LAWS3114 Lecture 5

Obligations of Loyalty and Confidence

Recommended Reading: Sarah Worthington, Equity (2nd ed), 129-143, 148-157

Private Law Obligations

Cause of Action Primary Remedial Right (Secondary Right)
Breach of Contract Right to performance of consensual undertaking (promise) Specific performance; Damages measured by reference to value of performance
Tort Right that D not interfere or not inflict harm by negligent conduct Damages measured by reference to degree that P is worse-off by reason of wrong
Breach of Trustee’s Duty of Administration Right to performance of administration according to the terms of the trust Restoration of trust estate to the position in which it would have been had the administration been performed according to the terms of the trust
Breach of Fiduciary Obligation Right that D refrain from pursuing its own interest Disgorgement of any benefit procured by D (or compensation for all adverse consequences of D’s disloyalty)

A. Fiduciary Obligations

  • Usually arise in the context of a consensual undertaking, in the context of contractual or trust relationship, but they are not obligations to perform a specific task
    • Not normally contractual, etc to perform a task
  • Not obligations to refrain from inflicting harm
  • Creature of equity, a recognition that some people in a relationship has the power to make judgements that affect the other party – basically they can control the affairs of the other person
  • May be used to advance the interests of the other person, but may actually be a potential to cause harm
  • Concerned with the possibility that the person in the stronger position might be tempted to use that position to pursue her/his own benefit.
  • The idea is to close off the possibility of pursuing their own interest in the matters that concern the relationship
  • Two words frequently used to describe fiduciary obligations:
    • Proscriptive – in that they are prohibiting the person who owes fiduciary obligations from doing something, particularly, they are prohibiting the person from engaging in self-interested conduct. (see page 129 of the Worthington chapter)
    • Prophylactic – protective of the relationship. Pre-emptive measure against the temptation to pursue their own interest.
  • Trustees are legal owners of the trust property, and trustees have obligations to administer trust property for the benefit of the beneficiaries. This may involve selling trust property for cash, investing trust property, etc. If the trustee in the course of performing administrative duties decides to buy the property themselves, or if the trustee decides to invest the trust property in a company/investment in which they have a personal interest – in doing either of these things, the trustee would be tempted to pursue their own interest, over the best interests of the beneficiaries. These actions aren’t allowed because of the fiduciary duty! Pre-emptive attack on the trustee pursuing their own interests.
  • It is a strict duty and thus the measure of compensation is strict – no remoteness of loss. The fiduciary must compensate the beneficiary for all adverse consequences.
  • An account is concerned with what the fiduciary has gained – and that may not necessarily a gain at the direct expense of the plaintiff.
  • Other relationships where fiduciary obligations are ALWAYS owed:
    • The relationship between solicitor and client is a fiduciary duty. Duty to refrain from pursuing their own interests. This is because the solicitor is a person on whom the client relies and the solicitor generally decides on how the client’s interests will be pursued – the client doesn’t ‘look over the shoulder’ of the solicitor. There is a huge opportunity to use the relationship to their own benefit.
    • Director of a company – to the company as a whole, not to the individual shareholders.
  • Other relationships where a fiduciary obligation may be owed
  • General criteria to determine whether a fiduciary obligation is owed.

1. Identifying Fiduciary Relationships

  • Hallmarks of a Fiduciary Relationship
  • Hospital Products Limited v United States Surgical Corporation (1984) 156 CLR 41
    • An Australian company (Hospital Products) was USSC’s agent in Australia. Hospital Products was to be the sole Oz distributor for a product made by USSC, called Auto-Suture. The contract (written) between Hospital Products and USSC stated that Hospital Products was to use its “best efforts” to promote the sale of Auto-Suture. Failure to do this would be breach of contract (and this happened and was found in the court case).
    • We’re interested in whether there’s a breach of fiduciary duty.
    • Hospital Products had developed a competitor for Auto-Suture and pursued their own interests in selling their own product rather than Auto-Suture when the opportunity arose – this is what USSC complained about.
    • Either party were free to terminate the contract at any time. The agreement didn’t define what quantities of Auto-Suture had to be sold by Hospital Products. They didn’t have to purchase a quantity of Auto-Suture.
    • Whether the relationship between Hospital Products and USSC was a contractual relationship and, in addition, a fiduciary relationship.
    • Hospital Products v United States Surgical Corporation (1984) 156 CLR 41, 66 per Gibbs CJ:
      • 1. ‘One person is obliged, or undertakes, to act in relation to a particular matter in the interests of another and is entrusted with the power to affect those interests in a legal or practical sense’;
      • 2. ‘The special vulnerability of those whose interests are entrusted to the power of another to the abuse of that power’.

