Dee6, as her vulnerability relied on Simple and Knot to be diligent in their practices. In Hospital Products7 although Dawson J dismissed the notion of fiduciary duties existed, he stated ‘the notion underlying all the cases of fiduciary obligation that inherent in the nature of the relationship itself is a position of disadvantage or vulnerability on the part of one of the parties which causes him to place reliance upon the other and requires the protection of equity acting upon the conscience of that other’. •

Trust & confidence:

The protective notion of fiduciary relationships is that it is implied that fiducial duties are typically expected in situations where the relationship is one of trust and confidence and one of the members depends upon the integrity, expertise and/or judgement of the other. As the positions that Simple and Knot held were that of seniority and experience, Jane had trust and confidence in those positions and that the holders would use their positions with integrity.

4 5

LAC Minerals Ltd v International Corona Resources Ltd (1989) 61 DLR (4th) C-Shirt Pty Ltd v Barnett Marketing and Management Pty Ltd (1996) 37 IPR 315

6

Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89

7

Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 54 at 142

Mason J summarised in Hospital Products8 that ‘The accepted fiduciary relationships are sometimes referred to as relationships of trust and confidence or confidential relations”.

•

Agreement to act for/on behalf of:

The fiduciary’s agreement with the principal/beneficiary my be in express or implied terms. Often in contractual agreements parties found to be in fiduciary relationships will have duties that are over and above the contractual duties they owe each other.9 For the purpose of answering this question it is assumed that in Jane’s role as office manager and de facto partner she was put in a position of trust and, as a result of this position she would have been called on to make decisions of a business nature on her employer’s behalf. As many employee’s would be in the position, we must assume that the decisions made were of a high relevance to the firm10. •

Inequality of bargaining power

To consider this I am endeavoring to ascertain if one party in a stronger position and can that position be used to their advantage. From the facts, Simple and Knot are senior partners in the firm and have an undeniably stronger position of power, in Hodgkinson a Canadian case from 1995, La Forest J ‘Liability here flows from the principles underlying the notion of fiduciary duty, one of a species of a more generalized duty by which the law seeks to protect vulnerable people in transactions with others.’11 •

Unilateral exercise of power/discretion

The person/s in the fiduciary position can make a decision unilaterally and without discussion. In exercising this position of power, the decision of the fiduciary must be for the benefit of the principal/beneficiary, it must not place them in a vulnerable position. Again, we look to Mason

8 9

Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 54

Jane Knowler and Charles Rickett, ‘The Fiduciary Duties of Joint Venture Parties – When do they Arise and What do they Comprise?’ (2011) 42 VUWLR, pg 118 10 Douglas Brodie, ‘The Employment Relationship and Fiduciary Obligations’, (University of Stirling, December 2010) pg 2 11 Hodgkinson v Simms (1995) 117 DLR (4th) 161 (C/M 144)

J

in

Hospital

Products12

where

he

maintains

‘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. The expressions 'for', 'on behalf of', and 'in the interests of' signify that the fiduciary acts in a 'representative' character in the exercise of his responsibility". The facts of this case are very peculiar. I could look to establishing a fiduciary relationship of an employer and employee, but the Australian Court system is somewhat stalling in acknowledging this relationship to be fiduciary, in contrast we have seen the reverse relationship established.13

From the facts that Jane has bought to me, she views this

relationship as one of much greater value than that of employment, she believes she is in a de facto (in fact not law) - ‘something that is for the case ‘for all intents and purposes’ but has not been formalised according to law’14 partnership. Although there is not a legal partnership executed between the current partners, when applying the indicia to the facts I submit that the court will highly likely establish a fiduciary relationship on a non-presumed base. I submit that there is an existence partnership in the form of a joint venture. Not all joint venture partnerships involve the fiduciary relationship. If an express contract is in place and the parties are all on equal footings and have equal bargaining powers and the nature of the agreement is commercial, there need not be a need for any or one party to be part of a fiduciary agreement. A joint venture is commonly a business arrangement 15 and ‘usually (but not necessarily) contributing, money, property or skill’16. Fiduciary duties arise in this type of relationship when one party is in a weaker position and they rely on the party/’s in the stronger position to exercise their duties for the good of all involved, and the business has more of a partnership characteristic.

12

Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 54 at 96 Ancient Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd [2018] HCA 43; Victoria University of Technology v Wilson [2004] VSC 33 14 Australian Law Dictionary (Second Edition 2013) ‘de facto’ pg 216 15 Jane Knowler and Charles Rickett, ‘The Fiduciary Duties of Joint Venture Parties – When do they Arise and What do they Comprise?’ (2011) 42 VUWLR, pg 119 16 United Dominion Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1 at 10 13

For the purpose of answering this question, I am going to assume that at this stage of the process, Simple and Knot had become aware of the money that Jane has contributed to the firm before they were unethically using the funds. The relationship does not have to be legal as expressed by Mason, Brennan, Deane JJ ‘A fiduciary relationship can arise and fiduciary duties can exist between parties who have not reached, and who may never reach, agreement upon the consensual terms which are to govern the arrangement between them.’17

THE SCOPE OF DUTIES FOR A FIDUCIARY RELATIONSHIP ARE: i.

