Topic 1 Introduction and History[footnoteRef:1] [1: Any reference to MGL refers to R, P Meagher, J D Heydon, M J Leeming Meagher, Gummow and Leahanes Equity Doctrines and Remedies, 4th Edition, LexisNexis Butterworths, Sydney, 2002 the preeminent book on equity.]

IntroductionThe foundations of equity began in England in the 13th Century in the Court of Chancery. The chancellor was a member of the Church who sought to determine, based on individual merits, whether the common law had produced an unjust or unfair ruling. The Chancellors role was basically: To ensure that the fair and just application of the law was apply in a Court of Equity To protect a plaintiff from an unconscionable or misapplication of the law in the Chancellors view. To develop a system of equity maxims which would ensure that equity would uphold the fair and just application of the law. To disregard precedent and completely ignore the need for consistency and homogeny in favour of ad hoc decisions based on individual merit.Thus, equity refers to a body of rules and principles that have developed over a long period of time which are distinct from common law principles developed under the common law judicial system. In fact, until the Judicature Acts of 1873-1875 (UK) was passed equitable cases were heard in a separate Court from their common law counterparts the ideology being that a separate Court would provide a distinct and unique application of equity principles on the case.Once the Judicature Acts of 1873-1875 (UK) was passed, this changed significantly since the number of disputes and legal proceedings rapidly increased requiring the Courts to administer both equitable doctrines and common law rulings concurrently. Most important to note however, was that this resulted in the amalgamation of common law and equity into the same Courts equity remains a very unique and distinct body of law which has its own applications and principles and values and goals. There is, and will never be, a symbiotic relationship between common law and equity since the root of their application is entirely different. As you may well know, common law cases rely on prior authorities established throughout time and their relevant application of these principles equity relies on what is just and right and can disregard prior rulings in favour of the pure application of fair and just equitable principles.As stated by Justice Kitto, equity is the saving supplement and complement of the common law. In modern times, the boundaries between common law and equity are shifting the interaction between the two now becoming the very forefront of private law. Equity now tends to fill the void that common law simply cannot and equitable remedies can be applied when common law remedies are not suitable or simply do not provide, what the Court deems to be, sufficient relief. Maxims of EquityThe Maxims of Equity are a series of guiding principles developed throughout time which can be applied to assist the determination of a claim. These principles were commented on in Corin v Patton (1990) 169 CLR 540 by Mason CJ and the core maxims are listed below: Equity is equality Equity will not, by reason of a merely technical defect, suffer a wrong to be without a remedy Equity looks to the intent rather than the form Where the equities are equal, the first in time shall prevail. He or she who seeks equity must do equity Equity looks on that as done without to be done Equity imputes an intention to fulfil an obligation Where there is equal equity, the law shall prevail. Equity acts in personam Equity does not assist a volunteer Equity follows the law He or she who comes into equity must come with clean hands Delay defeats equitiesFrom these maxims, a long list of important contributions by equity can be established. This list provides some insight in the modern application of equity principles but by no means is a complete and authoritative list: equity may foresee the creation of a property right at law; equity has a longer list of property rights than does the common law; equity may recognize property rights in situations where the common law would, or perhaps, could not; equity has developed the important doctrines of contribution, marshalling and documented a range of equitable securities; equity is more far reactive to mistake, fraud (including unconscientious behaviour) and breaches of confidence; equity is more lenient than the common law when considering a failure to comply with the requirements of formality; equity has been regarded as a more adequate function to be able to trace through substitutions of one asset for another; equity has a highly important role to play in the consideration of the institution of the trust and with it the fiduciary obligations of trustees; equity has a longer list of remedies than the common law does.

Equity will always prevail

Most importantly perhaps in Australia, is the notion now upheld by statutory authority that where the rules of equity and the common law are in conflict or discrepancy equity will always prevail. An example of such statutory authority is s29 of the Supreme Court Act 1986 (Vic).

Use of the Maxims

The use of equitable maxims is entirely in the hands of the litigating parties to determine whether there use is beneficial or harmful to the arguments of their respective cases. For example, if a plaintiff has a history of unconscionable or bad faith behaviour (and assuming that this evidence is admissible) then a defendant may attempt to defeat the plaintiffs case by simply arguing that the plaintiff does not come to Court with clean hands.

Most relevant is the use of the maxims is the concept outlined in Black Uhlans Inc v NSW Crime Commission (2002) 12 BPR 22,421 where it was stated by Campbell J that 2 preconditions must apply in order to rely on equitable maxims. The conduct of the plaintiff must:

have an immediate and necessary relation to the equity sued for and must;constitute a depravity in a legal as well as in a moral sense.

Such requirements, as outlined by Campbell J, underpin the legal justifications for equity in modern law most particularly in the later point. While common law will examine and accept policy considerations where relevant, it will typically not extend these considerations to what is morally correct. The morality of a decision in common law is not considered in any detail yet in equity it is closely examined. Such a difference highlights the equitable origins of the Court of Chancery in upholding what is just and fair.

If we turn our attention to the remarks of Gummow J in his paper Change and Continuity: Statute, Equity and Federalism OUP Oxford 1999 pp. 53-54 it is seen that:

It is the concern of equity with the standards of probity and good conscience, the adaptability of equitable doctrine to changing circumstances and the discretionary nature of equitable relief which stand in marked contrast to the more rigid formula applied by the common law and equip it better to meet the needs of the type of liberal democratic society which has evolved in the 20th century.

The conscience of a Court of Equity extends not to the private morality and bias of a judge but rather to the judges application of that morality in consideration of civil and official duties. Thus, it is correct to purport that while modern equity law will strongly consider and uphold conscience where relevant, it may not readily apply it in the face of an established equitable authority. This specific point was commented by Justice Hayne in Bridge v. Campbell Discount Co. Ltd [1961] q QB 445 at 459 where His Honour states:

[I]dentifying some conduct as unconscionable or unconscientious is a statement of conclusion which would sit as well in the discourse of an ethicist, as it does in reasons for judgment. But in the law, they are not terms that invite, or even permit, recourse to a judges idiosyncratic, or characteristic, sense of justice. What sets apart the two fields of discourse of the ethicist and the judge is the need for the judge to articulate what it is that leads him or her to the conclusion that the conduct in question should wear this label.

It is also possible to look further to High Courts comments in Farah Constructions Pty Ltd v. Say-Dee Pty Ltd (2007) 81 ALJR 1107 at [154] where it upheld previous comments of Gummow J in Roxborough v. Rothmans of Pall Mall Australia Ltd (2001) 208 CLR 516 at [74]:

To the lawyer whose mind has been moulded by civilian influences, the theory may come first, and the source of the theory may be the writings of jurists not the decisions of judges. However, that is not the way in which a system based on case law develops; over time, general principle is derived from judicial decisions upon particular instances, not the other way around.

Other notable equitable cases worth reading include:

Vadasz v Pioneer Concrete (SA) Pty Ltd (1995) 184 CLR 102; 130 ALR 570 High Court Australia Walsh v Londsdale (1882) 21 Ch D 9 Court of Appeal (UK) ORR v Ford (1989) 167 CLR 316; 84 ALR 146 High Court of Australia

Topic 2 - Unconscientious and/or Unconscionable Conduct

Introduction

Most scholars new to law often confuse unconscientious and/or unconscionable conduct with the previously learnt Trade Practices Act 1974 (Cth) s51 through s53 and relevant statutory concepts relating to misleading and deceptive conduct. While it is true that the statutory authority is often the most quoted in the media and the primary focus of many law journals around Australia equity can also provides relief from transactional unconscionability in a variety of situations.

Signing a Contract

It is important to ensure that confusion does not occur when studying cases involving incapacity, non est factum (it is not my deed), fraudulent misrepresentation, mistake or duress which are each distinct, and very developed bodies of law in their own right. Each of these doctrines typically always involves a signed written contract that one party is attempting to rescind or terminate entirely and most common law cases deal entirely with this issue. This was best typified by the comments by the High Court in Toll (FGCT) Pty Ltd v. Alphapharm Pty Ltd (2004) 219 CLR 165 at [45]:

It should not be overlooked that to sign a document known and intended to affect legal relations is an act which itself ordinarily conveys a representation to a reasonable reader of the document. The representation is that the person who signs either has read and approved the contents of the document or is willing to take the chance of being bound by those contents, as Latham CJ put it, whatever they might be.

The general attitude of the common law is therefore that when a person signs a document, doing so makes this signature a gift or enters this person into the contract. Consequently, at common law a person cannot revoke the terms of the contract they have signed and cannot rescind or terminate a completed gift.

