Summary Equity And Trusts In Australia Lecture 1 - 10, Complete PDF

Preview

Summary

Download Summary Equity And Trusts In Australia Lecture 1 - 10, Complete PDF

Description

Table of Contents TOPIC 1 – Nature and History of Equity ............................................................................................................. 2 What is Equity? ......................................................................................................................................................................... 2 Reform and the judicature legislation ............................................................................................................................. 2 Equity in modern law ............................................................................................................................................................. 2 Equitable remedies ................................................................................................................................................................. 2

1

TOPIC 1 – Nature and History of Equity What is Equity? In a legal sense Equity is judge made law - an established set of complex legal principles developed by the Court of Chancery in England prior to 1873 and since modified by all courts administering that jurisdiction. Equity is usually defined as the principles and rules enforced exclusively in the Court of Chancery as distinguished from the Courts of Common Law and is part of the dualist system of judge made law that obtains in all common law systems (Australia, Canada, UK, NZ etc). Reform and the judicature legislation In the early nineteenth century the chancery court attracted criticism, principally on account of its delays in hearing and disposing of cases. The Judicature Acts 1873-6 enacted reforms, which improved the administration of common law and equity but which, with a few exceptions, did not change the substantiative law of either. The Act merged and harmonised the administration of both the law and equity into one court, which was known as the High Court of Judicature. The Five divisions included: •

Queen’s Bench,

•

Probate,

•

Chancery,

•

Divorce and

•

Admiralty

Section 24 of the Judicature Act gave all divisions the power to administer equitable remedies, hear equitable defences, recognise equitable rights. Further, where common law and equity conflicted then the equitable rule was to prevail (Sec 25 (11)).

Equity in modern law Two related conclusions can be drawn from this brief account of the history of equity. The first is that the subject matter of equity can only be determined by reference to legal history. I cannot be logically deduced from general propositions. The second is that the existence of a separate body of equitable principles means that much of Australian private law exhibits a dual character. Large parts of the law, including contract and property, are drawn from both common law and equity. Equitable remedies Common Law remedies focuses on compensation such as damages, whereas Equities remedies include coercive (specific performance; injunction) and gain stripping remedies (account of profits; constructive trusts) as well as compensatory ones (Equitable compensation).

2

Table of Contents TOPIC 2 - Fiduciary Law ........................................................................................................................................... 2 1a. Sue for breach of contract? ........................................................................................................................................... 2 1b. Determine if a fiduciary relationship arises: ......................................................................................................... 2 1. Is the fiduciary in an established category of persons? ........................................................................................ 2 2. On the facts, can a fiduciary relationship arise?...................................................................................................... 5 Persistent Criteria – fact based method ......................................................................................................................................... 6 3. Determine scope of fiduciary duty ............................................................................................................................... 7 4. Did the fiduciary breach their fiduciary duty? ......................................................................................................... 7 4a. A duty of loyalty (CONFLICT RULE) ......................................................................................................................................... 7 4b. A duty to account for benefits gained (NO PROFIT RULE) ............................................................................................. 7 5. Are there any defences to the breach of the fiduciary duty? .............................................................................. 8 5a. Contractual clauses/Exemption Clauses ................................................................................................................................ 8 5b. Honesty ................................................................................................................................................................................................. 8 5c. Beneficiary Making the Gain ........................................................................................................................................................ 8 5d. Contributory Negligence ............................................................................................................................................................... 8 5e. Fully Informed Consent .................................................................................................................................................................. 8 6. Remedies ................................................................................................................................................................................ 8 Equitable compensation ....................................................................................................................................................................... 8 Account of profits ..................................................................................................................................................................................... 8 Constructive Trust ................................................................................................................................................................................... 8 Injunctions .................................................................................................................................................................................................. 8

1

TOPIC 2 - Fiduciary Law A fiduciary relationship is one where a person (the fiduciary) acts solely for another person (the beneficiary) in exercising discretionary power over the legal or practical interests of the beneficiary 1a. Sue for breach of contract? Analogous to Hospital Products, can the plaintiff also sue for damages at common law for breach of contract. Is there a contract? Has its terms been breached? Can they get damages for loss? BUT, state, as in Hospital Products, damages probably aren’t enough, and they will want the more attract equitable remedies, so sue for breach of fiduciary duty. 1b. Determine if a fiduciary relationship arises: Deane J in Chan v Zhacaria (1984) 154 CLR 178, 195 is authority that ‘Fiduciary relationships may take a wide variety of forms and may give rise to a wide variety of obligations’. Can be present in horizontal or vertical relationships:  Horizontal – both are fiduciaries to one another (e.g. partnership)  Vertical – where only one party is a fiduciary 1. Is the fiduciary in an established category of persons? In Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41, Dawson J observed ‘obvious examples’ such as: 

