Topic 4: Fiduciary Obligations

Question 0

What are the characteristics of Fiduciary obligations?

Answer 0

Bristol v Mothew:

1. Concerned with loyalty;
2. Mere incompetence is not enough
3. They are PROSCRIPTIVE, not prescriptive
4. They are profilactic - intended to protect the principal and prevent the fiduciary from acting in their own interests
5. They are extremely strict - liability will occur even where there is no loss

Question 1

What are fiduciary obligations?

Answer 1

They are obligations equity imposes where by reason of the position they occupy within a relationship, the fiduciary has some power to make decisions or exercise discretion on behalf of the other party, in a way that can affect their legal interests

Question 2

How can Fiduciaries comply with the proscriptive aspect of fiduciary obligations?

Answer 2

Sarah Worthington: Essentially, they can carry out their duties without doing that which breaches the Fiduciary relationship. They do not have to do anything extra to avoid liability.

Question 3

What is the difference between contract obligations and fiduciary obligations?

Answer 3

Contractual obligations are prescriptive and prescribe an end position in which the other party is to be put. It requires actively placing that party in that position.
Where else, fiduciary obligations do not prescribe an end position, but simply that the fiduciary refrain from pursuing it’s own interests.

Question 4

What is a case to demonstrate the proscriptive nature of fiduciary obligations?

Answer 4

Breen v Williams

Question 5

What are the facts in Breen v Williams?

Answer 5

• A woman underwent breast implant surgery and developed complications.
• Dr Williams performed remedial surgery for her
• Several years later B was involved in class action against the manufacturer of the breast implants and required her medical records from W.
• W agreed to give it to her only on the condition she indemnify him from any potential claims against him
• B unhappy so brought proceeding, arguing he owed her a fiduciary duty.

Court held:

• No fiduciary relationship because the duty that B was alleging was prescriptive requiring W to do something.
• In Australia, the fiduciary obligations are necessarily proscriptive.

Question 6

How to identify a fiduciary relationship?

Answer 6

There are two cases:

1. Where it is always presumed; and
2. Where it arises on the particular facts of the case

Question 7

What are the relationships where a fiduciary relationship is presumed?

Answer 7

1. Agent and Principal
2. Employee and employer
3. Managing Director and company
4. Business partners
5. Solicitor and Client; and
6. Most obviously: trustee and beneficiary.

Question 8

What is the criteria to determine whether a fiduciary relationships arises from any given set of facts?

Answer 8

In Hospital Products v USSC it is where:

1. Someone has undertaken or agreed to act for someone else or on their behalf
2. The fiduciary has significant discretion in performing the obligations
3. The fiduciary has a power to affect the interests/legal relationship of the Principal such that the Principal is vulnerable to abuse

Question 9

What are the facts in Hospital Products v USSC?

Answer 9

• USSC wished to market their surgical product in Australia. They formed a contract with Hospital products.
• The contract contained two important terms:
  1. HP would use it’s best efforts to promote the product
  2. Either party was free to terminate the contract at any time.
• The contract didn’t stipulate an amount that HP had to sell or buy.
  -HP begun to develop and sell their own product in competition with USSC’s product.
  USSC argued breach of contract and fiduciary duty, arguing HP had power over distribution and they had entrusted HP with their actual and prospective business connections. They were also relying on HP so HP should have refrained from pursuing it’s own interests.

Court held:

1. Certainly was breach of contract
2. Majority concluded no fiduciary relationship. because there was insufficient delegation of control to HP and vulnerability of USSC
3. Because it was a contractual relationship, presumption is they had equal bargaining power, so dealing was at arms length
4. Contract didn’t require HP to buy or sell a certain amount

Question 10

What is the relevance of Pilmer v Duke Group?

Answer 10

It is also demonstrative of where a fiduciary relationship arose on the facts

Question 11

What are the facts in Pilmer v Duke Group

Answer 11

• Kia Ora (now named Duke Group) wanted to take over a mining company called Western Mining.
• They proposed an offer to the shareholders to sell shares in Western Mining for those in Kia Ora
• They had to get a report done for regulatory purposes stating the price was fair and reasonable.
• Pilmer’s firm produced this. and the take over went ahead
• Shortly after the stock market crashed and Kira Ora and WM were affected badly.
• Kia Ora then became Duke Group who upon examination realised Pilmer had made a gross overestimation of the value of WM’s shares.
• Liquidators brought action against him for breach of his fiduciary duty. They argued Pilmer’s firm was close with both companies and therefore he had private interest in remaining on good terms with the companies in order to keep work flowing, therefore he couldn’t produce independent report for KO.

