LLB205 Week 3 Lecture PDF

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Lecture notes for LLB205 Equity and Trusts...

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LLB205 Week 3 Fiduciary Duties Framework, definition and characteristics of fiduciary duties Overview Module 2 – Equitable Obligations 1. Obligation of confidence  Week 2 2. Fiduciary duties  Weeks 3 & 4

W3 Part 1 – Framework, definition and characteristics of fiduciary duties W3 Part 2 - Establishing fiduciary duties (incl distinguishing from other legal obligations) W3 Part 3 – Scope, duration and breach of fiduciary obligations W4 Part 1 - Defences and remedies W4 Part 2 – Third party liability Framework Does a fiduciary duty exist?

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What is the scope of the duty? What is the duration of the duty?

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(a) Presumed; OR

(b) Establish on the facts and circumstances

Has the fiduciary duty been breached?

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Do any defences apply?

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What remedies are available?

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(a) Conflict of duty and interest; OR (b) Conflict of duty and duty; OR (c) Profit from position

Is a third party liable?

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Definition & characteristics In equity, certain relationships of trust, here the trust placed by one person in another, mean that equity imposes obligations on the latter (in addition to those prescribed by the common law) designed to prevent the abuse of that trust •

No comprehensive definition see Breen v Williams (1996) 186 CLR 71

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Someone who, in his or her relationship with another, is entitled to expect that the other will act in his or her interest to the exclusion of the other’s own self-interest

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A fiduciary is a person who has undertaken to act for the benefit of another person in some particular matter

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The undertaking:

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may be general, specified or limited

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does not have to be a contract or for value

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may be requested or officiously assumed

Idea •

Service of another’s interest

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Obligation to act in an unselfish and undivided way

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Acting in the best interests of another person

Characteristics •

Relationship of trust and confidence – may be abused

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Undertaking to act in the interests of another

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Vulnerability to another’s power or necessitating reliance (unequal bargaining power)

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Reasonable expectation that the second party will act in the first party’s best interests

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These characteristics call for imposition of the duty of loyalty – none necessarily definitive

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Beach Petroleum NL v Kennedy (1999) 48 NSWLR 1

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Moffat v Wetstein (1996) 135 DLR (4th) 298

Chan v Zacharia (1984) 154 CLR 178 •

Identify the nature of the particular relationship

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Define any relevant obligation which flows

Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 Blackman – exclusive distributorship arrangement with USSC HPL substituted as distributor HPL used USSC products as models to manufacture own products – competition Did HPL owe fiduciary duties to USSC? Commercial relationship entered into by equal partners at arm’s length with the intention for both parties to profit

Establishing fiduciary duties Module 2 – Equitable Obligations 1. Obligation of confidence  Week 2 2. Fiduciary duties  Weeks 3 & 4 Establishing fiduciary duties – Distinguishing other duties / contexts •

Special duties peculiar to equity

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Differ from other duties which may also be applicable eg duty to use proper skill and care; common law duty of care; contract law duties; statutory duties

Contract law: •

requires less stringent standards - assumes parties may pursue self-interests (fiduciary standard requires subordination of self-interest)

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fiduciary duties arise independently of contract ie can exist where not expressly created by the parties

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contractual and fiduciary duties can exist concurrently

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fiduciary duties will not be superimposed on a contract to distort the arrangement entered into by the parties see Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41

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fiduciary obligations can exist within a defined area of the contract while other areas may be exempt see Price v Powers & Ors [2005] WASC 154

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fiduciary may attempt by contract to remove or limit the existence of a fiduciary obligation: Australian Securities and Investments Commission v Citicorp Global Markets Australia Pty Ltd (no 4) (2007) 160 FCR 35; Eaton v Rare Nominees Pty Ltd [2019] QCA 190

Commercial contexts: •

scope but reluctance to find fiduciary duties in commercial contexts between parties of comparable bargaining power dealing at arms length

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especially where no special reliance, trust or special vulnerability

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examine the legitimate expectations of the parties see Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41

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example: John Alexander’s Clubs Pty Ltd v White City Tennis Club Ltd [2010] 241 CLR 1

Establishing fiduciary duties – why? •

Common law action might not exist or be weak

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Common law relief may be excluded eg limitations legislation or defences such as contributory negligence

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Ability to access equitable remedies including those in rem (proprietary remedies)

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Potential liability of third parties

Fiduciary duties may arise where 1.

