Lecture 4- Fiduciary Obligations PDF

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Lecture 4- Fiduciary Obligations Overview:     

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Fiduciary Relationship Fiduciary Obligations can be something a part of a fiduciary relationship; these are conceptually VERY different to common law obligations. The equity world is NOT clear cut or distinctive…even the courts get confused when examining different cases. The fiduciary obligation can’t really be defined, and the court doesn’t give any tests… they just say you know it when you see it. In common law: personal autonomy is respected and preserved as a matter of theory underlying the laws; in equity: private autonomy is restricted in fiduciary law, as your ability to act is circumscribed by your fiduciary duties. This is unusual in law, but the limits on private autonomy come from the fiduciary noprofit and no-conflict rules, and they are aimed at protecting the principal to whom you owe fiduciary obligations. This is why these duties are PRO-scriptive, not prescriptive; in the fiduciary world the duties don’t prescribe how you act, they simply limit how not to act. There are the two negative restrictive duties, and this is all. Relationships Presumed to Give Rise to Fiduciary Duties:

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There are certain recognised categories of fiduciary duties, recognised by courts as carrying fiduciary obligations: - Trustee and beneficiary (cestui que trust) - Agent and principal  No word is more abused than ‘agent’: if it is a true agent/principal relationship a fiduciary duty exists, BUT this word is used often in the wrong context and this relationship doesn’t exist. - Solicitor and client  This is an atypical relationship, as fiduciary duties exist even at the stages of negotiating a retainer - Director and company  There is an ongoing debate (in older cases, now the law is more evolved) that potentially the director/company relationship gives rise to OTHER fiduciary duties aside from no profit and no conflict;  This has been tested in the HCA though, and they did NOT want to extend these 2 fiduciary duties;  Potentially other director’s duties (e.g. duty of good faith) are simply common law duties, coexisting with the fiduciary duties. - Partners (see: Chan v Zacharia) - Also, master and servant (Gibbs CJ USSC) Critical features of each of these is the undertaking or agreement by the fiduciary to act only for or in the interests of the other person. These are ‘status-based’ or per se relationships. The presumption of these relationships is rebuttable (but not often): e.g. not ALL employees will have a fiduciary duty to employers.

Lecture 4- Fiduciary Obligations The Critical Feature: “The critical feature of the ‘accepted traditional categories of fiduciary relationship…was “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 interest of that other person in a legal or practical sense...” From this power or discretion comes the duty to exercise it in the interests of the person to whom it is owed. --USSC (Mason J); John Alexander (HCA) [87] Keech v Sanford (1726) Sel Cas T King; 25 ER 223    

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This case has been called ‘the progenitor of the modern fiduciary concept’; There is no mention of fiduciary duties in the case as they didn’t use that language back then, they used: ‘trust and confidence’. This language lingers on in the cases…but we should use the language of ‘fiduciary’ as the language of ‘trust and confidence’ in law is different to common use. FACTS: - K created a trust for an infant of a lease of a market - Trustee sought to renew the lease – lessor declined - After lease expired, trustee obtained a new lease in own name - King LC found the trustee held the lease for the infant. Key Passage in the case “This may seem hard, that the trustee is the only person of all mankind who might not have the lease: but it is very proper that rule should be strictly pursued, and not in the least relaxed; for it is obvious what would be the consequence of letting trustees have the lease, on refusal to renew to the cestui que use.” The denial of autonomy is the important thing here, the trustee is the ONLY person who is limited in their personal autonomy by their fiduciary duties…regardless if the offer is free for the rest of the world.

Farrington v Rowe McBride [1985] 1 NZLR 83 

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This case is a NZ case, but it has been generally accepted to discuss solicitor’s duty to their clients…the court said solicitors are like agents, but to a purer degree as they are officer of the court. Solicitors owe clients fiduciary duties – the relationship requires them to act with “absolute fairness and openness” They are like other agents, but to a higher degree, as officers of the court and must observe the utmost good faith towards the client Inflexibility of the rule is designed to prevent the fiduciary from being swayed by interest or a conflicting duty Acquitted of conflict of interest and duty, but not of conflict between duty and duty. If conflict of duty to one or more clients, must fully disclose facts and obtain consent. Key Point “And there will be some circumstances in which it is impossible, notwithstanding such disclosure, for any solicitor to act fairly and adequately for both”.