Generally, the common law will only seek to reverse transactions when one of the contracting parties has entered the contract under duress, non est factum, unconscionable conduct or undue influence. The primary focus of this section is address the relief that the law of equity provides to parties under undue influence and unconscionable conduct.

Undue Influence

Definition

Undue Influence is a doctrine of equity which provides relief under common law where one contracting party has exerted undue or excess confidence, control, domination or influence over another party which has resulted in a transaction that has lead to the transfer of property. The doctrine considers and seeks to balance the motives of the stronger party against those of the weaker and more vulnerable one.

Purpose

Thus, the doctrine focuses on the plaintiff establishing that their will was influenced and dominated by the defendant and this let them to entering into the contract. A plaintiff who cannot establish this requirement, as suggested in the decision of Archer v Archer [2000] NSWCA 314, cannot succeed in satisfying the requirements of undue influence and the Court will not set aside the transaction.

Inter vivos Transactions Only & Inequality of Bargaining Power

The doctrine is only concerned with transactions that occur inter vivos or during the donor lifetime. The doctrine applies to gifts and to cases where there is a transfer of value to a weaker party. In Johnson v Buttress (1936) 56 CLR 113 Dixon J suggested in obiter that the preferred view is that where the transaction is cast a contract the presumption will still arise but can be rebutted if the transaction is shown to be a proper business dealing. Of course, it is critical in any case that a clear and transparent distinction is made between the setting aside of a transfer of property due to undue influence and the setting aside of a contract merely because it has turn sour for one of the contracting parties.

To consider the Courts view on Undue Influence, we can look to the case of Brusewitz v Brown [1923] NZLR 1106 where at 1109-10 Sir John Salmond said: the mere fact that a transaction is based on an inadequate consideration or is otherwise improvident, unreasonable, or unjust is not in itself any ground on which this court can set it aside as invalid ... The law in general leaves every man at liberty to make such bargains as he pleases, and to dispose of his property as he chooses. However improvident, unreasonable, or unjust such bargains or dispositions maybe, they are binding on every party to them unless he can prove affirmatively the existence of one of the recognised invalidating circumstances is unduely influenced.

This general principle, however, is subject to an important exception. Where there is not merely an absence or inadequacy of consideration for the transfer of property, but there also exists between the grantor and the grantee some special relation of confidence, control, domination, influence, or other form of superiority, such as to render reasonable a presumption that the transaction was procured by the grantee through some unconscientious use of his power over the grantor, the law will make that presumption, and will place on the grantee the burden of supporting the transaction by which he so benefits, and of rebutting the presumption of its invalidity. In such cases it is necessary for the grantee to prove that the suspected transaction has not its source in any improper influence over the mind or will of the grantee, or in any fraud, misrepresentation, mistake or concealment of material facts which ought to have been disclosed by the grantee to the grantor in view of the relation between them. Unless the grantee can prove this the transaction will be set aside at the suit of the grantor or his representatives.

Types of Undue Influence

Undue Influence has been classified into three different classes, as per the obiter in Bank of Credit and Commerce International SA v Aboody [1990] 1 QB 923 at 952, where the English Court of Appeal suggested the following classes:

1. Class 1 Actual Undue Influence2. Class 2 Presumptive Undue Influence3. Class 3 Influence proved rather than presumed

Class 1 Actual Undue Influence

Proving Undue Influence

Before a more detailed discussion into each of the later classes is considered, it is first prudent to examine how actual undue influence must generally be proven. In Johnson v Buttress (1936) 56 CLR 113 at 134, Dixon J stated that for undue influence to be proven four elements must be satisfied. These elements are:

1. The inducing party has the capacity to influence the complainant;2. The influence actually occurred;3. The occurrence was definitively undue; and4. The occurrence is directly correlated too, and brought about by, the transaction.

The case of Daniel v Drew [2005] EWCA Civ 507 (6 May 2005) considers actual undue influence in greater detail regarding an elderly woman who was a trustee of a family trust and whose nephew wanted her to resign as the trustee of this trust.

The nephew consequently pressured his aunt to resign and the aunts son took the nephew to Court seeking equitable relief.

The Court ruled that there was a substantial body of evidence to satisfy that undue influence had occurred and that the nephew had forced the aunt to resign when she did truly not want to.

Class 2 Presumptive Undue Influence

What is the presumption?

Class 2 circumstances of undue influence primarily arise where proof of the relationship alone is sufficient to raise a presumption of undue influence. Equity recognises certain relationships which inherently involve a high degree of trust and confidence and such relationships, by their very nature, allow one party to have substantial influence and control over the other weaker party.

These relationships can also carry a pre-existing economic component whereby the stronger party can easily influence the weaker party to engage in economic transactions. Relationships of this nature therefore also carry a fiduciary dimension. It is important to note that although this pre-existing relationship can increase the burden of proof for the defendant; this component is not a critical one if the exertion of undue influence results in a subsequent later transaction.

Recognised Categories that raise the presumption for the plaintiff

If the relationship between the parties falls into one of these pre-existing recognised categories, the effect is that the plaintiff does not have to prove that undue influence occurred to induce the weaker party to enter into the transaction.

Consequently, and as suggested in Johnson v Buttress (1936) 56 CLR 113, this infers that the burden of proof shifts to the defendant to prove that the plaintiff entered into the transaction freely as opposed to the plaintiff having the prove that defendant induced them into the transaction. Thus, unless the defendant can rebut the presumption of undue influence then the transaction will be set aside by the Court.

The following table illustrates some of the presumed relationships of influence and those which Courts have suggested also carry a fiduciary relationship.

Stronger/Weaker PartyPresumed RelationshipFiduciary Relationship

Solicitor-clientYesYes

Child-parentNoNo

Parent-childYesNo

Doctor-patientYesNo

Spouse-spouseNoNo

Religious Leader - worshipperYesNo

Effect of Presumed Relationship

Most notably are the comments of Dixon J in the case of Yerky v Jones (1939) 63 CLR 649, 675 which inferred that presumptive relationships of undue influence are not, by themselves, entirely sufficient to fully explain the transactions or to account for them without suspicion that the relationship of confidence has actually been abused.

In Talbot & Oliver v Shann [2005] WASCA 34 it was established that it is not necessary to prove that either party had knowledge that a presumed relationship existed, rather the most critical aspect is that one in fact did exist.

Spousal

If we consider the spousal relationship for example, in Latham CJs decision from Yerky v Jones he states:

It is true that undue influence maybe more easily proved in the case of husband and wife than in cases where no special relationship exists between the parties, but there is no presumption of such influence from the marital relationship.

Thus, the spousal relationship does not carry a presumptive relationship of undue influence since the notion exists that each spouse will always wish to benefit the other. The same logic can be applied to the relationship of a child and a parent since it is assumed that a parent will always love their children and want to benefit them. However, the reverse is not presumed and therefore parents are not presumed to subject to undue influence of their children.

Class 3 Influence proved rather than presumed

Not Presumed Difference between Presumed and Not Presumed

There are relationships of undue influence which can be proven but are not presumed. It is always the responsibility of the plaintiff to show that the influencing party had a position of power or domination over them and that it was due to this position that the transaction was entered. Evidently, this is the primarily difference between a presumed relationship of undue influence which falls into an established category and one that must be proven.

In Johnson v Butress (1936) 56 CLR 113, 134-5, Dixon J stated that a relationship of influence is

where one party occupies or assumes towards another a position naturally involving an ascendancy or influence over that other, or a dependence or trust on his part

Proving the Presumed Relationship Raises the Presumption

If the plaintiff can prove that such a relationship exists, then the presumption of undue influence arises and the defendant must rebut the presumption and convince the Court that transaction was entered into freely by the plaintiff. Of course, there are numerous factors which can increase the presumption that a defendant used a relationship of influence to induce a transaction over a plaintiff. In Union Fidelity Trustee Co Of Australia Ltd v Gibson [1971] VR 573, 576, Gillard J stated some factors which can increase the presumption that a relationship of undue influence exists:

1. Attributes of weaker party:a. Standard of intelligence and education; (Johnson v Buttress (1936) VLR 270; [1946] ALR 323)b. Fragile character and personality; (Brusewitz v Brown [1923] NZLR 1106)c. Age, experience and lack of business affairs and a fragile state of health. (Bank of NSW v Rogers (1941) 65 CLR 42)

2. Aspects of stronger-weaker party relationship:a. Length of friendship or association;b. Strength of the character and personalities of the parties;c. The existence of a family relationship;d. The breadth and depth of business dealings between the parties.