Court held:

• No fiduciary relationship
  2. It was possible to have relationship between financial advisor and client, but not here
  3. Pilmer had not been retained to provide advise on whether it was a good decision or not, but merely to prepare the report.
  4. IT was up to KO to make up it’s mind.
  5. Also no vulnerability or reliance so no fiduciary relationship
  4. Whether Pilmer had done the report negligently was another case.

Question 12

How does a fiduciary breach their fiduciary duty?

Answer 12

By breaching the two rules of:

1. No Conflict; and
2. No Profit rules

Question 13

What is the no conflict rule?

Answer 13

The Fiduciary must not put itself in a position where it’s own private interests conflicts with it’s duty to the principal.

Question 14

What are the two considerations for the no conflict rule?

Answer 14

1. The scope of duty to the principal; and

2. The private interests of the Fiduciary.

Question 15

What are the cases for the No Conflict rule?

Answer 15

1. Consul Development v DPC Estates; and
2. Boardman v Phipps
3. Queensland Mining v Hudson

Question 16

What are the facts in Consul Development v DPC estates?

Answer 16

1. Mr Walton (W) owned a legal practice and a property development business
2. W was busy so he hired Mr Gray to manage the business.
3. Mr G had to scan the market and identify any properties suitable to be developed and report to Mr W
4. Mr W was particularly interest in one property and told Mr G to offer low, but don’t let the sale fall through
5. Clearly there was fiduciary relationship, Mr W was relying heavily on Mr G
6. Mr C was employed in Mr W’s legal practice as a law clerk. He too had his own property business and knew Mr G.
7. G told C the properties that were on sale and suggested C buy the property through Consul Development as he knew Mr W’s offer was grossly underpriced and rejected.
8. G and C formed an agreement that if C bought and redeveloped, G would get a share of the profits
9. C offered a considerably higher price and got the properties.

Question 17

What was the decision in Consul Development v DPC Estates?

Answer 17

1. Consider G’s duties
   - It was to seek out and provide recommendations to W;
   - He had positive oblgiation to do his best and negogitate the purchase of properties on behalf of DPC
   - Mr W had specificalyl told G not to let it fall through
2. Consider G’s interest
   - He had private interest in seeing C get the properties so he would get share of profits
3. There was a clear conflict
4. CD however were not required to account for profits because they did not have the required level of knowledge for knowing assistance

Question 18

What is the relevance of Boardman v Phipps even though it is primarily a no profit case?

Answer 18

Boardman was the solicitor for the trust and had a duty to advise the client to go to court to obtain the authority to obtain shares.
However because of his private interest to obtain the shares himself, the courts were satisfied he would not have been able to give unprejudiced advice as to whether they should have gone to court. However there was only a remote possibility of conflict, nevertheless enough.

Dissenting judges said there needed to be real and sensible possibility of conflict.

Question 19

What are the facts of Queensland Mines v Hudson?

Answer 19

• Hudson was managing director of QM
• He had negotiated mining licenses from the Government of Tasmania.
• Evidence showed they granted the licenses only because of the reputation of Queensland mining and their effectiveness.
• Mr H then resigned as managing director and exploited those licenses himself.
• Court adopted the dissenting judgements in Boardman v Phipps that there must be a real and sensible possibility of conflict

Question 20

What is the no profit rule?

Answer 20

A fiduciary must not make unauthorised profit by virtue of their fiduciary position.

Question 21

What is the question to ask in a no profit case?

Answer 21

1. Whether the fiduciary has made use of an opportunity, knowledge of information that arose out of the fiduciary relationship and as a result has made a profit for itself.

Question 22

What are the cases related to the No Profit rule?

Answer 22

1. Regal Hastings v Gulliver

2. Boardman v Phipps

Question 23

What are the facts of Regal Hastings v Gulliver?

