— Introduction Fiduciary relationships “Fiduciary obligations What's online?(10.1) 110.2) (10.3) (10.4) 150 PART D: EQUITABLE OBLIGATIONS Introduction Equity closely: scrutinises relationships in which one party places trust and Confidence human interaction, but equity cannot gry nt relief against every breach of trust and confidence, any More than contract law can enforce and some obligations of confidence? 5, re in another, There are many examples of (rus! 1 all promises. Only some trusting relationships' protected. The relationships which equity protects are known as fiduciary relationships, snship of trust and confidence will be recognised as fiduciary where i arses from p confers a discretion on F, and in respect of which the exercise of discretion affect ». B may hand over vvestor handing over money to an investment adviser. A settlor may A rela F undertaking to act in the interests of B in « matter which ts B's economic interest property to F, such as an hand property to F to hold on trust for B. Alternatively, B may entrust F with the task of negotiating a contract on behalf of B so that F is B's agent. Or F may be entrusted with the ; of obtaining information on behalf of B which will enable B to exploit a commercial t opportunity. This is also an example of agency. In all these cases the relationship between F and B constitutes a fiduciary relationship, F will owe fiduciary obligations to B. If, in the second example, F negotiates to take the benefit of a contract for himself, and not for B, he has committed a breach of fiduciary obligation, Fiduciary relationships do not — or do not simply - require the fiduciary, F in these examples, to act reasonably, as may be the case in tort or contract. The essence of a fiduciary relationship is that the fiduciary must act exclusively in the interests of the beneficiary in matters coming within the scope of the relationship. ‘The central concem of ficticiary law is the division between the management and enjoyment of property, which is broadly defined for this purpose to include such matters as information and the opportunity to obtain the benefit of a contract. (The latter is sometimes called ‘soft property’.) Fiduciary obligations regulate managers’ behaviour where their activities cannot be properly supervised by those on whose behalf they act, whom we will refer to as ‘the beneficiaries’. This is achieved by imposing on them obligations which limit their pursuit of self-interest. The obligations, discussed below, are the duty not to make a profit out of the relationship, and the duty not to place themselves in a position of conflict between self-interest and the duty owed to the beneficiary, or in a position where they owe conflicting duties to several beneficiaries. Fiduciary relationships Recognised fiduciary relationships Like most legal concepts, the concept of the fiduciary does not lend itself to a dictionary definition. It is more easily described than defined. Some legal relationships have !on8 Limited protection is given in respect of relationships affected by undue influence. See [7.18} See chapter 12. 3 For discussions of the fiduciary concept, see P D Finn, Fiduciary Obligations (Law Book Co, 197%? P Finn, “The Fiduciary Principle’ in T G Youdan (ed), Equity, Fiduciaries and Trusts (Carswell, 1989) ‘Matthew Conaglen, Fiductary Loyalty (Hart Publishing, 2010); James Edelman, ‘When Do Fiduckt” Duties Arise?’ (2010) 126 Law Quarterly Review 302.» ;Chapter 10: Fiduciary obligations 164 recognised as fiduciary. ‘These re relationships." In each the . Hionships have be , st circle’ of fist party owes fiduciary obligations to the second. ‘en described as the‘ fiduecia hey are + Trustee-Reneficiary + Solicitor-Client + Director-Company + Employee-Employer + Agent-Principal + Partner-Co-partner Executor-Beneliciaries of deck ed's estate The list of es ablished (or presumed) fiduciary relationships is not closed and other n be added. A prime candidate is the relationship of investment adviser and client.* Moreover, there is no uniformity in the list of core fiduciary relationships across the common law world. The Canadian Supreme Court has held that the relationship between parent and child is “intuitively fiduciary’® but no Australian court has held that parents are recognised fiduciaries. Even so, there are circumstances in which a parent managing a child's money will be subject to fiduciary obligations, The trust is regarded as the paradigm fiduciary relationship, although it has some special features not shared with the other fiduciary relationships.” The history of the law of fiduciary relationships has to a considerable extent involved the extension of trustees’ obligations to other relationships perceived by courts to be ‘trust-like’. What the relation- ships have in common is that the fiduciary is expected to act exclusively in the interests of another on matters covered by the relationship and is not permitted to pursue self-interest.