In Johnson v Buttress (1936) 56 CLR 113 at 134-5 Dixon J said:One occupying such a position falls under a duty in which fiduciary characteristics may be seen. It is his duty to use his position of influence in the interests of no one but the man who was governed by his judgment, gives him his dependence and entrusts him with his welfare. When he takes from that man a substantial gift of property, it is incumbent upon him to show that it cannot be ascribed to the inequality between them which must arise from his special position. He may be taken to possess a particular knowledge not only of the disposition itself but of the circumstances which should affect its validity: he has chosen to accept the benefit which may well proceed from an abuse of the authority conceded to him, or the confidence proposed in him; and the relation between him and the donor are so close as to make it difficult to disentangle the inducements which led to the transaction. These considerations combined with reasons of policy to supply a firm foundation for the presumption against a voluntary disposition in his favour.Rebutting the Presumption

No Extraneous Dominance or Control

Once a presumption of undue influence has been established by a plaintiff either through an established category, or via evidence submitted to the Court which indicates that a relevant relationship existed the burden shifts to the defendant to prove that a relationship did not exist. In Johnson v Buttress (1936) 56 CLR 113 at 134-5 Dixon J said:

the gift was the independent and a well understood act of a man in a position to exercise a free judgement based on information as that of the donee.

Thus, it is clear that is not enough to show that the weaker party understood and assented to what he was doing or the consequence thereof. In order to rebut the presumption it must established that the intention of the stronger party was one which was free of influence over the weaker party, and that no extraneous dominance or control was forced onto the weaker party to enter the transaction.

Key Points to Rebutting the Presumption

As per the commentary in Johnson v Buttress (1936) 56 CLR 113, in order to rebut the presumption, the defendant must prove that:

1. No Advantage - No advantage or benefit was taken over the plaintiff;

2. Independent Transaction - The transaction in question was free and independently understood by the plaintiff and no judgemental imbalance occurred;

3. No Exercise of Undue Influence - No position of influence existed which adversely led the plaintiff into entering the transaction.

External and Independent Evidence

Most commonly, if the stronger party has recommended that the weaker party seek external and independent advice regarding the transaction this is enough to rebut the presumption as suggested in Gillard JN Union Fidelity Trustee Cost of Australia v Gibson [1971] VR 573 at 577-8.

It is important to note that advice must not only be independent but a presumption is established that the independent advice must be of a certain standard including:

1. Knew all the facts - That the person providing the advice has been adequately briefed on all facts (Brusewitz v Brown [1923] NZLR 1106 at 1116)

2. Independent - The person providing the advice is entirely independent of the defendant and not related (Powell v Powell [1900] 1 Ch 243)

3. Sufficient Skill - The person providing the advice is sufficiently skilled and has the appropriate qualifications for the subject matter the advice is being provided for (Inche Noria v Shaik Allie Bin Omar [1929] AC 127)

Delay and Consent

The most notable other forms of rebutting the presumption are delay and consent.

Delay

Delay is a traditional form of equitable relief and can rebut the presumption in an undue influence claim if, after the influence has occurred, the plaintiff excessively delays in seeking equitable relief. This occurred in Allcard v Skinner (1887) 36 Ch D 145, where the Court refused an order to return property after an undue influence claim was successfully established because the plaintiff had taken more than six years to lodge a complainant.

Interestingly, modern equitable relief has also ignored delay in circumstances where the parties had not altered their positions and were in no way affected by the delay. This occurred in Bester v Perpetual Trustee Co Ltd [1970] 3 NSWLR 30 where the Coutr ruled in favour of the plaintiff despite their being more than 20 years since the undue influence event occurred.

Consent

If the plaintiff indicates that a wrong done to them is through their own behaviour and not that of another party despite there being clear evidence of undue influence then the Court can rule that relief can occur through acquiescence.

Third Parties

Third parties can be involved in undue influence in two ways:

1. Influence over the Plaintiff to benefit Defendant with knowledge - By exercising influence over a plaintiff in order to benefit the defendant with the defendants knowledge; or

2. Influence over the Plaintiff to benefit Defendant without knowledge - By influencing the plaintiff to enter a transaction without the defendant having knowledge of the influence.

A pivotal case to illustrate the first class was Khan v Khan (2004) 62 NSWLR 229. The Supreme Court of NSW ruled that a reluctant vendor, who was advised by a muslim cleric to sell a property because she would be rewarded in the afterlife, were in an automatic presumed relationship of influence. Since the purchaser knew of the relationship of third party influence and the fact that the vendor would act on the influence so provided, the Court set aside the transaction.

Creditors & Banks as Third Parties

Most cases involving third parties are typically related to creditors such as banks and financiers who take a guarantee or some sort of security from a third party in support of the indebtedness of the debtor when that debtor obtains the aforementioned guarantee or security through the use of undue influence over the third party. Effectively the borrower applies undue influence to a guarantor in order to obtain a security which secures or guarantees the debt for the lender. Thus, the lender is the primary beneficiary since they gain security for the loan to the borrower.

Notice

In modern equity law in Australia, the most common case in which the lenders security will be set aside is where the lender has notice that the guarantors agreement has been acquired through the use of undue influence. If the use of the undue influence is probable then notice must be obtained by the lender of the relationship between the borrower and the guarantor.

This was seen in Bank of NSW v Rogers (1941) 65 CLR 42 where an uncle procured his niece to provide security for his overdraft. The niece had a close relationship with the uncle and the Court held that the bank must have been aware of this relationship, and therefore had notice. This led the Court to set aside the transaction. Conflicting Representation

Of relevant note, in Bank of Baroda v Shah [1983] 3 All ER 24, the English Court of Appeal held that the bank was entitled to assume that solicitors for the debtor who represented they were acting also for a third party, would give the third party proper advice.

Remedies

Recession

The most common sought remedy for undue influence is simply recession of the transaction in dispute.

The Court will typically return the parties to the same state they were in before the transaction took place and recession usually always achieves this aim. In some cases, the plaintiff will want specific restitution of the asset most commonly when they have been influenced into selling the property against their will and the Court can easily enact this when the asset has not been sold by the defendant.

Resitutio in integrum restore to original condition

In more difficult cases, restitutio in integrum will occur when the asset or transaction no longer exists or cannot be reversed. The Court will seek to provide equitable compensation in replace of the irreplaceable asset or transaction such as in Smith v Glegg [2004] QSC443.

Third Parties

The most complex cases are third party cases where one of the parties is unaware that undue influence has occurred and they have taken ownership of the property and subsequently sold it leaving the party who was the subject of undue influence in a difficult position.

While the courts have, as in Bester v Perpetual Trustee Co Ltd [1970] 3 NSWLR 30, ruled in situations where A influences B to transact with C and C has not yet dispose of the property that the transaction is set aside and the property is to be restored to B no common law has been found in relation to circumstances where A influences B to transact with C and C has disposed of the property - the available remedies to B. This is due to the fact that if C is unaware of the undue influence placed on B by A, B may receive no equitable compensation against C since they are effectively an innocent party in the transaction.

Statutory Relief

Trade Practices Act 1974

While these notes are not an exploration of other areas of law except equity it is useful to note that a number of statutory provisions which can provide relief for undue influence. Most notably are the provisions contained with s51AA(1) of the Trade Practices Act 1974.

Consumer Credit Code

Additionally there are numerous Fair Trading Acts in each state which each contain unique provisions dealing with unfair trading and transacting of goods. Additionally, statutory relief can be found in the uniform Consumer Credit Code under s70 which primarily relates to unjust transactions.

Contracts Review Act

Where relevant in Australia, the Contracts Review Act may also provide relief where contracts have been entered into when the Court is satisfied that they are unjust.Unconscionable Conduct

Unconscionable conduct or unconscionable dealings is an independent but parallel area of law similar in principles to the doctrine of undue influence. The primary difference, as outlined by Kitto J in Blomley v Ryan (1956) 99 CLR 362 at 415, is that the doctrine of unconscionable conduct in equity focus on

whenever one party to a transaction is at a special disadvantage in dealing with the other party because of illness, ignorance, inexperience, impaired faculties, financial need or other circumstances affect his ability to conserve his own interests, and the other party unconscientiously takes advantage of the opportunity thus placed in his hands

Differences between Undue Influence and Unconscionable Conduct

Essentially, the primary difference is that while the doctrine of undue influence deals with inappropriate or undue control, domination, assertion or persuasiveness over a party to a transaction it does not focus heavily on the special disadvantage that influenced party may be subject too.