Answer 23

• Regal Hastings (RH) owned cinemas and wished to acquire further cinemas in the area
• They set up a subsidiary to do that but could not afford the full 5,000 shares of the company, but only 2,000
• Director of RH and solicitor purchased the remaining 3,000 shares in their own names
• Shortly after the subsidiary company shares were sold for a substantial profit
• RH brought action against director and company solicitor claiming breach of fiduciary obligation.

Court held:

1. There director had obtained the profit by virtue of their position as directors. They were only able to sell the shares because of their positions. It didn’t matter if there was any conflict, they had breached no profit rule.
2. Director had to account for profits.

Question 24

What are the facts of Boardman v Phipps?

Answer 24

- Boardman was a solicitor to a family trust, not a trustee. - Main items of trust property was a minority share in a private company which wasn't performing. - In his capacity as solicitor he went with Phipps (beneficiary under trust) and went to annual general meeting of company - There he obtained information and saw potential for significant profit - They thought it would be beneficial trust if they obtained majority share holding and hence control of the company so they could direct it - Trust didn't have enough funds to obtain the majority and there was also limitations on the power of investment. - B and P decided to purchase shares in their own names. - They did seek consent of the trustees, one of which lacked legal capacity because he had dementia - Also informed beneficiaries of the plan - He obtained shares and subsequently made a large profit so no harm to the trust. - One of the beneficiaries brought action for breach of fiduciary duty.

Question 25

What was the decision in Boardman v Phipps?

Answer 25

- There was a breach of the no profit rule because B had obtained the profit as a result of his position and knowledge. - He had not disclosed sufficient information to amount to informed consent of the beneficiaries - B had to account for profits.

Question 26

Is there a conflict of interest if the trustee purchased the trust property from the trust?

Answer 26

The trustee already has legal title but intends to sell the property to himself. Also known as the Self dealing rule There is a conflict of interest because: Ex Parte James 1. As a buyer, he would want to get the lowest price possible; and 2. As a seller, he would want to sell for the highest price possible.

Question 27

What is the relevance of Wright v Morgan?