The relationship is presumed to give rise to fiduciary duties •

The inherent nature of the relationship means the characteristics are assumed to exist

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Rebuttable - onus on person claiming no fiduciary duties owed to prove this

2. The nature of the relationship means that fiduciary duties should be imposed •

Onus on person claiming fiduciary duties owed to establish this

Establishing fiduciary duties – presumed relationships •

Trustee and beneficiary (focus of trusts module)

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Archetypal relationship

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Keech v Sandford (1726) Sel Cas T King 61; 25 ER 223

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Director and company

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Directors not to profit personally from position

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Directors not to allow a conflict to arise between duty as director and self-interest (see Corporations Act 2001 (Cth) s 182(1); s183(1))

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Corporate business opportunities should be pursued for the benefit of the company: Regal Hastings Ltd v Gulliver [1967] 2 AC 134

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Company consent: Queensland Mines v Hudson (1978) 18 ALR 1

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Lawyer and client

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Lawyer cannot make an unauthorised profit or engage in conduct that places the lawyer’s interests, or those of a third party, in conflict with the duty to the client: Boardman v Phipps [1967] 2 AC 46

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Lawyer must avoid lawyer/client conflict (or duty/interest conflict) eg Maguire v Makaronis (1997) 188 CLR 449 AND client/client conflict (duty/duty conflict), both concurrent - Stewart v Layton (1992) 111 ALR 687 and successive

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See also Australian Solicitors’ Conduct Rules 2012 rr 10-12

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Partners

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Partners owe fiduciary duties to each other: Chan v Zacharia (1984) 154 CLR 178

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Agent and principal

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Must act at arm’s length and with full disclosure. I n addition to general fiduciary law see also the statutory duties, defences and remedies in the Powers of Attorney Act 1998 (Qld) (POAA):

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S 66 - no benefit to principal

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S 73 - conflict transaction without authority

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S 88 - limits on gif

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SS 106-7 – compensation orders

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S 105 – relief from personal liability

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Considered in eg: Smith v Glegg [2004] QSC 443; Moylan v Rickards [2010] QSC 327; Neuendorf v PTQ as Executor of the Estate of Dickfos [2013] QSC 156

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Enduring power of attorney (EPA)

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Definition

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Commences on incapacity or as provided

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Powers limited by fiduciary and statutory duties (see eg POAA)

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Consent for conflict transactions?

Establishing fiduciary duties – Nature of the relationship Where not presumed consider •

Undertaking to act

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Vulnerability, disadvantage or unequal bargaining power

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Legitimate expectation that a party (fiduciary) will act in another’s (principal) best interests

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Sometimes referred to as the persistent criteria

 IE characteristics such as trust, confidence, loyalty, reliance  See eg ASC v AS Nominees Ltd (1995) 133 ALR 1; Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 Example #1 Joint venturers •

Persons associate together to produce a product to be shared amongst participants

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Agreement inform scope

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Many forms – some can attract fiduciary duties

United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1 •

Participants were joint venturers in a commercial enterprise with a view to profit

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Profits were to be shared

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The joint venture property was held on trust

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The participants indemnified the managing participant against losses

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The policy of the joint enterprise was a matter for joint decision

Example #2 Accountant/financial adviser/stockbroker and client •

Not conclusively determined in Australia

Daly v Sydney Stock Exchange Ltd (1986) 160 CLR 371 Undertaking to give financial/investment advice by accountant/financial adviser/stockbroker in a manner that creates the impression that it will be impartial assumes fiduciary role ie must disclose any information that could impinge upon loyalty Hodgkinson v Simms [1994] 3 SCR 377 Example #3 Banker and client •

Generally not – contractual

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Unless financial institution creates an expectation that it will advise customer about proposed investments irrespective of the financial institution’s own interests: Commonwealth Bank of Australia v Smith (1991) 42 FCR 390

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Position different where bank creates no such expectation: Commonwealth Bank of Australia v Finding [2001] 1 Qd R 168

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Attempts to oust effect of loan/guarantee agreements more commonly argued on basis of unconscionable conduct, undue influence, breach of statutory provisions prohibiting misleading / deceptive conduct

Example #4 Doctor and patient •

Not traditionally ‘fiduciary’

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Normally relief sought in tort

Breen v Williams (1996) 186 CLR 71 •

HC rejected appellant’s contention that a doctor has a fiduciary duty to allow access to medical records (some legislation allows this)

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But envisaged that doctors might become subject to fiduciary duties and as such, should not enter into relationships which could place his or her interests, or a duty to a third party, in conflict with the duty owed to the patient

See also 8.11 – 8.12 Good Medical Practice: A Code of Conduct for Doctors in Australia, Medical Board of Australia (2014) Example #5 Employer and employee •

Duty of fidelity arising from employment contract

IE breach for employee during employment to embark on competing business for own interests or to take opportunity arising from employment for own benefit without employer’s fully informed consent •

Duty of fidelity or duty of loyalty (ie fiduciary duty)?

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No exact line – better view not a presumed relationship

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Does the relationship need protection exceeding the duty of fidelity/employment contract?

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What is the nature of the relationship?

Employee’s situation and responsibility within employer’s business is highly relevant The more senior/the greater the latitude = the greater the vulnerability of the employer to potential misuse of position by the employee (Flanagan Sailmakers v Walker [2002] NSWSC 1125) Green and Clara Pty Ltd v Bestobell Industries Pty Ltd [1982] WAR 1 •

Employer building contract for stage 1 of medical centre in Perth

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Employee was Victorian state manager

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While still employed, employee est own company through which he tendered for, and won, the stage 2 building contract

Fundamental (as in all cases) to establish scope

Scope, duration and breach of fiduciary duties Scope & Duration of the fiduciary duty

Scope

Establish a fiduciary duty

Precisely define the scope of the duty

Does the breach fall within the scope of the duty?