Undue Influence does focus on special disadvantage - In effect, undue influence does not focus on the raw exploitation of a partys special disadvantage where as doctrine of unconscionable conduct does. While it is clear that there are evident parallels between the two doctrines and this is often why both doctrines are used together in litigation where appropriate it will become clear that each does not entirely overlap the other.

Easier to Establish a Claim - In Australia, more claimants use the doctrine of unconscionable conduct because it is often much easier to establish than a claim under the doctrine of undue influence. This is due to the fact that it is often easier for a plaintiff to establish that the

a) parties meet on unequal terms; andb) the stronger party takes advantage of this; c) in order to obtain a beneficial bargain than it is to meet the requirements stipulated under a claim of undue influence. Additionally, it seems apparent from common law that the evidentiary burden of an action under undue influence is much greater than that of the doctrine of unconscionable conduct. For examples of cases which have failed under an action of undue influence but succeed under unconscionable conduct refer to Bridgewater v Leahy (1998) 194 CLR 457 and Westpac Banking Corp v Cockerill (1998) 152 ALR 267.

Requirements for Unconscionable Conduct

Equity will seek to assist a plaintiff through the doctrine of unconscionable conduct when the plaintiff can establish that the

a) Unequal Terms & Special Disadvantage - Defendant and plaintiff have meet on unequal terms which render the plaintiff at a special disadvantage which the defendant is sufficiently aware of; and

b) Takes Advantage - The defendant takes advantage of the special disadvantage;

c) Beneficial Bargain - In order to achieve a beneficial bargain.

If the plaintiff is able to establish these three elements, then the onus will pass to the stronger party to show his conduct to have been fair, just and reasonable as stated in Fry v Lane (1888) 40 Ch D 312 at 322.

Commercial Bank of Australia Ltd v Amadio

The most commented example of unconscionable conduct is in the High Courts decision of Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447. An elderly couple who had a limited understanding of English executed a mortgage in favour of the bank after their son stated he needed it for his successful business. The sons business was, in fact, in severe debt and the bank was going foreclose the business if they did not receive a guarantee over the sons requested overdraft. The mortgage contained a personal guarantee and the couple mistakenly believed that their liability was limited to $50K when it was in fact unlimited. The bank made the couple sign the document on the same day it learnt from the son that his parents would guarantee the overdraft. The son subsequently defaulted on the overdraft and the bank sought to enforce the mortgage against the couples house. The Court ruled to set aside the transaction on the grounds of unconscionable conduct.

Reasoning

In this case, the majority of the High Court held that it was sufficient to attract the operation of the doctrine of unconscionability if instead of actual knowledge of the plaintiffs special disadvantage, the defendant was merely aware of the possibility that the situation might exist, or if facts suggested to a reasonable person that the possibility may exist. If either of these instances occurs, then equity will seek to set aside the transaction if it is established that the defendant has taken unfair advantage of their superior bargaining power by entering into the transaction.

Exploitation of the Elderly Couple

It was evident that not only did the bank know of the sons business but they also did not seek to inform the couple of the true state of the sons business and nor did they advise the couple to seek independent advice before entering into the transaction. It is evident that strong exploitation of the elderly couple occurred through the banks actions, and no viable defence was presented by the bank which sought to rationally explain its conduct.

Is there a special disadvantage?

The key outcome from the Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 was the High Courts use of special disability. This was first commented upon in Blomley v Ryan (1956) 99 CLR 362 where the following factors were provided which can help indicate that one party is at a special disadvantage:

a) The age of the weaker party;b) The sex of the weaker party;c) The sickness or mental health of the weaker party;d) The poverty or need of any kind of the weaker party;e) The coherency and alcohol levels of the weaker party;f) The level of educational or business experience of the weaker party;g) The degree to which independent expert advice or assistance is provided to the weaker party.

Evidently, each of these factors play a key role in determining whether a defendant has taken special advantage over an innocent party. In Commerical Bank of Australia Ltd v Amadio (1983) 151 CLR 447, 462 per Mason J comments, the disadvantage must amount to one which

seriously affects the ability of the innocent party to make a judgement as to his own best interests

The practical application of this statement is illustrated in Louth v Diprose (1992) 175 CLR 621 and Bridgewater v Leahy (1998) 194 CLR 457.

Louth v Diprose

The trial judge found in Louth v Diprose (1992) 175 CLR 621 that a man was under special disability in dealing with a woman because his infatuation with her which she was aware of and he bestowed upon her many gifts. The women appealed and the High Court agreed with the trial judge that the woman had engaged in unconscionable conduct.

Bridgewater v Leahy

A man, Bill, left a property to his wife and the remainder to his four daughters. The man had a nephew, Neill, whom he treated like a son and left him the option to purchase large sections of a farm at the substantial discount of $200K. The land was valued at around $700K. Bill was 84 years old and understood very well business transactions. After his death, the daughters wanted to set aside the transaction.

The High Court ruled that it was unconscionable conduct for Neill to get the benefit of the transaction since he was meeting on unequal terms and took special advantage of Bill through his special relationship with his uncle. This advantage allowed him to reap an extraordinary benefit which would not have occurred had there not been such a dependence.

Degree of Knowledge of the Special Disadvantage?

Aware of the Disadvantage

Evidently, a critical facet of any action taken under unconscionable conduct is that the defendant was actually aware, or a reasonable person in the position of the defendant would have been aware, of the plaintiffs special disadvantage. The law is unclear on how much knowledge a defendant must have of a plaintiffs special disadvantage and currently this is left for the Court to determine on the basis of the evidence submitted.

Takes Advantage

Clearly, if the defendant has unequivocal and actual knowledge of a plaintiffs special disadvantage, as in Louth v Diprose (1992) 175 CLR 621, and takes advantage of this disadvantage then they will be liable under the doctrine. However, as seen in Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447, it was held that actual knowledge was not actually required. The Court specifically ruled that it was enough to establish that the bank new of a possibility of a special disadvantage and that because they knew of this possibility they should have made reasonable inquiries to determine the extent of it.

Notable cases since the Amadio case include: Koh v Chan (1997) 139 FLR 410 In this case, the Court ruled that actual knowledge was required and the Court effectively discounted the High Courts ruling. State Bank of NSW v Layoun [2001] NSW Conv R Constructive knowledge is not enough to establish a defendant actions as unconscionable.

ACCC v CG Berbatis Holdings Pty Ltd

The High Courts decision in ACCC v CG Berbatis Holdings Pty Ltd (2003) 214 CLR 51 is a case in point. There, several lessees of shops in a shopping centre bought proceedings against the lessor for the recovery of amounts which they claimed had been overpaid. While those proceedings were pending, the lessee of one shop whose lease was due to expire negotiated with the lessors agents for a new term. The existing lease conferred no right of renewal. The lessor was under no obligation to renew, and were entitled to negotiate new terms for renewal. In negotiations the lessor stipulated that the lessee discharge the lesssor from all claims the subject of the pending proceedings. At first instance French J held that the lessor had acted unconscionably. That decision was overturned on appeal to the Full Federal Court. The High Court dismissed the lessees appeal.

Gleeson CJ said that a person is not in a position of special disadvantage simply because of inequality of bargaining power. He said many, perhaps even most, contracts are made between parties of unequal bargaining power, and good conscience does not require parties to contractual negotiations to forfeit their advantages, or neglect their own interests.

Gleeson CJ continued (at [15]) in the present case, there was neither a special disadvantage on the part of the lessees, nor unconscientious conduct on the part of the lessor. All the people involved in the transaction were business people, concerned to advance or protect their own financial interests. The critical disadvantage from which the lessees suffered was that they had no legal entitlement to a renewal or extension of their lease; and they depended upon the lessors willingness to grant such an extension or renewal for their capacity to sell the goodwill of their business for a substantial price. They were thus compelled to approach the lessors, seeking their agreement to such an extension or renewal, against a background of current claims and litigation in which they were involved. They were at a distinct disadvantage, but there was nothing special about it.Taking advantage of the special disadvantage?

If presumption is raised, defendant must rebut

If a plaintiff is able to establish that the defendant was aware, or a reasonable person in the defendants position would have been aware, of a plaintiffs special disadvantage and the defendant actually acted on that disadvantage the onus of proof shifts to the defendant to rebut the presumption show that no advantage was taken or

show that the transaction was fair, just and reasonable per Deane J in Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447.

