Lecture 5- Fiduciary Obligations PDF

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Lecture 5- Defences to Breach of Fiduciary Duty Hint about Fiduciary Duties Problems:  

BEFORE you answer the first sub part of the question…READ the whole thing; The whole thing will give you an idea where the answer should go for each sub part.

Review of Fiduciary Obligations: 1. Do fiduciary obligations attach to the relationship? If no…look elsewhere! (e.g. contract or tort) (a) through a “status-based” fiduciary relationship; or (b) is there an ad hoc relationship (by reference to the indicia?)  NOTE: even if it looks status base it is often not that easy…when in doubt go to Hospital Products. 2. What is the scope of that particular relationship? (a) Do the acts/omissions fall within the scope of F’s duty of loyalty by reference to the indicia?  This is a VERY important step, define the scope, AND reference the language used in the problem questions to describe this scope! 3. Do the acts/omissions constitute a fiduciary breach?  If the breach is not a fiduciary breach (no profit/no conflict) but another breach, too bad…no equitable remedies. 4. Are there any relevant defences available? This is a very good yes/no list…you need all the aspects to have a fiduciary problem question. Leading Cases on Fiduciary Defences/Duties  Three things useful to know about fiduciary defences: 1. Fully Informed Consent is an AMAZING defence, it covers everything, but is very hard to get…and in writing is always better; there are other defences though: 2. Laches; i.e. the person has sat on their hands and did nothing for too long; with equity timing is very important; 3. Acquiescence; in other words you have impliedly consented to the equitable breach which has occurred, and so cannot claim breach of fiduciary duties. Before going into the details of the leading Australian case, lets revise the foundation principles of fiduciary duties Boardman v Phipps per Lord Upjohn at p130: 

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Blackacre is trust property and next to it is Whiteacre; but there is no question of the trustees being interested in a possible purchase of Whiteacre as being convenient to be held with Blackacre. Is a trustee to be precluded from purchasing Whiteacre for himself because he may have learnt something about Whiteacre while acting as a trustee of Blackacre? It may seem difficult, BUT anyone else in the entire world may be able to buy Whiteacre, BUT the trustee for Blackacre; they are the ONLY ones precluded. If you do buy Whiteacre, then the land of Blackacre would be held on constructive trust for the owners of Whiteacre for the trustee. What if there was fully informed consent? YES; this is a DEFENCE! - If this trustee was a minor, you cannot get fully informed consent…

Lecture 5- Defences to Breach of Fiduciary Duty Queensland Mines Ltd v Hudson (1978) 18 ALR 1 Leading Australian Case  

Hudson resigns position to exploit Tassie Mine Series of meetings minuted; Hudson made sure to not everything that was said in the meetings: - Queensland Mines renounced the opportunity; and it was also noted that - Hudson had informed them he had become "personally" involved regarding the mine development; he resigned first, but then let them know that he was not personally involved.

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This matter went to the Privy Council, and the council held: - “[T]heir Lordships can put only one construction upon the events following upon the withdrawal of Mr Korman in February 1961 and culminating in the Queensland Mines board meeting of 13 February 1962. The board of the company knew the facts, decided to renounce the company's interest, whatever it was, in the Tasmanian iron ore venture, and assented to Mr Hudson doing what he could with the licences at his own risk and for his own benefit.” Basically, the court said that fully informed consent WAS obtained in tis case: the QLD mines had renounced their interest in the Tas mines, and they were informed of Hudson’s interest in it… The Privy Council said that ‘fully informed consent’ needs 1. Fully informed of all the relevant facts; AND 2. Assent in free and full manner to what would otherwise be a breach of fiduciary obligations; No specific words or processes strictly required; look at the words, conduct—short of simple inaction, and strongly dependent. Equity doesn’t want specific formulas; that is why you want BROAD principles to apply to different facts in different circumstances/cases.

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Lecture 5- Defences to Breach of Fiduciary Duty ASIC v Citigroup Global Markets Australia Pty Limited (2007) 241 ALR 705 Leading Australian Case   