* Was there a fiduciary obligation?
* 3 judges: Gibbs, Wilson and Dawson said there was no fiduciary duty
* Mason and Dean said there was no fiduciary duty.
* The disagreement doesn’t seem to be over the hallmarks of a fiduciary duty, it seems to be based on a differing interpretation of the facts.
* Majority (no fiduciary relationship): Gibbs CJ observed that there was a contractual obligation to use one’s “best efforts” to promote the sale of the product. That didn’t necessarily translate into a fiduciary obligation. The terms of the contract shows that either party could terminate the agreement at any time. Hospital Products weren’t obliged to purchase or sell any quantity – just a vague “best effort” to promote sale of product. In so far as the contractual terms, USSC could have gotten special protections written into the contract (they are, after all, a huge company).
* Minority: Mason J (page 99). Said that the fact that a relationship is to some extent for the benefit of the entrusted person doesn’t prevent it from being fiduciary. The fact that Hospital Products was free to make a profit for itself doesn’t prevent the obligation from being fiduciary. (page 100-101). In effect Hospital Products was to be in charge of USSC’s product goodwill in Australia. USSC had to presence in Australia apart from the agency relationship with Hospital Products.

Relationship between financial advisers and their clients

  • Banks hire financial advisers, but generally give advice about products from their bank.
  • Other types of financial adviser/client relationship with a level of reliance and control. For example – seeing a financial adviser who gives tailor made financial advice. There is a reliance on the financial adviser that leads to a fiduciary relationship
  • *Pilmer v Duke Group Ltd (in liq) (2001) 207 CLR 165
    • Gold Mining company called “Kia Ora” (subsequently changed name to Duke Group). Before Kia Ora went into liquidation, it had made a takeover bid for Western United. Kia Ora offered the shareholders of Western United $1.20 per share plus 5 shares in Kia Ora for every two shares. Where there’s an Australian Company making a takeover bid over another Australian company a report must be produced showing whether the price offered for the shares in the company being taken over is fair and reasonable. An external company (Pilmer/NW) produced the report. The takeover bid was successful.
    • October 1987 – stock exchange crash. The share values of Western United and Kia Ora fell and incurred losses. Kia Ora became insolvent. It turns out that the price paid was too much, and was not fair and reasonable. The liquidators sued Pilmer for breach of fiduciary duty.
    • There had been longstanding relationships between partners of NW/Pilmer and Kia Ora and Western United. There was a personal interest for Pilmer/NW in having a good relationship with these companies.
    • Majority: McHugh, Hayne, Gummow, Callinan. Minority: Kirby.
    • Majority found no fiduciary relationship. Paragraph 70 onwards
    • The point which the majority makes very strongly is that this is not the case that a firm of accountants had been engaged on the wisdom of a transaction – no financial advice on the wisdom of the takeover bid. NW instructions were to prepare a report about whether the price being offered for the shares in Western United were a fair and reasonable price. The preparation of that report was a regulatory requirement. There was some evidence of incompetence in the production of the report – so they should sue for negligence, not for breach of fiduciary obligations.
    • Kirby: (read from para 137/page 220) thought that was NW had was a reporting function. Was engaged to provide a reporting function as to whether the price was fair and reasonable. Was meant to perform this with selfless loyalty to the client that commissioned the report. Kirby emphasised the potential for NW to be conflicted by their director’s interest in keeping a good relationship with Kia Ora and Western United.

2. Breach of Fiduciary Obligation

  1. The fiducariy place itself in a position in which its private interest conflicts with its duty to the principal – the CONFLICT rule.
  2. The fiduciary makes use of knowledge or an opportunity which arises out of the fiduciary relationship – the profit form position rule.