Lecture 4- Fiduciary Obligations 

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The level of disclosure to ensure no conflict between duty and duty is very high, but ALSO, in some cases there is NO level of disclosure enough to ensure the solicitors are acting for BOTH clients fairly and adequately. You also cannot contract OUT of irreducible core fiduciary duties…the solicitor will ALWAYS have these duties.

Brunninghausen v Glavanics (1999) 46 NSWLR 538  

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This case illustrates that in some circumstances, fiduciary duties can be found between relationships NOT in the common list… This case was peculiar on the facts, and it was due to the exact facts of this case that fiduciary duties were found between a director and SHAREHOLDERS (never held before) Two step-brothers with a common mother-in-law were running two parallel businesses of hardware (ski gear) and software (ski clothing). Glavanics was the minority shareholder in the more successful of the two businesses; his brother (Brunninghausen) was the majority shareholder. They had a falling out in 1982, and Brunninghausen cut out Glavanics completely, but this affected the family so their step-mother said they should buy each other out of the other company, separate them, and make-up. Brunninghausen said he will buy Glavanics out, and ‘pay him a fair price’. In 1987, Brunninghausen bought Glavanics out of his minority share, but didn’t tell him that he had agreed to sell the business for a HUGE profit to another party; thus he bought Glavanics shares for ‘hugely undervalued’ price. Essentially: a director in a proprietary company may, for some purposes, owe fiduciary duties to a shareholder. Such a duty arose here because the sole effective director and majority shareholder (B) took advantage of the imminent sale of the company to acquire G’s minority holding at a gross undervalue. NSWCA stressed: - G was “almost totally powerless” – his directorship was “an empty shell” - He had no right to inspect the books of account or to be informed of negotiations to sell the business - B occupied a position of advantage - After they fell out, B took no steps to act in G’s interests or their joint interest The fact this fiduciary relationship was established relied on the unique facts: Absence of a positive or implied undertaking by B was not fatal. Question was whether G, as the vulnerable party, was entitled to expect that B would act in their joint interests. G was so entitled on the facts.

McKenzie v McDonald [1927] VLR 134 

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Normally, real estate agents are not strictly ‘agents’ for fiduciary duties; they introduce the buyer to the seller, BUT they don’t enter into the contract and don’t have a fiduciary duty…USUALLY. Real estate agent acting on sale of farm agreed with vendor to sell it to him.

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He knew of vendor’s financial difficulties, took advantage of them to achieve an advantageous bargain for himself, including suppressing information as to the farm’s value and making misrepresentations. HELD: agent could only deal at arm’s length and after full disclosure of all he knew about the property.

Kelly v Cooper [1993] AC 203    

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This is another agency case, with a very different result… Two adjoining properties in Bermuda: Calavan and Vertigo; they have access to a remote (nearly private) beach. Both owners wanted to sell their properties, and engaged Coopers Real Estate to sell their properties. The SAME buyer was interested in both properties, but there was a law in Bermuda that ex-patriots could only own one property: so this buyer bought one, and his son bought the other (officially). Kelly refused to pay commission to Cooper, as he found out that the buyer wanted both properties for a family compound, and had already bought Vertigo, and so he could have gotten a higher price for his property but the agent (cooper) was telling him they were struggling to find buyers. Essentially, Coopers did not tell the vendor the value of their property. Privy Council HELD: agents had not breached a fiduciary duty to the vendor. The real estate agent was NOT a fiduciary ‘agent’: Implied term estate agents entitled to act for other competing principals and to keep confidential information from each principal. The primary judge said there was fiduciary duties…the court of appeal said there was not…the nature of equity means the cases are not cut-and-cry.