Must act on the special disadvantage

Evidently, no action will be available to a plaintiff in an action of unconscionable conduct if the defendant has not acted on the plaintiffs special disadvantage to their own self advantage. Importantly, the decision in Bridgewater v Leahy (1998) 194 CLR 457 suggests that the bar for acting on a special advantage is extremely low. The mere passive acceptance of a benefit by a defendant can be enough to satisfy to a Court that the defendant acted on the special disadvantage of a plaintiff.

Can still be unconscionable even with consideration

Interestingly, a transaction can still be unconscionable even though clear and reasonable consideration has moved from the stronger party to the weaker one. In Amadio, it was evident that the consideration moved from the bank to the son but not to the parents and if we refer back to equitable maxims it was suggested in the obiter of the Amadio case that equity treats the guarantors as volunteers.

Rebutting the presumption

The most common method of a defendant rebutting the presumption that they were engaged in unconscionable conduct is to clearly show that the plaintiff received external advice, or at the very least, the defendant involved an external independent third party to assist with the transaction. This was the most important element arising out the Amadio case for the defendants ensuring that unbiased and independent third party advice is obtained by the plaintiff to ensure that they have a full understanding of the transaction being undertaken.

This is the consistent with the authority of Powell v Powell [1900] 1 Ch 243, 246-7 which purports that independent advice must be of an acceptable quality and sufficient in the circumstances. Additionally, the authority of Fry v.Lane(1888) 40 Ch D 312 infers that the defendants conduct must fair, just and reasonable.

Spousal Guarantees

The doctrine of unconscionable conduct is particularly important in relation to spousal guarantees. This first arose in the case of Yerky v Jones (1939) 63 CLR 649 and was later affirmed in the Garcia v National Australia Bank (1998) 194 CLR 395 which stated in the head note that a presumption arises that the lender must rebut if the lender knows that

a) Wife did not Understand - the wife did not understand the purport and affect of the transaction;

b) Transaction is Voluntary - the transaction was voluntary, in the sense that the wife obtained no gain from the contract the performance of which was guaranteed;

c) Husband didnt inform wife - the creditor is to be taken to have understood that the wife may repose trust and confidence in her husband in matters of business and therefore to have understood that the husband may not fully and accurately explained the purport and affect of the transaction to his wife; and

d) Creditor didnt explain to wife - the creditor nonetheless did not take steps to explain the transaction to the wife or find out that a stranger had explained it to her.

If the lender cannot rebut the presumption, then doctrine of unconscionable conduct steps in to set aside the transaction.

Rebutting the presumption

The outcome of the Garcia v National Australia Bank (1998) 194 CLR 395 has indicated that if the plaintiff makes the claim that she was a victim of actual undue influence, then the lender is unable to hold the security against her unless they have ensured that she has received unbiased and independent advice.

Lender must rebut

If the plaintiff claims that she did not understand the transaction, then the lender can enforce the security against her if the defendant is able to satisfy to the Court that reasonable steps were taken to ensure that the plaintiff, or a reasonable person in the plaintiffs position, would have understood the transaction.

Successfully rebut

In Radin v Comonwealth Bank of Australia [1998] FCA 1361 the Court agreed with that bank that it had done enough to rebut the presumption. Most specifically the bank had:

a) Multiple Explanations to Wife - given multiple explanations to the wife regarding the transaction she was engaging in;

b) Requested she obtain independent advice - written to her suggesting that obtain independent legal advice regarding the transaction; and

c) Obtained affidavit - obtained a written affidavit from her stating that she understood the transaction and its effects.

Unsuccessful Rebut

If we contrast this decision with the decision in Armstrong v Commonwealth Bank of Australia [1999] NSWSC 588, the Court ruled in favour of the plaintiff as it was of the opinion that bank had not done enough to rebut the presumption. In this instance, the bank had:

a) No instruction for independent advice - the bank did not advise the wife to seek independent advice until the transaction was almost completed;

b) No steps to ensure understanding - the bank took no steps to determine if the wife had understood this advice or whether she had actually received it; and

c) Advice not related to transaction - the advice which the wife received did not relate to the transaction that the bank was seeking to enforce.

Additionally, commentary from Dixon CJ, McTieman and Kitto JJ in Jenys v Public Curator (Qld) (1953) 90 CLR 113 at 118-19 suggests that merely satisfying each of the elements for an action under unconscionable conduct is not immediately straightforward in equity.

The jurisdiction of the court of equity to set aside a gift or other disposition of property as, actually or presumptively, resulting from undue influence, abuse of confidence or other circumstances affecting the conscience of the donee is governed by principles the application of which calls for a precise examination of the particular facts, a scrutiny of the exact relations established between the parties and a consideration of the mental capacities, processes and idiosyncrasies of the donor.

Such cases do not depend upon legal categories susceptible of clear definition and giving rise to definite issues of fact readily formulated which, when found, automatically determined the validity of the disposition. Moreover, equitable relief is discretionary and is subject to discretionary defences.

Remedies

Recession

Consistent with undue influence, the most common ready for unconscionable conduct is the setting aside of the transaction, either by an order for recession or through a refusal of the specific enforcement of the transaction.

The plaintiff must establish all elements of unconscionable conduct and the defendant must not be able to rebut the presumption. Remedies for unconscionable conduct also run into the difficulties of third parties that are consistent with the problems of undue influence mentioned above.

More complex remedies occur when gifts are made inter vivos and then a will attaches the gives to someone else. This was consistent with the problems faced by the High Court in Bridgewater v Leahy (1998) 194 CLR 457 which ultimately ruled that the transaction was to be set aside and revert the matter back to the Supreme Court to determine the relevant necessities.

Topic 3 Fiduciary Obligations

Introduction

Not free to pursuit self interest and altruistic

A fiduciary obligation is a relationship in which one party is not free to pursue their own separate interests, but rather serve the exclusive interest of some other person or group of persons. The accepted fiduciary relationship is typically one that creates a special relationship of trust and confidence between the parties with one of the parties being in a special position to exercise power or discretion which will affect the interest of the other party in an economic or legal sense.

In LAC Minterals Ltd v International Corona Resources Ltd the Court indicates the relationships as relationships of trust and confidence or confidential relations where the exercise of a power or discretion will affect the interests of another person in a legal or practical sense such that this person is especially vulnerable to abuse by the fiduciary position.

Definition

In Norberg v Wynrib [1992] 2 SCR 226 at 272 McLachlin J said

The foundation and ambit of the fiduciary obligation are conceptually distinct from the foundation and ambit of contract and tort. Sometimes the doctrines may overlap in their application, but that does not destroy their conceptual and functional uniqueness. In negligence and contract the parties are taken to be independent and equal actors, concerned primarily with their own self-interest. Consequently, the law seeks a balance between enforcing obligations by awarding compensation when those obligations are breached, and preserving optimum freedom for those involved in the relationship in question. The essence of a fiduciary relationship, by contrast, is that one party exercises power on behalf of another and pledges himself or herself to act in the best interests of the other.

Thus, as suggested by the High Court in Youyang Pty Ltd v. Minter Ellison (2003) 212 CLR 484 at 501 [40] in referring to commentary made by McLachlin J of the Canadian Supreme Court in Canson Enterprises Ltd v. Boughton & Co [1991] 3 SCR 534 at 543

[T]he essence of a fiduciary relationship is that one party pledges itself to act in the best interest of the other. The fiduciary relationship has trust, not self-interest, at its core, and when breach occurs, the balance favours the person wronged.

****Extent of the Fiduciary Duty****

General

Common law favours the pursuit of self interest

As such, the common law favours the pursuit of self interest and suggests that contractual obligations would not occur unless both parties are satisfied that their own self interests are satisfied. Lord Ackner suggested this in Walford v. Miles [1992] 2 AC 128 at 138

a concept of a duty to carry on negotiations in good faith is inherently repugnant to the adversarial position of the parties involved in negotiations each party is entitled to pursue his own interest, so long as he avoids making misrepresentations.

To illustrate, it would be ludicrous to contend that a lawyer does not have to act in the best interests of their client. Conversely, it would be equally ludicrous to suggest that a store manager has to disclose to a customer a product which they have a material interest in. The later example is a common facet of everyday life, and such common transactions will always contain a strong element of autonomy and favour the pursuit of individual self interest.

Equity favours autonomy to an objective standard

Equity does not seek to stop these transactions from occurring, since these relationships are not relationships which draw the jurisdiction of fiduciary obligations. The limit, of course, is that store manager must advance the customers interests in accordance with an objective standard. If this standard is breached then the store manager would be liable for the unsatisfactory recommendation passed onto the customer.

The point is that fiduciary duties are imposed entirely to prevent unconscionable conduct and to serve the interests exclusively of some other person. Fiduciary obligations infer that the party owing them cannot pursue their own or separate interests.