Duty not to engage in conflicts between interests and duty:

A fiduciary must not put oneself in a position where their personal interests may conflict with the duties of their fiduciary position. The information Jane has given is that Simple and Knot are engaged in activities that are unethical involving monies of clients. For the purposes of this question, I am assuming that the monies in question are in trust. Simple and Knot are lawyers who are in esteemed members of the society and are required to uphold the law. I am assuming that they are using the monies for a personal gain, which is quite obviously a conflict. Again, we look to Hospital Products18 where the objective test was is there a ‘real or substantial possibility of a conflict’ between the personal interest of the fiduciary and the person whom they are bound to protect. By using client’s monies for unethical reasons can only be a conflict of interest and can only put Jane in a negative position. Furthermore, the use of this money can only be for their own personal gain, not for the benefit of the joint venture and/or Jane, therefore Simple and Knot were only acting in their best interest; United Dominions19 In a case that I could draw similarities to, Victoria University of Technology20, because of the nature of the relationships, His Honour drew on Chan v Zacharia21 to emphasis his point that

17

Ibid at 2 Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 54 at 103 United Dominion Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1 20 Victoria University of Technology v Wilson [2004] VSC 33 21 Chan v Zacharia (1984) 154 CLR 178 at 199 18

19

‘a fiduciary is not allowed to put himself in a position where his interest and duty conflict and a fiduciary who profits outside the scope of his undertaking…’

ii.

Duty not to engage in conflicts between duty and duty:

The concept of this duty is that the fiduciary cannot engage in two conflicting activities; such as having opposed clients or being directors for competing companies. I do not find that this duty is being breached. iii.

Duty not to accept a secret commission or bribe.

From the facts I do not have enough information to form an argument on this duty. I am not able to clearly define that the monies are being used to accept a secret commission or bribe. Simple and Knot have breached their duty of engaging in personal interests that are conflicting with their fiduciary duties. POSSIBLE DEFENSES FOR BREACH OF FIDUCIARY DUTIES: 1. Disclosure and Informed Consent: The court will pardon a fiduciary from any liability for a breach of their fiducial duties if they have obtained full and informed consent from the beneficiaries. A recent case Queensland Mines v Hudson22 gave the parties this defense as the court found that ‘consent given by the board of the directors was valid’ as per the contractual agreements of the company; in contrast with Regal (Hastings) v Gulliver23 where the court held that, although the share holders of the company would more than likely have given consent to the directors, no consent was sought through the resolution of the shareholders, they had breached their duty. A fiduciary must make full disclosure to the person who is owed the fiduciary duty of the transaction or activities they are choosing to enter into, if they are wanting to escape liability;

22 23

Queensland Mines Ltd v Hudson (1978) 18 ALR 1 Regal (Hastings) v Gulliver [1942] UKHL 1

and the person who is owed the duty must make an informed consent. ‘Nothing short of fully informed consent’ is acceptable; Boardman v Phipps24 Simple and Knot did not fully disclose their actions and the transactions that were taking place, and by way of consequence, they did not seek full consent.

2. Contractual Variation of duty arising in equity: This defense is not applicable in our circumstances. 3. Unclean hands – he who comes to equity must come with clean hands; This is one the maxims in Equity and can be used as a defense in circumstances where the beneficiary has acted in an unethical manner or has acted in bad faith. The burden of proof would be on Simple and Knot but from the facts presented to me, Jane has not been dishonest or concealed any unethical acts. 4. Delay defeats equity: When has the beneficiary become aware of the breach? From the facts presented to me, Jane has contacted our firm with the information, seeking advise and possible restitution. This defense is not valid. From the above information, it is not foreseeable that the court will find Simple and Knot to have a defense to breaching their duties.

REMEDIES FOR BREACH ARE: 1. An account of profits; 2. Imposition of a constructive trust; 3. Equitable Compensation – principle is to place the principal/beneficiary in the position he/she would have been in had there been no breach of fiduciary duty; 4. Equitable liens and charges;

24

Boardman v Phipps [1967] 2 AC 46

5. Rescission with restitution.

CONCLUSION: From the above it has been established that there was a fiduciary relationship on foot because the related to a non-presumed status base category – joint venture. It has been argued that Simple and Knot have breached one of the fiduciary duties owed to Jane and, I also argue that Simple and Knot do not have a valid or strong defense as there has not been full disclosure and informed consent. My advice to Jane would be that the following remedies; An account of profits: this remedy is ‘operates to strip a fiduciary of unauthorised gains.’25 This remedy was most prominent in the case of Warman International Ltd26 where the High Court calculated an account of profits for a specific period of time, for Warman it was two years but the time frame would be dependent on the case: ‘in the case of a business it was said to be inappropriate and inequitable to compel the errant fiduciary to be accountable for an indefinite period.’27; Equitable compensation: if the principal’s loss exceeds the fiduciary’s profits gained, the principal can elect to seek equitable compensation, this remedy aims to place the principal in the position that they would have been in if there has not been a breach of the fiduciary’s duties. Warman again held that the principal can ‘elect between an order for equitable compensation or an order for an account of profits….’.28 are available to her and I would strongly advise she elects the equitable compensation.

25

Peter Devonshire, ‘Account of Profits for breach of Fiduciary Duty, Thomson Reuters, Wellington, 2013 Warman International Ltd v Dwyer (1995) 182 CLR 544 27 Ibid 561 (Mason CJ, Brennan, Deane, Dawson and Gaudron JJ) 28 Ibid

26...