Chan v Zacharia (1984) 154 CLR 178    

High Court held that Keech v Sandford applied to renewal of partnership lease by one partner only, after dissolution of the partnership. Deane J developed the two “themes” of proscriptive fiduciary duties “No-profit” & “No conflict” Referred to Dixon J’s view that a stronger case of a fiduciary relationship than that between partners could not be conceived - Birtchnell v Equity Trustees 1929 The Indicia of a Fiduciary Relationship

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CAREFUL: these indicia are not hard and fast rules, they are merely principles or guidelines, as the uncertain nature of equity means they cannot be more concrete. Lord Upjohn—Boardman v Phipps: “Rules of equity have to be applied to such a great diversity of circumstances that they can be stated only in the most general terms and applied with particular attention to the exact circumstances of each case.” In equity, the facts are critical for each case.

Lecture 4- Fiduciary Obligations Ad Hoc or Fact-Based Fiduciary Relationships: NOTE: this is not a checklist, it is merely guidelines…you need to weigh these against each other on the facts. 

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Factors pointing to such a relationship: - Trust and confidence - Undertaking to act in the interests of another - Disadvantage - Vulnerability - Inequality of bargaining power But no clear, definitive test or criteria…Fact-dependent!!

Relationships where Fiduciary Duties are often alleged include:        

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Parent-child Priest-penitent Doctor-patient Bank-customer Financial advisor-client “Joint-venturers”: this phrase has gone out of favour in the HCA. Crown-Indigenous people These sort of relationships have fiduciary characteristics/elements, but that does not necessarily mean it is a fiduciary relationship…especially if you can’t really put aside your own interests for theirs. Also: fiduciary duties are ONLY for the protection of economic interests…so if the relationship does not have this it MAY not be a fiduciary relationship (just has characteristics).

Galambos v Perez [2009] SCR 247    

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This is an example of an ad hoc relationship; Very unusual facts, loan from employee/client to incorporated solicitor’s firm; Mr Galambos was a solicitor in an incorporated practice; Ms Perez was office manager for the firm. The office was struggling, so Ms Perez started putting in loans to the firm, not requested by the firm; Galambos was angry and asked her to repay herself and repay her interest. She didn’t stop, the loans from MS Perez were not repaid, and the firm became insolvent. She sued for breach of fiduciary duty – failed Supreme Court rejected Court of Appeal test of “power-dependency” They said: 1. Mr Galambos has no power of Ms Perez, he had no power in terms of the loans she willingly gave; 2. They rejected the idea of a ‘power-dependency’ at all… 3. They also said, even though its not a criteria…there was no power dependency anyway Not all such relationships were fiduciary.

Lecture 4- Fiduciary Obligations UDC v Brian (1985) 157 CLR 1       

UDC, Brian & SPL negotiating to develop land in a “joint venture” UDC provided most of the capital, Brian the balance. SPL provided the land Before the formal agreement was entered into SPL mortgaged the land to UDC. The mortgage covered all advances from UDC, not merely for the venture. The venture was successful, but UDC exercised its rights as mortgagee for SPL’s entire debt to it. Left Brian without a profit. HCA held the relationship was fiduciary even before the final agreement was signed. The negotiations had gone beyond ‘mere negotiations’ and so there was already a fiduciary duty…but there is no hard line as to when this ‘mere negotiations’ line is crossed.

Lac Minerals v Corona (1989) 61 DLR (4th) 14      

Corona imparted confidential information about a mining prospect, which LAC misused to obtain. By a majority, the SCC held that no fiduciary duty arose. They held it would be rare to find a fiduciary relationship in an arm’s length commercial transaction. The vital element (citing USSC) of dependency or vulnerability was missing. Corona was an experienced miner, they should have known better than to trust LAC with this information without a confidentiality agreement. Misuse of confidential information cannot create a fiduciary obligation.

John Alexander’s Clubs (2010) 241 CLR 1  

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JACS exercised an option to buy land. A memorandum of understanding was entered into with the Club that the Club said imposed fiduciary duties on JACS so that it held its interest in the land on constructive trust for it. HCA rejected this argument. Did not regard the term “joint venture” as being helpful. The MOU obligation was conditional on two events that never happened. The Court stressed that in commercial transactions at arm’s length it will be rare to find fiduciary duties.