Fiduciary Relationship and Contractual Obligations

A fiduciary relationship can co-exist with a contract such that a contractual relationship can regulate the basic rights and liabilities of the parties while the fiduciary relationship must accommodate itself to the terms of the contract such that it is consistent with them. Contractual obligations are always created to represent the express or implied intentions of the parties which make them and such obligations are almost always typically formed to protect each partys respective autonomy.

In a relationship which is constituted by contract, the nature of the fiduciary obligations owed are determined by the contract as stated in Hospital Products Limited v United States Surgical Corp (1984) 156 CLR 41. The subject matter to which the fiduciary obligations extend is referenced to the character of the venture being undertaken and the agreement of the parties as stated in Birtchnell v Equity Trustees, Executors & Agency Co Ltd (1929) 42 CLR 384.

Extent of Fiduciary Duties & Contracts

In Henderson v Merrett Syndicates Ltd [1995] 2 AC 145, it was explained that the extent and nature of the fiduciary duties owed in any particular case ought to be determined by reference to the contractual relationship underlying the relationship between the parties.

In this case, the Court provided an example such that an agent, in the absence of contractual provision, would breach their fiduciary duties if they competed for another who was in competition with their principle unless the contract under which he is acting allows him to do so. In such a case, the fiduciary obligations are said to have been modified by the contractual agreement such that the contract has adapted the extent and nature of the general duty that would otherwise arise.

Pre-contractual obligations

Australian Courts have had considerable reluctance in imposing fiduciary obligations on pre-contractual negotiations when terms of the contract are being struck at arms length. This was consistent with the decision in Hospital Products Limited v United States Surgical Corp (1984) 156 CLR 41 Gibbs CJ stated at 70 that

the fact that the agreement between the parties was of a purely commercial kind and that they had dealt at arms length and on equal footing has consistently been regarded by this court as important, if not decisive, in indicating that no fiduciary duty arose

If parties are currently negotiating a contract, a contracting party does not owe either a duty of good faith or fairness to the respective contractual counterparty this is the common laws representation of the pursuit of self-interest. In Walford v Miles, Lord Ackner stated

a concept of a duty to carry on negotiations in good faith is inherently repugnant to the adversarial position of the parties involved in negotiations each party is entitled to pursue his own interest, so long as he avoids making misrepresentations.

Contractual obligations take precedence

As suggested previously, a fiduciary relationship can co-exist with a contract but the contractual obligations will take precedence over the fiduciary ones. Mason J in Hospital Products Limited v United States Surgical Corp (1984) 156 CLR 41 at 97 stated:

Indeed, the existence of a basic contractual relationship has in many situations provided a foundation for the erection of a fiduciary relationship. In these situations it is the contractual foundation which is all important because it is the contract that regulates the basic rights and liabilities of the parties. The fiduciary relationship, if it is to exist at all, must accommodate itself to the terms of the contract so that it is consistent with, and conforms to, them. The fiduciary relationship cannot be super-imposed upon the contract in such a way as to alter the operation which the contract was intended to have according its true construction.

However, it is critical to remember that trust and reliance are often mixed with autonomy during contractual negotiations and this can easily lead to abuse.

Joint Venture

In United Dominions Corporation Ltd v. Brian Pty Ltd (1985) 157 CLR 1, it was established that a fiduciary relationship can arise and exist between parties who have not reached, or may never reach, an agreement in joint venture agreements where the terms are not settled and the parties are no longer acting at arms length. As stated in this case

In particular, a fiduciary relationship with attendant fiduciary obligations may, and ordinarily will, exist between prospective partners who have embarked upon the conduct of the partnership business or venture before the precise terms of any partnership agreement have been settled. Indeed, in such circumstances, the mutual confidence and trust which underline most consensual fiduciary relationships are likely to be more readily apparent than in the case where mutual rights and obligations have been expressly defined in some formal agreement. Likewise, the relationship between prospective partners or participants in a proposed partnership to carry out a simple joint undertaking or endeavour will ordinarily be fiduciary if the prospective partners have reached an informal arrangement to assume such a relationship and have proceeded to take steps involved in its establishment or implementation.

Cannot call off negotiations

To illustrate, a partner cannot call off negotiations in a joint venture deal in order to pursue their own self interests. If such an action were permissible, it would allow one party to contemplate and obtain information regarding the other party for the purposes of contractual negotiation, and then act in their own separate interests and perhaps competing interests.

Arms Length

Before the United Dominions Corporation Ltd v. Brian Pty Ltd case, the accepted view was that until the joint venture agreement had crystallized, no fiduciary duties were capable of arising. This was because it was contended that parties were dealing at arms length and were entitled to advance their own autonomy and therefore owed no fiduciary duties. If the parties agreement did not eventuate, then the parties, as stated in Keith Henry & Co Pty Ltd v. Stuart Walker & Co. Pty Ltd (1958) 100 CLR 342

were engaged in ordinary commercial transactions with each other, dealing with each other, as the saying goes, at arms length.

This was rejected by the High Court in United Dominions Corporation Ltd v. Brian Pty Ltd who stated

A fiduciary relationship can arise and fiduciary duties can exist between parties who have not reached, and who may never reach, agreement upon the consensual terms which are to govern the arrangement between them.

Any agreement or agreements subsequently made between the parties are made to an existing fiduciary relationship and this will continue until the agreement has matured.

Intending joint ventures owe an obligation not to profit

However, fiduciary duties are less likely to be reached if the negotiating parties are dealing at arms length as stated in Gibson Motorsport Pty Ltd v Forbes (2006) 149 FCR 569 where the parties never established a joint venture agreement and yet substantial wealth was created.Partnerships

A partner will always owe fiduciary duties to their firm since the firm is not a separate legal entity. In addition, a partner will also owe fiduciary duties to other parties, and they are not free to pursue separate interests but must purse interests of the partnership in a horizontal fiduciary relationship.

The notion of horizontal fiduciary relations is based on the associative that is, the parties in a fiduciary relationship must purse interests which do not contain elements of autonomy but are rather joint to the association. This was expressed in New Ltd v. Australian Rugby Football League Ltd (1996) 64 FCR 410.

A horizontal relationship is more likely to involve an undertaking, actual or imputed, that the parties act only for their mutual advantage.

This was upheld in Chan v Zacharia (1984) 154 CLR 178.

Companies and Directors

A company director must be prohibited from engaging in conduct that would put them in a position of inherent difficultly such that his obligations to advance the interests of the company where in conflict with his own interests as per Cook v Deeks [1916] 1 AC 554. In R v Byrnes (1995) 183 CLR 501, the High Court stated that a company director can be a director of more than one company but not where the fiduciary duties owed to each conflict.

Thus, a director can also not advance his own interests over the interests of the company to which they are a fiduciary. And so in the famous case of Legal (Hastings) Ltd v. Gulliver [1967] 2 AC 134 Lord Russell of Killowen said:

The rule of equity which insists on those who by use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud, or absence of bona fide the liability arises from the mere fact of a profit having been made.

In this case, the directors made a profit on the sale of the shares in a subsidiary company. The appellant company, through its new owners, then sought an account of those profits from the previous directors. In the Court of Appeal the claim was dismissed as the directors were deemed to be acting as bona fide and in the best interests of the appellant company. The House of Lords held this was wrong as stated above.

Breach obligations

A director will breach, in accordance with Hospital Products Limited v United States Surgical Corp (1984) 156 CLR 41, his obligation if he obtains for himself an opportunity to profit which is sought by his company or if he benefits personally from an opportunity. In Regal (Hastings)Ltd v Gulliver (1942) p1967] 2 AC 134, the House of Lords held that the directors were accountable to Regal for profits made on the sale of shares stating the directors standing in a fiduciary relationship to Regal in regard to the exercise of their powers as directors, and having obtained their shares by reason and only by reason of the fact that they were directors of Regal and in the course of the execution of that, are account for the profits which they made of them

Regal Hastings was applied in Canadian Aero Services Ltd v OMalley [1974] SCR 592, where the Court stated

an imprecise ethical standard ... which prohibits an executive here defined to include either a direct or an officer from appropriating to himself a business opportunity which in fairness should belong to the corporation.