* In most legal relationships self-interest is expected, and even considered desirable in a “pitalist society; there is no expectation that one party will act in the other's interests. The relationship which is diametrically opposed (o a fiduciary relationship is that of vendor and Purchaser. Although legislation and the general law impose basic requirements on contracting Panis to avoid misleading and unconscionable conduct,” a sales contract is the classic legal relationship in which the pursuit of self-interest nd socially approved. The more closely a legal relationship approximates to that of vendor and purchaser, the less likely it is to be fiduciary, if See Finn, above n 3, 33, 41s probable thatthe relationship Is already established as fishucary, but the development has been obscured by contractual exclusions of Fiduciary obligations in contracts entered into with clients. See Australian Securities and Investments Commission v Citigroup Global Markets Australia Pry Ld (No) . coor) 160 PCR 35; Sourcebook 1060 8 7 (K) v MC) 96 ), 323 (Lat Fores 7 Inada nes yc re dy oor wor a ne uke beneficiaries, Breen » Williams (1996) 186 CLK 71, 137 (Gummow ). 5 Se Finn, above n 3, Competition and Consumer Act 2010 (Cth) sch 2 (10.5) (10.4) 00.7)(10.8) (10.9) (10.10) 10.11) |ATIONS a 152. PART D: EQUITABLE OBLIG Outside the recognised relationships ‘Vertical’ relationships fi iary 1 ionships will be he| Other relationships outside of those recognised 38 fave ne man ied held 10 be ogee hie wole orn part where Weve seer ary showy ci ter to the interests of another. in a particular mat hips do not attract subordinate his intere fiduciary obligations; contracts in these cases dual selFinterest. But some contracts give lations ste for the pursuit of indivi will act exclusively in the interests of the other. In News Lid Australian Rughy League Lid’ Gummow J identified criteria which a in establishing whether a commercial relationship gives rise to fiduciary obligations. A distinction was drayn between ‘vertical’ fiduciary relationships where one party has greater access to resources, skill or information than the other, and ‘horizontal’ fiduciary relationships where resources, skill and information are shared for the purpose of achieving a common goal. Trust and agency relationships typify vertical fiduciary relationships, whereas a professional or business panner- ship is an example of a horizontal fiduciary relationship. ‘The High Court decision Hospital Products Ltd v United States Surgical Corporation" is the gations to vertical business relationships, Most commercial enable parti rise toan expectation that one party s 10 coopera leading authority on the application of fiduciary obli USSC manufactured surgical stapling products, The first defendant, Blackman, realised that USC's products were not patented in Australia and offered to become its distributor. He obtained exclusive distribution rights in Australia under an oral contract. Blackman established his own company, Hospital Products, which competed with USSC by repackaging USSC's products and selling them as its own, and by reverse engineering USSC’s products to enable competing products to be developed. This was so successful that Hospital Products began competing with USSC in the USA as well as Australia, USSC terminated its contract with Blackman and sued him and Hospital Products for breach of contract and breach of fiduciary obligation. ‘The High Court unanimously held that Blackman’s conduct in developing a business which competed with USSC’s was a breach of contract. However, the majority held that Blackman did not owe fiduciary obligations to USSC, and that therefore no constructive trust could be imposed over Hospital Products’ assets. Mason J dissented on the ground that the defendants were under a limited fiduciary obligation to protect USSC’s Australian product goodwill. The test ofa ficluciary relationship proposed by Mason J in Hospital Products was accepted by the majority judges even though they disagreed on the application of the test to the facts. It has also been applied in many subsequent cases. The essential features of fiduciary relationships were explained as follows: The critical feature of these relationshij that the fiduciary undertakes or agrees to act inother person in the exerci pow ae xercise of a power oF discretion which will affect the interests of that person i 2 son in a legal or practical sense. is sumt 2 . ein ee ee of a fiduciary relationship is often termed the ‘undertaking j , ‘Veh De a serious oversimplification to assume that a fiduciary relationstiP 10 (1996) 64 FCR 410, 11 1984) 156 CLR 41; Sourcebook 10.2a, p 206, 12° Ibid 96-7. aeChapter 10: Fiduciary obligations 153 nother in some matter. Suppose sakes to buy theatre tickets for B with his own money. A is not acting in a fiduciary “apaeity. The position will be different iB entrusts A with her money so that A can buy theatre s-In that ease A has temporary control (or power) over B's money and any misapplication ofthe money will constitute a breach of fiduciary