Wik Peoples v Queensland (1996) 187 CLR 1     

WP argued, unsuccessfully, that Queensland owed them fiduciary duties. Canadian law recognised a fiduciary duty towards indigenous peoples – Guerin v R [1984] 2 SCR 335 That case was referred to by Brennan CJ, Dawson and Toohey JJ in Mabo v Queensland. In Wik a unanimous High Court did not accept the fiduciary duty argument. This rejection has continued in Northern Territory v Griffiths [2019] HCA 7, although the issue was not squarely raised in the HCA.

Lecture 4- Fiduciary Obligations The Bell Case   

This case ran for 11 years…longest running civil case in Australia’s history…444 hearing days. The Bell Group in WA, a company within the group came to attention of Alan Bond and he took it over; During the 1980s, under previous owner, it had issued hundreds of $$ into the Eurobond market, a subordinate bond market, which should mean the bond debt ranks behind all the senior debt in the group.

Commonly held views BEFORE Bell: 1. The fiduciary duties of directors were confined to proscriptive duties, as per Breen and Duke Group and only breach of these duties could found a Barnes v Addy claim. 2. The other duties of directors, such as acting in good faith, for proper purposes or with due skill and care were not fiduciary duties and could not support a Barnes v Addy claim. (Barnes v Addy: an accessory to the breach of fiduciary duty can be liable in certain cases…) 3. A transaction entered into by the directors believing it to be in the best interests of the company was not, if made without care, a breach of fiduciary duties. FACTS:        

20 Banks lent to the holding (TBGL) and treasury company (BGF) in the Bell Group The group also raised funds via a NA company, BGNV, by the issue of “subordinated” bonds. 1988 Bond Corporation took controlling interest in TBGL. By mid-1989 public speculation about financial health of Bond Corporation; TBGL and BGF negotiated renewals/extensions of their facilities, in return for security over the “group’s” assets. July 1990 BGNV entered deed with Banks affirming that the bond monies, on-lent to TBGL and BGF, were subordinated. 1991 Bell Group collapsed; Liquidators sued the banks for being knowingly concerned in, and receiving assets via, breaches of fiduciary duty by the directors.

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The liquidators claimed the duties of the directors were fiduciary, and thus the banks were knowingly concerned in the breach of these fiduciaries. Thus, the liquidators got the remedial smorgasbord against the banks. The banks were held liable in equity (by the HCA). Initially, trial judge, Owens J—under first limb Barnes v Addy—knowing receipt The: WASCA – under the 2nd limb as well, knowing assistance to a fiduciary pursuing a “dishonest and fraudulent design”. Required what the directors had done to be a breach of fiduciary duty…Banks held liable as accessories by the HCA.

Lecture 4- Fiduciary Obligations Lee AJA:  [919] In respect of the fiduciary relationship between the Bell group companies and their directors, the reliance upon, and trust placed in, the directors by the companies for due management of the companies was entire.  [920] At insolvency of pending insolvency duty “not to prejudice the interests of creditors”.  [921] Duty to act in the best interests of the companies, and consequences if they did not so act, would cause equity to treat a breach of that duty by a director as a breach of a fiduciary duty”.  [931] Power to encumber assets is a fiduciary power.  [932] Not to exercise a power for Improper purpose is a fiduciary duty Drummond AJA:  [1956] “The duty of a director to act bona fide in the interests of the company and to exercise powers conferred for proper purposes only are necessarily fiduciary obligations.”  [1961] No decision binding on the court that the fiduciary duties of directors were limited to proscriptive duties.  Neither Breen nor Pilmer considered the position of directors.  [1978] the duties of company directors to act bona fide in the interests of the company and to exercise their powers for proper purposes [are] to be accepted as fiduciary ones even though they may require the directors to take positive action. Judicial Reaction to this Case     

[2013] HCATrans 049 - HCA granted special leave Hoh v Frosthollow Pty Ltd [2014] VSC 77 CBA v Kojic [2016] FCAFC 186 at [149] Hasler v Singtel Optus [2014] NSWCA 266; (2014) NSWLR 609 Essentially the other courts did not react well to this, and have distinguished Bell Group Case very carefully…...