(a) The Conflict Rule

  • Williams v Barton [1927] 2 Ch 9
    • Trustee of deceased estate. Worked at a stockbrokers, earned half of any commission on work that he introduced to the firm. The deceased estate needed shares valued and so he referred the estate to the stockbrokers. The trustee then received half of the commission. The trustee had in his duty to further the estate, had conflicted with his personal interests.
  • *Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373
    • Walton was a solicitor. In addition to legal practice, had a property development company. The property development company was named DPC Estates. Because Walton was busy with legal practices and hired a manager for DPC Estates named Mr Grey. Mr Grey would seek out properties for DPC to purchase and redevelop, and would commission reports about these properties from Mr Thorn, and once he had the information would report back to Walton, who would decide whether to buy and renovate the property. Mr Grey had a lot of control over what information Walton got. Mr Grey thus owed fiduciary obligations over the business affairs of DPC Estates.
    • Walton employed an articled clerk named Clowes. Clowes and Grey knew each other. Grey found a property and was meant to tell Walton about, but he didn’t. Grey offered property to Clowes. Clowes asked why – Grey said DPC was in financial difficulty.
    • Gibbs J (page 393): defined what the scope of Grey’s positive duty to DPC Estates. Grey’s duty was to seek out investment opportunities for DPC and to manage these investments for DPC. In the case of this particular project, his instructions were to make an offer (Walton told Grey to make an offer). Thus was definitely within scope of DPC business. Rather than carry out his duty to DPC Estates, Grey offered it to Clowes, in exchange for whatever benefit Clowes would bestow on Grey. To what extent

(b) The Profit from Position Rule

*Regal (Hastings) Limited v Gulliver [1967] 2 AC 135
Boardman v Phipps [1967] 2 AC 46

3. Some Specific Situations

(a) Fiduciaries Renewing Leases

Keech v Sandford (1726) 25 ER 223
Chan v Zacharia (1984) 154 CLR 178

(b) Employees Receiving Bribes or Secret Commissions

Reading v Attorney-General [1951] AC 507
Lister v Stubbs (1890) 45 ChD 1
Attorney-General for Hong Kong v Reid [1994] 1 NZLR 1

(c) Doctor and Patient

*Breen v Williams (1996) 186 CLR 71

(d) Real Estate Agents

Kelly v Cooper [1993] AC 205

4. Informed Consent

Pilmer v Duke Group Ltd (in liq) (2001) 207 CLR 165, 223 (Kirby J)
Brickenden v London Loan and Savings Co [1934] 3 DLR 465
Maguire v Makaronis (1997) 188 CLR 449
Queensland Mines Limited v Hudson (1978) 18 ALR 1

5. Remedies

(a) Compensation

McKenzie v McDonald [1927] VLR 134

Probable sale price £2,445
Cash received £300
Value of shop/house £1,550 £1,850
Compensation Payable £595

Sorry for the dodgy table. I tried to get the £2,445 and £595 to align to the right, but it wouldn't listen to me :/

Maguire v Makaronis (1997) 188 CLR 449

(b) Account

*Warman International Limited v Dwyer (1995) 182 CLR 544
Chirnside v Fay [2006] NZSC 68

(c) Exemplary Damages?

Harris v Digital Pulse Pty Ltd (2003) 56 NSWLR 298

6. Third Party Liability

“Strangers are not to be made constructive trustees…unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees.”
(Barnes v Addy (1874) LR 9 Ch App 244 at 252 per Lord Selbourne LC)

(i) Knowing Receipt of Trust Property

Doneley v Doneley [1998] 1 QdR 602
Say-Dee Pty Ltd v Farah Constructions Pty Ltd (2007) 81 ALJR 1107

(ii) Knowing Assistance in a Breach of Trust or Fiduciary Duty

*Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373
Royal Brunei Airlines Sdn Bhd v Tan [1995] 3 WLR 64

B. The Duty of Confidence

1. Confidential Information

(b) The Nature of the Information

Ansell Rubber Co v Allied Rubber Industries [1967] VR 37
Attorney-General (UK) v Heinemann Publishers Australian Pty Ltd (1987) 8 NSWLR 341

(c) The Circumstances of Communication

Seager v Copydex Ltd [1967] 2 All ER 415

2. The Public Interest Defence

Lion Laboratories v Evans [1984] 2 All ER 417
Francombe v Mirror Newspapers Ltd [1984] 2 All ER 408

3. Trustee’s Duty to Provide Information

Re Londonderry’s Settlement [1965] Ch 918
Hartigan Nominees Pty Ltd v Rydge (1992) 29 NSWLR 405