obligation, A's expenditure of B's money will affect B in both a legal and a practical sense. All clements of Mason J's test have to be applied to 4 relationship to determine whether it is fiduciary; it is not enough to conclude that A is a fiduciary just because A has undertaken to act for B. In Hospital Products the majority held that Blckman and Hospital Products had not undertaken to act in USSC’s interests so as to justify the imposition of fiduciary obligations. The latitude Blackman enjoyed under the distributorship agreement with USSC was inconsist- cent with the existence of a fiduciary relationship. Blackman was not obliged to sell any specific quantity of USC's products, could determine the sale price of the products and was permitted to make a profit on his own account." Moreover, the contract was terminable by either party at will, These factors all indicated that the defendants were free to promote their own interests and had not exclusively agreed to act in the interests of USSC. If USSC had wanted more effective protection for its product goodwill in Australia it should, in the view of the majority, have negotiated a detailed confidentiality agreement." Although it is sometimes argued that the function of fiduciary law is to insert hypothetical ‘implied terms’ into contracts, to which the parties would have agreed if they had been a matter for negotiation,’* Hospital Products demonstrates that courts will not, by the application of fiduciary principles, make agreements for parties which they have not made for themselves. Situations to which the undertaking test has been applied include professional advisory relationships.!° Relationships such as banker-customer and accountant-client are primarily govemed by contract law, supplemented by legislation. Incompetent performance in these relationships usually attracts liability for breach of contract or in negligence.’” For example, the relationship between bank and customer is contractual, being the relationship of debtor and creditor (the customer being the creditor if her account is in credit), It is not ordinarily fiduciary relationship and the taking of deposits from customers does not attract fiduciary obligations."® But a bank advising a customer on the investment of the customer's money may owe fiduciary obligations to the customer if it has undertaken to provide wholly disinterested cvs whenever one person undertakes to at for A runide' tick advice and to act exclusively in the customer's interests, In Commonwealth Bank of Australia v Smith’? the plaintiffs - longstanding customers of the bank who often relied on its advice in their business dealings - sought the bank's advice in buying the lease of hotel from another of the bank's customers, The bank was also interested 13° Ibid 72-3 Gibbs G). 4 bid 72 15 FH Easterbrook and D R Fischel, ‘Contract and Fiduciary Duty’ (1993) 36 Journal of Law & Economics 425; Anthony Duggan, ‘Contracts, Fiduciaries and the Primacy of the Deal’ in Elise Bant and Matthew Harding (eds), Exploring Private Laww (Cambridge University Press, 2010) 275. 16 Daly v Syeney Stock Exchange Lid (1986) 160 CLR 371; Sourcebook 10.2b, p 210; Hodgkinson v Simms 1y__ [199413 8c 37, tg “lenderson v Merrett Syndicates 1995] 2 AC 145. 1» Foley v Hill (1848) 2 HLC 28; 9 ER 1002, (ag91) 42 FCR 390; Sourcebook 10.5.2c, p 236. (10.12) (10.13)(10.14) (10.15) TABLE OBLIGATIONS = 154 PART D: EQUI ans it had made 10 the vendor Were rpg “ase was a ‘good buy’, even thou : slants thatthe purchase was & nee re sate . the bans et ahat the hotel was worth kes ha the ce he in —_ on sow e “ise » hotel would be renew, Ce eal ite ee Oe wold be eee eg agreed to pay, He also repres he representation. ‘The plaintiffs bought the hote| and i ing the representa sae ‘| 5 refused to renew the lease, y operating it. Moreover, the landlord ner Se. The Fuy consider oP bank hd so identified is interests with those oft inte Federal Court held that the bank 2 ei ated ta awed the plaintiffs fiduciary obligations ~ it ha : ° hii owed the ph ni the purchase of the hotel. I had acted in ie Of fiduciary obligaign sing them on the purchas ‘i ‘a ; 8 ition of coniict berween the advisory duties it owed the pling cf the lease. The bank had made no profit from the con, ble compensation tothe plants ort el so that To in arminging the sale of the hotel so th branch manager told the having no grounds for mal in when if placed itself in a ps and its interest in ensuring the of interest, Nevertheless, it was ordered to pay equ financial losses incurred in running the hotel ‘Horizontal’ relationships ‘We have seen that some fiduciary relationships can be described as vertical because one pany possesses more sill or resources, or superior access to information, than the other party Other commercial relationships are structured as horizontal in that both parties bring resources, skill and information to the pursuit of a common goal. The paradigm of a horizontal commercial relationship which also imposes ficuciay obligations