Relationship between partners, o Also per Gibbs CJ in Hospital at 68, or Mason J at 96 o It will extended before the partnership (UDC v Brian), during the partnership and after the partnership (Chan v Zacharia) o Partners owe fiduciary duties to one another in relation to the conduct of the partnership business and in respect to partnership assets. Chan v Zacharia o An individual partner must not directly or indirectly use partnership assets for his own private benefit Dean v McDowall  Duties prior to negotiation of partnership  Fiduciary duties can precede the execution of a partnership agreement during negotiation stages, most likely where mutual rights and obligations are defined in an agreement United Dominions Corporation v Brian Pty Ltd  Fiduciary duties following dissolution  Duties can endure beyond the formal dissolution of the partnership to cover any matters involved in its dissolution, as need for mutual trust and confidence persists. Chan v Zacharia

HOWEVER • No duties will attach where the partnership is fully wound up, as the relationship giving rise to the duties has ended. Sew Hoy v Sew Hoy

Test: Does a high degree of mutual trust and confidence exist between the parties? 

2

Pre-contractual relationships between possible parties to a joint venture Issue: can fiduciary obligations be imposed on parties negotiating towards a joint venture, despite not reaching agreement at the time of the alleged breach? In LAC Minerals v International Corona Resources, a minority of the Canadian Supreme Court found a fiduciary relationship between two companies engaged in unsuccessful joint venture negotiations, one party having exposed itself to vulnerability by revealing confidential information to the other. The minority would have imposed a remedy of constructive trust. 

Between employee and employer, o Depending on level of trust, confidence and vulnerability,  Only ‘senior management employees’ owe a duty: Hospital Products  See Green v Bestobell  Will normally cease on the termination of the employment contract: Hodgson v Amcor o Employer-employee is also an accepted category



Between agents and their principals. o Where one person has authority or capacity to create or affect legal relations between another person and third parties o The agent does not need to receive a payment o Obliged to disclose all information to the principle o For example, real estate agents, powers of attorney and commercial agency  Self-appointed agents are also fiduciaries



Between solicitors and their clients, o Boardman v Phillips o Applies to admitted solicitors, law-clerks or accountants, if they are relied upon in the same manner as a solicitor or carry out the same functions



Between directors and their companies, o See Regal (Hastings): Directors must avoid conflicts of interest and duty and must not use information that they receive in their capacity as directors for personal gain. o If multiple directorship, the director owes a duty to each company: Bell v Lever  Being a director of two competing companies wont itself be a breach of the conflict rule o A person not appointed a director but made a director by operation of law is a fiduciary  Equity looks at substance not form! If a person performs the same duties of a director (Without the title) they will analogously be a fiduciary. o Directors generally owe their duties to the company, not the shareholders  Certain exceptions exists in special circumstances:  Where the member has expressly or impliedly sought the director’s assistance and the director has expressly or impliedly undertaken to act on the member’s behalf, where the director occupies a place of influence in the family, of which family member is also associated.  Where shareholders authorise them to negotiate on their behalf with a potential takeover bidder, or  Where the directors have taken it upon themselves to act as the agents of shareholders o Once a director resigns, the fiduciary duty will remain for a reasonable or appropriate time



Between wards and their guardians, o Clay v Clay is authority that a guardian to children is fiduciary. o Must provide independent legal advice to the ward where there is a potential conflict of interest, or cause of action o However, ‘cause of action’ should not be read too broadly, and it is not a positive duty

3



Promoters to the company (like a director for an unestablished company) o This includes those who establish partnerships, unit trusts, or other forms of ‘collective noncorporate investment schemes’. o A promoter is someone who participates in the organisation formation or financing. It will include ‘even those persons who do not actively participate in promotional activities but leave it to other on the understanding they will profit’.

  

Trustees and beneficiaries - Hospital Products Possibly financial adviser and client – Calvo v Sweeney Brokers and clients – Daly v Sydney Stock Exchange

Regal (Hastings) [1967] 2 AC 134

Amalgamated was established with 5000 shares by Regal. Regal could only purchase 2000 of these shares. Amalgamated wanted to lease two cinemas, but the landlord would not allow them to until all 5000 of their shares were purchases. The directors of Regal therefore purchased the remaining 3000 shares. Amalgamated then got new directors, and these new directors sued the old ones for breach of fiduciary duty. The CW Phillips trust was formed by CW Phillips’ will. It owned 8000 shares in Lester & Harris. Boardman had done legal work for the trust. He, and Tom Phipps (a beneficiary), decided to take over Lester & Harris. Two of the trustee gave them permission, but they did not ask the third as she had dementia. They also sent letters and received permission from the beneficiaries. They succeeded, and made lots of money for themselves and the trust.