Relationships of Fiduciary Obligations

The law does not recognise all relationships as fiduciary ones evidently, there are some relationships which should attract higher obligations than others and this does not infer that even these relationships will be fiduciary in nature. Typically, fiduciary obligation can arise in two different ways:

1. A presumed fiduciary relationship a. This first class are fiduciary relationships which are automatically assumed to exist and have been acknowledge in law as fiduciary relationships over time. A presumed relationship automatically creates fiduciary obligations and requires the defendant to rebut the presumption

2. A proven fiduciary relationship.a. This second class are relationships which can be proven as one party places trust and confidence in the other for some economic interest. A proven fiduciary relationship requires the plaintiff to prove that such a relationship existed, or should have existed, due to the trust and confidence bestowed on the defendant.

Presumed Fiduciary Relationships

The following table sets out the presumed fiduciary relationships in equity:

RelationshipAutomatically AssumedAuthority(without full citation)

Solicitor-clientYesPrince Jefri Volkiah v KPMG

Agent-principalYesMckenzie v McDonald

Partner-partnerYesChan v Zacharia

Company director-companyYesHospital Products Limited v United States Surgical Corporation

Trustee-beneficiaryYesBoardman v Phipps

Bank manager-clientNo, can be proven-

Joint venturersNo, can be provenRefer to United Dominions Corporation v Brian Pty Ltd

Doctor-patientNo, can be provenRefer to Breen v Williams

Parent-childNo, can be proven

It is prima facie evident that all these relationships do carry a high element of trust and confidence which can have a substantial degree of influence both legal and economic over a principals affairs.

Such relationships can be horizontal or vertical relationships such that in the former each party exhibits trust and confidence in each other while in the later only one party displays trust and confidence. This classification was first established in New Ltd v. Australian Rugby Football League Ltd (1996) 64 FCR 410 at 539 where it was stated

In the absence of a single test of a fiduciary relationship, it is useful to distinguish between two kinds of relationships: G M D Bean, Fiduciary Obligations and Joint Ventures (1995), p 117. The first has been described by Dr Bean as a vertical relationship, such as principal and agent or employer and employee. The second is a collaborative or horizontal relationship, such as a partnership or joint venture. The criteria to be applied in determining whether the relationships are fiduciary in character will not necessarily differ in each case. However, the significance of a particular criterion may vary, depending upon whether the relationship is vertical or horizontal. For example, although the notion of mutual trust and confidence can be applied to certain vertical relationships which are clearly fiduciary in character, it is perhaps more readily applied to collaborative undertakings. Similarly, it may be easier to apply the notion of a party undertaking to act solely in the interests of another where the relationship between them is vertical. A horizontal relationship is more likely to involve an undertaking, actual or imputed, that the parties act only for their mutual advantage.

Proven Fiduciary Relationships

As stated previously, if the relationship is not to be automatically assumed then the plaintiff must establish that:

1. The plaintiff has placed the defendant in a position of trust and confidence; and

2. The defendant has adversely affected a plaintiffs interest.

Both these elements must be satisfied by a plaintiff before an action can be taken under equity. The Courts have refused to recognise fiduciary obligations were the second element is not in existence. Most specifically, in SB v State of NSW [2004] VSC 514 the damage by the defendant was physical and did not adversely affect the plaintiffs economic interest despite the defendant being in a position of trust and confidence.

As stated in Hospital Products Limited v United States Surgical Corp (1984) 156 CLR 41, the categories of relationships are not closed.

Proving a fiduciary obligation exists

The Key Fiduciary Factors

Inherent to all fiduciary litigation are a number of specific characteristics recognised by Mason J at 96-97 in Hospital Products Limited v United States Surgical Corp (1984) 156 CLR 41 including:

1. A relationship of trust and confidence; a. It is almost always typical that a principal places trust and confidence in the person owing a fiduciary obligation. It is important to note that the mere presence of trust and confidence does not automatically create the presumption that a fiduciary obligation is owed. i. i.e. A customer may rely on a store manager in trust and confidence to recommend the best product, but this does not automatically prove that a fiduciary duty is owed.

2. Act in the best interests; a. The duty of a fiduciary is to always act in the best interests of the principal and put the principals interests ahead of their own. There are exceptions to this as seen in English v Dedham Vale Properties Ltd [1987] 1 All ER 382 but these are limited in scope.

3. The ability to affect the principals interests;a. The inherent nature of the fiduciary relationship is the power to affect a principals interest. Typically the word interest is categorised to encompass anything of an economic or property nature. If the nature of the fiduciary relationship is such, that one party can easily affect the other partys interest this provides a strong evidentiary burden to satisfying this element.

4. The susceptibility of the principal;a. Typically, the principal is always in a more vulnerable position than the fiduciary. This is because the principal is entrusting the fiduciary to act in their best interests and therefore make the appropriate decisions. Additionally, the fiduciary typically has a direct influence over economic or property interests of the principal and can significantly influence the decision making surrounding these interests.b. The more susceptible and reliable a principal is on the advice of another party (typically) the more evidence which can be presented to elicit a fiduciary relationship.

The Nature & Scope of Fiduciary Obligations Profit and Conflicts

General

The utmost duty to disclosure any conflicts and profits by a fiduciary underpins the very fabric of the fiduciary relationship of confidence and trust as explained in Breen v Williams (1996) 186 CLR 71.

A fiduciaries role is to act with utmost altruism and disinterest towards the scope of any interests of the principal which are currently carried on or planned to be carried on.

Consequently, as stated in Hughes Aircraft v. Airservices (1997) 146 ALR 1

A man of integrity can be a defaulting fiduciary without ceasing to be honest

Similarly, while some commenters believe this statement to be too narrow, a statement in Legal (Hastings) Ltd v. Gulliver [1967] 2 AC 134 by Lord Russel indicates how altruistic a fiduciary must be, and gives definitive insight into the importance that a fiduciary must place on confidence and trust such that

The rule of equity which insists on those who by use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud, or absence of bona fide the liability arises from the mere fact of a profit having been made.

Profits & Conflicts Rule (next page)

A fiduciary is unable to pursue any business opportunity if it is considered to be within the scope of the business that the principal is currently in or planning to be in. As we have seen, a fiduciary must act disinterred and avoid a conflict between their interests and the interests of the principal at all costs.So in effect, a fiduciary must abstain from the pursuit of any interest which may conflict with those of the fiduciary.

Obligations outside this scope are free from obligation

All interests outside this scope can be considered freely and are not encompassed within the scope of a fiduciary obligation. To more accurately determine the scope of the fiduciary relationship, the Courts will typically examine the extent of the relationship underlying the fiduciary obligations. In NZ Netherlands Society Organje Inc v Kuys [1973] 2 All ER 1222 it was established that a fiduciary position must be examined from the part of the fiduciaries activities within the scope of the obligations and the part of the fiduciaries activities outside the scope.

Consequently it is useful to consider the primary two considerations which the Courts will use to determine whether a fiduciary has breached their obligations. It is evident in considering both of these elements that there is a substantial overlap between each but clear segregation for illustrative purposes is still achievable.

1. Conflict - Whether the fiduciary is in a position of inherent conflict of interesta. If a fiduciary relationship is deemed to exist - the Court will typically examine whether or not the fiduciary engaged in conduct which was conflicting to the interests of the principal.

b. Most typically, a conflict will arise where the fiduciaries personal interests union with those of the principals -The fiduciary may be tempted to place their personal interests in favour of those of the principals which could cause significantly loss to the principal or, alternatively, a significant gain for the fiduciary.

c. In McKenzie v McDonald [1927] VLR 134 a real estate agent was acting for a vendor a recognised fiduciary relationship of principal and agent and purchased the property off the vendor at a price which was undervalued in exchange for his property which he overvalued. The agents fiduciary obligations were clearly breached which resulted in a loss to the principal which he had to compensate for.

2. Profit -Whether the fiduciary has profited from such a positiona. Where the fiduciary has made a profit - from a transaction resulting from the nature of their position as a fiduciary - they are in breach of their fiduciary obligations.

b. Strip Profits from Fiduciary - Equitys remedy to such a situation is to strip the profits from the fiduciary and redirect them back to the principal.

c. For a plaintiff to take a successful action - against a fiduciary for unauthorised profit they must:i. Show that a fiduciary relationship existed; andii. That the profit which was made by the fiduciary was inside the scope of the relationship.

d. Boardman v Phipps [1967] 2 AC 46, in which a solicitor and others acted for the trustees of a deceased estate and inappropriately purchased shares on behalf of the trustees which raised a profit. The plaintiffs were the trustees and claimed they had been inadequately informed and wanted an account for profits. The Court ruled in favour of the plaintiffs and found that while the defendants acted honestly they were in a fiduciary position and did not adequately disclose the nature of the transaction.