is a business or professional partnership. A partner does not undertake to act exclusively in the interests of the co-partners in matters within the scope of the partnership unless the partnership agreement makes provision for a partner to act as an agent for the others in some matter. Rather, all the partners undertake to actin the interests of the partnership. The Hospital Products testis therefore not apt to determine whether a partnership imposes fiduciary obligations, Other horizontal commercial relationships will create fiduciary obligations if they are analogous to. partnership. In determining whether they are fiduciary, the testis not whether one party has undertaken to actin the interests of another party (or other parties). The question will be whether the partes have placed a high degree of mutual trust and confidence in each other in the pursuit of their common goal. The precise: degree of trust and confidence requiredto justify the imposition of fiduciary obliga uantiied, In general terms, the degree of trust that one Partner expects of another will also be ie mie dyn aa n. Dminions Corporation Lid v Brin Py te Brn ae Fonts Ul ead pa aetat ' Lid.” Brian invested money under an agreement, Joint venture agreement, with UDC and $PL, it re neat Brisbane, SPL owned the land on which the shopping exe at 8 Sop cen = ¢ shopping centre was constructed. Although the shopping centre was successfully devel loped Brian was nei it sie nor paid a share of the profits. Unknown to Brian, sev pied de eaaeen and claimed payment ofthe profs UDC had taken a morgage over SPCS kind 20 4985) 157 CLR 1; Sourcebook 103.2 Serpe ers (2007) 230 CLR 89 LO1-105) Souceboa 11 82 Feb Consiuctions P 252, Pay lid v Say-bee PltFiduciary obligations 155 tepid itoFits share ofthe Profs, Mason, Bren an and Deane aye was in substance a p a - Deane JJ held that the joint venture ‘BP Moreover. tag igh it was not labelled a pa it jjocumentation. ' oreover, it was irrelevant that the co-ventrer a enfea eite joint venture activities before eae sip oF joint venture activites before formally executing the ay ae ae ‘agreement. The relationship on the parties at that * fiduciary since the penvee ecuting the he project prior to e: willingness of the parties to proceed agreeme eae — ee! a high degree of mutual trust : iclary obligations at the tim quis executed $0 that UDC could not obtain for itself a collateral ad ind consent of the other parties, “an with tl xd confidence. The ie the mortgage lage without the knowledge Concurrent contractual and fiduciary relationships stany fiduciary relationships are created by contract. Alternatively, they may evolve fi ee ively, wvolve from a relationship which was initially a contract permitting the pursuit of ree ee which over time became a relationship of trust and confidence.” Contract and fiduciary obligations often covexist. The solicitor-client relationship, for example, is established by a contract under which the client retains the services of the solicitor. ‘Three aspects of the relationship between contract law and the law of fiduciary obligations deserve emphas is (2) Fiduciary obligation be modified or even excluded by the terms of a contract. A dictum of Mason J in Hospital Products Lid v United States Surgical Corporation* emphasises the role of contract law in determining the content of fiduciary obligations: ‘The fiduciary relationship, if it is to exist at all, must accommodate itself to the is consistent with, and conforms to, them. The terms of the contract so thi fiduciary relationship cannot be superimposed upon the contract in such a way to alter the operation which the contract was intended to have according to its true construction. ‘A commercial contract may exclude or limit liability for breach of fiduciary obligation, This will be achieved by (a) an acknowledgement that the contract does not impose fiduciary obligations, of (b) limiting the areas to which fiduciary duties apply, or (©) excluding the application of remedies for breach of fiduciary obligation. In Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty La (No 4) an investment bank agreed to advise a company on its proposed takeover bid for another company. The day before the takeover bid was announced, a bank employee purchased shares in the target company on behalf of the bank, The employee did not have insider information about the takeover, and the bank had procedures in place to restrict the flow of commercially sensitive information. The tory regulator, ASIC, argued that the bank acted in. fiduciary capacity in advising on the takeover bid, and that it had committed a breach of fiduciary obligation by 21 The principal heme of Conaglen, ‘Fiduciary Loyalty’ above m3 isthat fury obligations poset reinforce the performance of non-fiduciary legal, equitable or sarwony Cates 22 (1984) 156 CLR 41, 97. 23° (2007) 160 FCR 35; Sourcebook 10.6a, p 2 ‘iduciary Duties’ 2 (2007) Journal of Equity 62. 4. J Getale, ‘ASIC v Citigroup: Contractual Exclusion of (10.16)