The old directors did breach their fiduciary duty by purchasing the shares and making a profit, despite acting honestly for the bets interests of the business.

Chan v Zacharia (1984) 154 CLR 178

One partner of a medical practice renewed a lease for himself when the option to renew was a valuable asset to the partnership

Was a breach of fiduciary duty, despite occurring after the partnership had formally ended

Keech v Sandford

Infant beneficiary, lease the property of a trust, when due for renewal the owners refused to relet, owner offered it to the trustee instead in a personal capacity which he did

‘the trustee is the only person of al mankind who might not have the lease’ Lord Chancellor King

Breen v Williams

Ms Breen has breast enlargement surgery. They leaked and Dr Williams removed them. Ms Breen waned to join a US class action to sue the manufacturer, but, Williams would not give her the medical records. Breen argued he owed her a fiduciary duty to allow her access.

Held that it was not a fiduciary relationship.

Boardman v Phillips [1967] 2 AC 46

The house of Lords held that they had breached their fiduciary duty. Boardman was a solicitor and put himself in a position of conflict. Tom Phipps chose to be treated in the exact same position, so he also had a fiduciary duty. Honesty, the benefit and the consent (needed all 3 trustees and the letters were too vague) were not defences. They were made to account for profits as there was a possibility of conflict between Boardman’s duty and interests.

4

2. On the facts, can a fiduciary relationship arise? Consistent with Gibbs CJ in Hospital Products, no single test exists for identifying a fiduciary relationship. So, a person may be fiduciary in some regards, but not others. 

Banker and customer o In circumstances where the bank takes on the role of financial adviser to the customer, it may assume fiduciary obligations: Commonwealth Bank of Australia v Smith



Financial adviser/client



Manufacturer/Distributor o Hospital Products



Bailee/Bailor: Mason J in Hospital Products



Licensee o Traditionally not, but may arise in some contexts where one party is undertaking to act on behalf of the other



Doctors/Patients o A doctor must avoid engagements which place their own duty or a duty to a third party in conflict with the duty to the patient. o Doctors must not make unauthorised profit out of their arrangement. Breen v Williams



Joint Ventures o Joint venturers may be fiduciaries towards each other, and will depend upon the ventures are associated on the basis of mutual trust, confidence, skill, knowledge and integrity of each other United Dominions Corporation v Brian o A mere common goal or joint advantage does not create a fiduciary relationship News Ltd v Australian Rugby Footbal League Ltd The terms of an agreement will be a significant factor in determining whether a fiduciary relationship o exists, and if so the extent of such a relationship to other activities of the business Noranda Australia Ltd v Lachlan Resources NL o Certain factors may be taken into account when deciding whether a joint venture is fiduciary in nature: Say-Dee Pty Ltd v Farah Constructions Pty Ltd  Whether one party undertakes obligations to enable parties to achieve maximum potential  Whether the non-performing party puts trust and confidence in the other party, thereby subordinating their own interests to them  One parties dependence on another due to their inexperience/other parties experience  Whether the joint venture gave one party a special opportunity to gain knowledge, whilst keeping it undisclosed to other party, making them dependent upon the knowledge

5

Persistent Criteria – fact based method Breen v Williams is authority persistent criteria include:     

The existence of a relation of confidence; Inequality of bargaining power; An undertaking by one party to perform a task or fulfil a duty in the interests of another party; The scope for one party to unilaterally exercise discretion or power which may affect the rights or interest of another; and A dependency or vulnerability on the part of one party that causes that party to rely on another

A. Apply ‘Undertaking’ theory: it’s current status in Australian law is unclear, as a result of the litigation in Hospital Products. Nonetheless, the HC did not disagree with the parties in John Alexanders Clubs Pty Limited v White City Tennis Club that Mason J’s approach from Hospital Products should be adopted. 



Mason J stressed ‘’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’’. Mason J also held that if a contract exists, the fiduciary duty must conform to the contract and not alter the operation of their agreement.

B. Apply the ‘Trust and Confidence theory’’: It has been held that it is the mutual confidence found between partner which gives rise to the fiduciary relations between the. ‘’The duty arises when, and because, a relationship or confidence exists between the parties’’ – Daly v Sydney Stock Exchange



BUT, this was empathetically rejected by Gibbs CJ in the Hospital Products case: ‘’An actual relation of confidence – the fact that one subjectively trusted another – is neither necessary for nor conclusive of the existence of a fiduciary relationship’’. C. Is there vulnerability?: In Hospital Products Dawson J strongly emphasised the importance of finding the element of vulnerability on the part of a beneficiary, that causes them to place...