Defences to Breaches of Fiduciary Obligations

Informed Consent

The most common defence to a breach of fiduciary obligations is the defence of informed consent. If a fiduciary wishes to enter a transaction or use information which would otherwise amount to a breach of their fiduciary position to avoid liability, they must make a full disclosure to the person to which the duty is owed of all relevant facts and that person must consent to the fiduciary proposal. In no other manner can a fiduciary more effectively avoid liability than to ensure that this occurs.

Defence Successful

In Queensland Mines Ltd v Hudson (1978) 18 ALR 1 the defendant had sought mining leases that a company was interested in at his own expense and risk. The company had originally been established for another purpose and the defendant eventually reported the status of these mining leases to the company board. The board did not want to proceed with the acquisition of any of them. The defendant later engaged in the leases for a substantial profit. The Court ruled that the defendant had adequately informed the company board and did not breach his fiduciary position. Additionally, the Court suggested the defendant conduct may have been outside of the scope of his fiduciary obligations anyway.

Defence not Successful

In Boardman v Phipps [1967] 2 AC 46 adequate consent was contended by the defendants, but one of the trustees had dementia and merely informing them was deemed inadequate. The Court suggested that signed consent and full and independent understanding was required on behalf of this trustee to ensure that the fiduciary obligations were satisfied. The defendants had not done this and therefore could not use this defence.

Remedies for Breach of Fiduciary Obligations

The most common remedies for breach of a fiduciary depend on whether the breach relates to a personal or proprietary breach.

Personal

Personal remedies are remedies which are directed at the fiduciary and which the fiduciary is solely responsible in fulfilling. A personal remedy is typically correlated to a debt that the fiduciary must compensate in the principals favour for their breach of fiduciary duties. Most personal remedies include one or more of the following:

An injunction; An account for profits; Equitable compensation.

Proprietary

Proprietary remedies are remedies that are directed towards a particular property rather than a debt. This is most relevant in insolvency matters since a personal remedy is a remedy that is treated as a debt and is therefore available to all other creditors. However, a proprietary remedy is a remedy that is raised in the principals favour and therefore gives them a higher standing than other creditors.

Important in any consideration of a proprietary remedy is the value of the property as opposed to its cash derivative. For example, if the value of the property has decreased then it may be more favourable for a principal to take a cash sum at the valuation price of the asset than reclaim the property.

Topic 4 Accessorial (Third Party) Liability in Equity

Property Rights

They must be both capable of assignment to third parties and capable of binding third parties without their consent.

A property right must be capable of transfer and of being exigible against a person without that persons consent.

Cannot be destroyed - A property right cannot be destroyed simply because the thing over which the right exists comes into the possession of some other third party. Parties are not free to create in objects they own property rights which will bind third parties, even though as a matter of personal obligation parties are free to agree as they wish.

Equity regards a party (X) as being under an equitable obligation to another party (Y) in relation to an item of property, equity regards Y as having enforceable personal rights against X in relation to that item of property. Y has rights to enforce the obligation against X.

Innocent (bona fide) Purchaser for Value

There is no general defence of good faith purchase due to the principle of nemo dat quod non habet or no one gives what he does not have. If legal title is passed to a bona fide purchaser for value without notice, equity will refuse to intervene to preserve the prior legal interest.

Property rights recognised at the common law typically survive any dispositions by non-owners, even those where the recipient is a bona fide purchase for value.

The general rule is that persons deal with property or exercise acts of ownership of such property at their own risk.

Legal vs. Equitable

A purchaser who retains the legal interest in the property will always defeat the equitable title in a dispute. If a purchaser only takes an equitable interest then the nemo dat rule will apply which infers that the prior equitable interest will remaining binding.

Prior equitable vs subsequent legal

If the legal interest holder took their title for value and without notice of the equitable interest, and the legal interest holder didnt have notice of the earlier interest then the equitable interest is defeated per Pilcher v Rawlins (1872) LR 7 Ch 259.

Prior legal vs Later equitable interest

A legal interest is stronger than an equitable one, the legal interest will win.

Prior equitable interest vs later equitable interest

Where two equitable interests are in competition, then as per Latec Investments Ltd v Hotel Terrigal Pty Ltd (1965) 113 CLR 265 the first interest will win.

If the merits are equal, priority in time of creation is considered to give the better equity

Types of Claims against Trustees

There are primarily two types of claims that can be taken against a person who is appointed as a trustee.

Proprietary

In a proprietary claim, the plaintiff asserts that a particular item of property owned or in possession of the defendant, is held by the defendant on trust for the plaintiff. The identification of such property in the hands of the defendant is a primary condition for such a claim.

The plaintiff MUST be able to show that an item of property owned by the defendant is held by the defendant on trust for the plaintiff.

An example

Suppose a trustee, in breach, uses $1000 of the trust money and $1000 of his own money to purchase an antique car. If the car is now worth $3000, then the plaintiff is able to claim a 50% share in the antique car thus taking advantage of the gain in value.

Personal

It is possible that the plaintiff can assert personal claims against the trustee for the loss and illegal breach of the trust assets.

Using the previous example - the $1000 illegally misappropriated from the trust if it is possible to trace where the trust monies which have been misappropriated then the plaintiff can assert a lien over the antique car to ensure that the trustee pays $1000 back to the trust.

The plaintiff would effectively claim a security interest over the asset which was been illegally acquired through the use of trust funds.

Use of a Lein

Importantly, a lien is a proprietary right and not an ownership interest. The function of such a device is merely to secure performance of the personal obligation from the trustee to pay compensation for a breach of the trust.

Remedy

Whether using proprietary or personal claims against the breach, it is seen that equity will restore the equitable property rights.

Third Parties

Equitable property rights remain even when the res that is, the subject matter of any equitable property right falls into the hands of some third party.

It is only once the res falls into the hands of a bona fide purchaser of legal title for value without notice of the prior equitable dispute, that the earlier equitable property interest will be destroyed.

In Montagus Settlement Trust [1987] Ch 264 at 276 it was stated by Sir Megarry V-C when speaking of the first limb of Barnes v Addy

the core of the question. is what suffices to constitute a recipient of trust property a constructive trustee of it. I can leave on one side the equitable doctrine of tracing: if the recipient of trust property still has the property or its traceable proceeds in his possession, he is liable to restore it unless he is a purchaser without notice.

Nature of the Third Party Liability Personal, not proprietary

A person who knowingly receives trust property or knowingly assists in the breach of fiduciary duty is liable as a constructive trustee. However, it is critical to remember that third party liable is not proprietary in nature, it is personal.

In Giumelli v Giumelli (1999) 161 ALR 473 the High Court stated,

The trust institution usually involves both the holding of property by the trustee and a personal liability to account in a suit for breach of trust for the discharge of the trustees duties. However, some constructive trusts create or recognise no proprietary interest. Rather, there is the imposition of a personal liability to account in the same manner as that of an express trustee. An example of a constructive trust in this sense is the imposition of personal liability upon one who dishonestly procures or assists in a breach of trust or fiduciary obligation by a trustee or other fiduciary

The important point from this statement is the emphasis on the to account as a constructive trustee. This is a reference to the trustee personal liability to account, rather than any associated obligation to hold property as a constructive trustee.

Tracing into the Hands of the Trustee vs. Personal Claim

Third party liability must be distinguished from any associated rules which apply when a principal seeks to trace his or her property into the hands of the defendant. If a principal is attempting to trace their property, this can only realistically be done by asserting a continuing equitable title over the property. The principal is unable to trace the property into the defendants hands, if the defendant is a bona fide purchaser of the legal estate for value without notice.

However, the equitable personal claim should be seen as distinct. A defendant can be liable even when they never received property from the defaulting fiduciary. A claim for liability as a knowing recipient can still succeed even though the defendant no longer holds the property or its traceable earnings Re Montagus Settlement Trusts [1992] 4 All ER.

In either case, the principal is not required to trace assets in order to assert a continuing proprietary interest. The principals remedy is monetary and the defendant must account. Barnes v Addy

Barnes v Addy (1874) LR 9 Ch App 244Barnes v Addy is the primary authority for the basis of third party personal liability as described above. The case has been considered to have two limbs which are subsequently discussed after the case overview below.CaseThe case involved a trustee, acting under a power in the trust deed, who appointed a third party trustee of some of the trust property. Two solicitors whom advised both the trustee and the beneficiaries thought that this was improvident and advised against it. The funds entrusted to the third party were lost and then an action was brought against the solicitors.Court Ruled: The solicitors were not responsible as strangers were not to be liable as constructive trustees simply because they acted as agents of trustees in transactions wit