Answer 27

``` To do with the self dealing rule. Courts held where a trustee: 1. Purchases at a public auction; and 2. Evidence shows s/he paid full market value Then perhaps it is valid. ``` However the beneficiary can still bring an action to set aside the transaction.

Question 28

Is there a conflict of interest where the trustee purchases trust property from the BENEFICIARY?

Answer 28

Here, the beneficiary is the vendor selling the beneficial interest. Known as fair dealing rule. There is a conflict of interest because: 1. Trustee is the legal owner so could have obtained information that places him at an advantage in negotiating price 2. They obtain the information by virtue of their trustee position.

Question 29

Where a trustee purchases trust property from a beneficiary, when will it be valid and not set aside?

Answer 29

Where the trustee can prove: 1. They paid full market value for the property; and 2. All information was laid down to beneficiary prior to sale; and 2. The trustee had not taken advantage of his/her position as trustee.

Question 30

What are the cases regarding Fiduciaries renewing Leases?

Answer 30

1. Keech v Sandford | 2. Chan v Zacharia

Question 31

What are the facts of Keech v Sandford?

Answer 31

- Trustee held a lease of profits of a market on trust for a child/infant. - Before the term expired, the trustee applied for renewal of lease for benefit of child - Lessor refused to renew concerned with not having adequate remedy against infant - he was happy to grant the lease to the trustee in his personal capacity Court held: 1. The trustee held the lease on constructive trust for child 2. Had to account for all profits made even though there was no fraud

Question 32

What are the facts in Chan v Zacharia?

Answer 32

-Two doctors were in a medical practice and took out a lease on premises where practice was located - The lease contained option for renewal for further 2 years - Doctors fell out and one doctor gave notice of dissolution of partnership - One doctor wished to renew the lease, but the other refused to renew it together - Before affairs of partnership wound up, owner of premise agreed to lease to D C in her own capacity - By the end of that year, the option had already expired Dr Z then brought proceedings against Dr C. -They were business partners, so clear fiduciary relationship Courts held: 1. Where fiduciary holds a lease in it's fiduciary capacity and subsequently renews for it's own personal benefit, there is a PRESUMPTION that s/he did so by using fiduciary position 2. Further, partnership hadn't fully dissolved, because the still had wound up matters. 3. The fiduciary obligations extended to those wind up matters, despite despite the notice of dissolution given. So obligations would end only up actual winding up. 4. Therefore renewing in his name before winding up was breach of fiduciary duty 5. He had obtained profit by virtue of his position as fiduciary 6. C held on constructive trust for Z

Question 33

What are the four cases for Employees receiving bribes or secret commissions?

Answer 33

1. Lister v Stubbs; 2. AG (HK) v Reid; 3. Sinclair Investments v Versailles Trade Finance 4. Romaldi v Chameleon mining

Question 34

What are the facts in Lister v Stubbs?

Answer 34

- Stubbs was employed by Lister's company dealing with silk. - S had task to purchase all the goods necessary. - Upon receiving secret commission from a particular firm, he placed a substantial order with them. - Some of the secret commission given to S had been used to invest, buy land and some still in cash - L discovered S had been paid secret commission and brought action for beach of fiduciary position by obtaining profits from his position - L not only claimed account of profits but constructive trust over money paid. Court held: 1. Money received not held on trust, therefore proprietary claim failed. Would be unfair that principal would obtain priority over creditors 2. P restricted to personal remedy. Obvious there was fiduciary relationship and he had obtained profit by virtue of his position

Question 35

What are the facts of AG (HK) v Reid?

Answer 35

- D was a solicitor employed by legal service in the gov of HK. He eventually became DPP - Throughout his career, he had taken bribes from criminals in exchange for exploiting his official position to obstruct prosecution of those criminals - He used part of his money to purchase properties in NZ which appreciated in value - There was fiduciary relationship, no doubt he had breached fiduciary duty and was liable for account of profits - Action brought in HC Of NZ arguing properties held on constructive trust - HC said no, they considered themselves bound by Lister v Stubbs Court held: 1. Properties were held on constructive trust. 2. As soon as bribes were received, they were held on constructive trust for government. 3. Query, did Reid have obligation to procure bribes on behalf of government, why would bribe money belong to government? 4. Judge concerned with deterrent function and to prevent Reid from profiting from his actions, so reasoning quite artificial

Question 36

What is the relevance of Sinclair Investments v Versailes Trade Finance?

Answer 36

- Director and principal share holder of Versailles Trade finance and also owned another company called Trading Partners In breach of fiduciary duty, he made profit on sale of his shares in Versailles Court held: 1. Reasoning in AG v Reid unsound, hard to see how a bribe can be viewed as an asset that the fiduciary was under a duty to take for the beneficiary.

Question 37

What is the approach in Australia regarding Government bribes on Constructive Trust?

Answer 37

Romaldi v Chameleon Mining: Opposite of Argument in AG (HK) v Reid In Australia, it is discretionary. It is not that there is a constructive trust in existence at the moment the fiduciary received the bribes and the courts have to simply declare it, it is instead a matter for the court to decide.

Question 38

Is the Doctor patient relationship one of fiduciary nature?

Answer 38

Breen v Williams, the HC held that it may be capable but not in the current case. It is true that: - The patient was relying on advice of the doctor - Patient did depend on intimate personal details; and - The patient places reliance on doctor and in a sense delegates control to doctor. However in this case: - the fiduciary obligation that Mrs B was claiming was prescriptive. Fiduciary obligations are strictly proscriptive. - A doctor has the duty to act in the best interests of the patient, which means controlling ho much information they have and how to treat. - Imposing a fiduciary obligation of a right of access, conflicts with this.

Question 39

Is there a fiduciary relationship between Real Estate Agent and client?

Answer 39

It most likely falls under relationship because the agent has ability to make inquiries and control flow of information to the principal. There are characteristics of power and ability to affect principal's interest: KELLY V COOPER

Question 40

What are the facts of Kelly v Cooper?

Answer 40

- Agent was working on behalf of multiple vendors, two of which had adjoining properties. - A purchase came along and expressed intention to purchase the two of them - One offer on one of the lands was accepted while the other vendor wished to get a higher offer - The agent informed them that they were unlikely to get a higher price. - However agent didn't inform the vendor of the second property that the purchaser was interest in buying both properties. - Argument was: it would presumably make the second property more valuable to the purchaser and hence likely to achieve a higher price Court held: 1. Well known an agent doesn't work for just one vendor. Confidential information parted with an agent is under a duty of confidence because he gets it from multiple vendors. 2. IT would be outside scope of duty to disclose that the purchaser was purchasing two properties 3. Held no breach by agent.