We need to identify the subject matter over which the fiduciary obligation extends  it is not enough to establish that a particular relationship can be described as fiduciary – we must also establish the precise scope of the fiduciary obligations within that relationship to determine whether a breach has occurred within the scope of the duties. NB: may be subject to fiduciary duties in respect of some activities but not others see eg Price v Powers [2005] WASC 154 Key Question: What has the fiduciary undertaken to do in the best interests of the other party? Scope •

General undertaking - may be necessary to show fiduciary has assumed a more specific duty

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The fiduciary may officiously expand the scope and ambit of the undertaking

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Scope depends on facts of each case and the nature of the relationship see eg Breen v Williams (1996) 186 CLR 71

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If the subject matter/opportunity falls outside the scope the fiduciary is free to pursue their own interests

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Green and Clara Pty Ltd v Bestobell Industries Pty Ltd [1982] WAR 1

Duration •

Characteristics that justify imposing fiduciary obligations exist independently of any contractual obligations ie can be pre or post contract

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Normally cease when relationship terminated but in some circumstances can be owed afer the relationship has ended and before the relationship formally arises eg Chan v Zacharia (1984) 154 CLR 178; 53 ALR 417

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Duty of loyalty may extend beyond termination of relationship where dealing ‘relates back’ to relationship that gave rise to fiduciary duties (eg directors, lawyers, trustees)

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Difficult to generalise – Edmonds v Donovan (2005) 12 VR 513, [58] (Phillips JA)

Core duties / breach No conflict duties 1. Cannot, in any matter falling within the scope of the undertaking, have an interest that conflicts with the scope of the engagement – no matter how fair the transaction (duty and interest) 2. A prohibition on having a conflict of duty and duty –inconsistent engagement with a third party (duty and duty) No profit duty 1. Cannot misuse the fiduciary position by misusing property, position, knowledge or opportunity resulting from the fiduciary position for own advantage or for a third party’s advantage (taking advantage of a fiduciary position – no profit)

Fiduciary duties are negative / proscriptive obligations. They do not impose positive obligations: Breen v Williams (1996) 186 CLR 71; Pilmer v Duke Group Ltd (in liq) (2001) 207 CLR 165

Core Duty #1 Conflict of duty and interest Does the fiduciary have a private interest that comes within the scope/ambit of the fiduciary duties owed so that the duties and interest conflict ie breach •

Need to establish a sufficient connection between •

Scope/ambit of the duties undertaken and

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The benefit obtained on own account

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Boardman v Phipps [1967] 2 AC 46; Blythe v Northwood [2005] NSWCA 221

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See Boardman v Phipps [1967] 2 AC 46

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Partners owe duties to one another re partnership business, assets - Chan v Zacharia (1984) 154 CLR 178

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Birtchnell v Equity & Agency Co Ltd (1929) 42 CLR 394

Agents

Partners

Joint venturers •

United Dominion Corp v Brian (1984) 157 CLR 1

Company directors •

Duty not to: allow conflict between duty as directors and self-interest; profit personally from their position

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Furs Ltd v Tompkies (1936) 54 CLR 583

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Hart Security Australia Pty Ltd v Boucousis [2016] NSWCA 307

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See QLS Guidance Statement No. 4 Receiving Referral Fees and Rule 12.4.3 Australian Solicitors Conduct Rules 2012 ASCR 2012 esp r 12

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See Good Medical Practice: A Code of Conduct for Doctors in Australia, Medical Board of Australia (2014) 8.11 – 8.12

Solicitors

Doctors

Core Duty #2 Conflict of duty and duty •

Loyalty should be undivided

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Prohibits fiduciary from serving two masters at once re the same transaction

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Mainly affects lawyers although other types of advisers such as financial advisers may be subject to this duty

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Eg acting for two clients in the same matter

2 types Same matter conflicts which prohibit a fiduciary from having an actual or a potential conflict between: •

The duty to serve the interests of one client; and

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The duty to serve the interests of another client

Without disclosure and consent of all clients Separate matter conflicts or successive representation conflicts: •

When the fiduciary acts in different matters for another client having acted for another client in an earlier matter

Separate Matter Conflicts •

Not really an issue of conflicting duties because retainer by the former client has come to an end

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No obligation to act in the best interests of the former client

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Action - seeking to restrain former lawyer from acting to prevent a misuse of confidential information as a result of acting for the former client which may be relevant and beneficial to the new client

Watson & Ors v Ebsworth & Ebsworth (a firm) & Anor [2010] VSCA 355

Same Matter Conflicts •

Applies to the simultaneous representation of different clients in relation to the same matter see Stewart v Layton (1992) 111 ALR 687. Must be vigilant in relation to the emergence of real, sensible possibilities of conflicts between the interests of various clients even if properly acting for multiple clients.

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If you withhold information that is material to a client’s interest will be in breach of duty. Eg Mantonella P/L v Thompson [2009] QCA 80

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Client may be abl...