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ASIC sued Citigroup for strange transactions which they found in their monitoring; ASIC thought there had been some share trading in Toll Holdings, while Citigroup has been acting for Toll Holdings. Information Barriers AKA Chinese Walls: this is used when the same company/law-firm/etc is acting for both sides, to prevent conflict of interest or sharing information between the two sides in a dispute. Chinese Walls or other information barriers provide a primary means by which fiduciary organisations (like law firms, accountants, auditors and investment banks) manage internal conflicts of interest. NOTE: as an aside, the difficulty identifying conflicts of interest with the speed and volume of business that is accommodated by modern technology – making it difficult to identify any particular transaction as linked to another. There was a mandate letter set up between Citigroup and Toll Holdings in relation to this takeover: - [Toll] acknowledges that Citigroup has been retained hereunder solely as an adviser to … and that [Toll’s] engagement of Citigroup is as an independent contractor and not in any other capacity including as a fiduciary. ... The Company should be aware that Citigroup … may in the future provide financial or other services to other parties with conflicting interests. The fact that Citigroup may be advising other companies at this time was not the issue, they MUST be able to do that to function…but as soon as a contract is signed, THEN the fiduciary duties start. Toll and Citigroup decided to put in writing that they are contracting out of their fiduciary duties…is this possible? However, the answer is NO, you cannot contract out of your fiduciary duties… you cannot ‘gloss against the statute’; i.e. you cannot contract out of a statutory duty. HOWEVER, the issue was these two companies are HUGE and are SOPHISTICATED commercial businesses and they are on equal footing, so they both know what they are doing (no unequal rights; no vulnerable party)… in these specific facts the contracting out of fiduciary duties is OKAY. It is really on the facts of the case, as with other equity cases…the equal footing of the parties, their sophistication… it meant the contracting out of fiduciary duties was okay. “The dealings between Citigroup and Toll [before signing of retainer/mandate] would have pointed strongly towards the existence of a fiduciary relationship in Citigroup’s role as an adviser” at [325]. - BUT the effect of the mandate here WAS to successfully contract out of the fiduciary duties.

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Did Citigroup nevertheless require fully-informed consent (that is, that, if the information barrier was breached, they were able to trade on their own account)? Jacobsen J: Drew distinction between ad-hoc, contractual and status-based fiduciaries. Potentially a 4th fiduciary…

Lecture 5- Defences to Breach of Fiduciary Duty Defences to Breach of Fiduciary Duty ‘Zone of Insolvency’ there are many cases that are dealing in this period when companies become insolvent; BUT if a fiduciary has contributed their money to an account which has then gone insolvent, they get 100% of this money back before other creditors. Contributory Negligence  This is not really a thing in equity…but people keep trying, hence the following cases: Day v Mead [1987] 2 NZLR 443         

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There was an attempt to say that the actions of the beneficiary were contributory to the breach of the fiduciary duties; and so the fiduciary should not pay as much; The fiduciary relationship is one of mutual trust and confidence… “The greater the degree of trust and confidence placed in the fiduciary by the principal in the given case, the greater the degree of duty imposed on the fiduciary.” Mead had been Day’s solicitor for 25 years and was director and shareholder of Pacific Mills Lt; Day purchased 20,000 shares in Pacific Mills, on advice from Mead, knowing that Mead was a shareholder; After this purchase, Day took an interest in the company, attended some shareholder meetings, etc. In Dec. 1977, acting on Mead’s advice, Day subscribed for as further 70,000; and in March 1978 the company went into receivership; Day lost both investments, and sued Mead for reach of fiduciary duty here; The HCNZ held that Mead was in breach of his fiduciary duties in failing to tefer Day to a different solicitor and in failing to inform him of the financial difficulties facing the company; The HC of NZ held that Day was contributory in this breach though, and so was only entitled to HALF of the loss of his investment. This case then went to the Privy Council on appeal…it was then HELD: Mead’s failure to defer Day to an independent advisor and inform him of the difficulties the company was facing was a breach of fiduciary duty arising from the trust and confidence placed in Mead, and Mead’s acceptance of this trust and confidence. Day was thus entitled to compensation…and said there is no reason not to take into account Day’s contribution to this case, in the idea of Laches: i.e. Day had waited too long to bring this case, and had waited around. They said the delay had prejudiced the other side’s case…BUT in this case Day bore no responsibility to the loss of the first investment of the $20,000 and was entitled to this amount; as to the second amount, Day was partly responsible, and so he was only entitled to HALF of this amount.

In Australia, there was initially some judicial support for an apportionment of equitable compensation for breach of fiduciary duty by virtue of unreasonable conduct on the principal’s part. See, Beach Petroleum v Abbott Tout Russell Kennedy (1997) 26 ACSR 114 (NSWSC), 286 per Rolfe J:

Lecture 5- Defences to Breach of Fiduciary Duty The authorities are pushing towards a recognition, in a case such as the present, of rules of apportionment if that is appropriate. Logically it would seem a sound approach. However, the High Court of Australia categorically rejected the idea of such an apportionment in Pilmer v Duke Group… Pilmer v The Duke Group Limited (in liq) (2001) 207 CLR 165  

The current position is that there are “severe conceptual difficulties” with importing contributory negligence into compensation for fiduciary breach. Note in relation to Pilmer v Duke Group - no fiduciary relationship was found on the facts, so this is strictly obiter....