LAWS 303 - EQUITY AND TRUSTS...Equity & Trusts Exam Notes 1 LAWS 303 - EQUITY AND TRUSTS Chapter 1:...

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Equity & Trusts Exam Notes 1

LAWS 303 - EQUITY AND TRUSTS Chapter 1: An overview of equity What is equity?

• The story of the raised metal ring. • Supplement the law – but not to replace it. • The dilemma of ‘universality’. • Equity was created to correct deficiencies caused by the rigidity of the

common law. • By the power of the royal prerogative, it recognised things the common law

didn't and allowed remedies which the common law didn't. • Firstly based on conscience, it evolved into a comprehensive and parallel

system of law, making use of precedents. • Eventually, the existence of two parallel systems caused problems. Today the

courts of common law and equity have 'fused' in the sense that they are tried by the same courts and the same judges, in the same room

• However, the 'bodies of law' have not fused. Common law issues remain common law issues, and equity remains equity

Institutional Equity & Medieval Origins

• The paradox of institutional equity. • The scope of equity’s jurisdiction can only be determined by reference to the

history of the jurisdiction. • The emergence of institutional equity: medieval origins • In medieval times, when applicant were unhappy with or unable to enter the

common law system (usually because of the technicalities of the forms of action), they could appeal directly to the King to rule on the base of morality or conscience. This informal practice grew in popularity until it was formally delegated to the Lord Chancellor.

• Equity remedied things which were technically legal, but unfair. Examples include contracts signed as a result of duress or undue influence, trust relationships which were violated etc.

• Trusts relationships for example, were not recognised by common law, but were recognised by the Chancellor through equity.

• Equity had different remedies (as opposed to just monetary damages offered by common law). These were usually an injunction or specific performance, and were possible because the Chancellor was exercising royal prerogative power.

• Eventually, the equitable jurisdiction developed into a concrete body of law with its own system of precedents.

• It did not displace the common law - the two systems were operating side by side to correct one another.

• At the time of the Tudors (16th Century), the convention of drawing Chancellors only from legal backgrounds emerged.



The formulary system.

• St Thomas More – Lord Chancellor. • Doctrinal issues settled by the jury verdict, not by judicial ruling. • Conscience.

Competition between common law and equity The Chancellor’s court was caught up in the great constitutional struggles of that age. Civil War: 1642-1651. Glorious Revolution: 1688. Earl of Oxford’s case (King James I ruled in favour of equity over the common law). Dispute between Common Law and Chancery: 613-16 During the time of the Stuarts and the civil war, Common lawyers believed that equity is too close to the royal prerogative, and were based on whims (arbitrary conscience) rather than sound law.

• The argument was headed by Sir Edward Coke, then Chief Justice of the Court of King’s Bench, against the Chancellor, Lord Ellesmere.

• The dispute came to a head in The Earl of Oxford’s case[19] and Courtney v Glanvil (1615). Eventually, James I stepped in to assert the rule, which still stands, that where rules of common law and equity are in conflict, equity should prevail.

• It was reenacted in the Judicature Act 1873 (Imp) s 25(11), and adopted in all Australian jurisdictions.

Reform and the judicature legislation

• Charles Dickens – Bleak House (1853). • See 4 major changes (p.9) • Equity shall prevail. • Fusion is a fallacy. • The reception of equity in Australia • First charter of Justice 1787 • The judicature legislation in Australia • Rapid adoption of English-style judicature legislation in all States except NSW. • Section 29 Supreme Court Act 1986 (Vic). • The place of equity in the modern law • No escape from history.

A map of equity

• Occupies the remainder of this chapter. Equitable remedies

• Remedies first – why? • Equitable claims are remedy driven. • Exclusive and auxiliary jurisdiction.



Quick recap on redemption • Only Equity could provide “An equity of redemption” -> because only equity

had power to order specific performance and thus a re-conveyance of the owner’s property.

• (Recall that the Old System mortgage required a conveyance in favour of the mortgagee.)

The Emergence of the Modern Equitable Jurisdiction Thus, the rules of equity were settled into a rigid system bound by precedent. Equity’s jurisdiction came to include:

• Property. • Contracts. • Deceased estates. • Procedure. • Guardianship & lunacy. • Commercial matters.

This created a nightmare for anyone wishing to litigate. Litigants had to go to both common law and equity courts due to their rigid jurisdiction (the courts were physically different courts, in different places in the city/country). This was fixed, to an extent, with the Judicature Act 1873 (Imp), which brought the common law and equity together. Today, there are three equitable jurisdictions:

1. Exclusive (exclusive to equity). • Trusts and fiduciary obligations.

2. Concurrent (both equity and common law). • Estoppel. • Misrepresentation. • Cases of overborne will (duress at common law, undue influence in

equity). 3. Auxiliary (equity aids operation of common law).

• Jurisdiction in aid of common law where common law remedies are inadequate

Contract Equity modifies contractual obligations. Property Equity made the trust. Other forms of intervention. Civil wrongs Fiduciary obligations. Breach of confidence. Civil procedure Contribution. Subrogation. Marshalling.



The reception of Equity in Australia The Supreme Court of New South Wales originally had jurisdiction to hear both common law and equity matters, decades before the Judicature Act. However, due to procedural restraints, this was in practice impossible.

• In 1840, the Administration of Justice Act (NSW) undid this arrangement and provided for the appointment of a judge for equitable matters.

• Until the Supreme Court Act 1970 (NSW), common law and equity matters were heard in separate courts in NSW. :*Interestingly, NSW was the last state in Australia to combine common law and equity. However, even though courts can exercise both jurisdictions, the legal bodies have not been ‘fused’.[22]

o This means that whilst they are tried in the same court, issues are still distinguished as common law issues and equity issues, and only the appropriate remedies can be awarded (ie, no equitable remedies to common law issues).

THE MAXIMS OF EQUITY (A slightly longer version) There are 'maxims of equity', which are broad underlying principles which determine how equitable rules and remedies will be applied, but they are not in themselves equitable rules. However, there are many exceptions to these rules. a) Equity will not suffer a wrong without a remedy b) Equity follows the law c) When the equities are equal, the first in time prevails d) He who seeks equity must do equity e) He who comes to equity must do so with clean hands f) Equity assists the diligent and not the tardy g) Equity is equality h) Equity looks to the intent rather than the form i) Equity regards as done that which ought to be done j) Equity imputes an intention to fulfill an obligation k) Equity will not assist a volunteer (ie a person who has not paid something) l) Equity will not perfect an imperfect gift m) Equity acts in personam Chapter 2: An Introduction to equitable remedies Introduction

• There are limits to what a jury can do • Equitable remedies are always discretionary (But not arbitrary).

o Consider both sides; (and the community too) • Personal and Proprietary remedies

o Personal – comply or be held in contempt o See CFMEU v Boral (17 June 2015)

• A bewildering array!



Equitable remedies grew out of the practice of chancellors, sitting without a jury but assisted by clerks and masters, exercising continuing supervision.

• Equitable remedies are always discretionary – not automatically awarded once plaintiff proved case.

o The court’s discretion is exercised after consideration of the positions of both parties before it; sometimes the effect of the remedy on other parties, including the wider community, is considered too.

At common law the plaintiff is limited to damages as a remedy. Equitable remedies are more varied and can be distinguished according to their effect and according to the purpose they fulfil: Personal and proprietary remedies Personal – comply or you will be in contempt of court. Proprietary – directed against specific property. Types – (i) the constructive trust (ii) the equitable lien (or charge). Personal Remedies An order directed to the person of the defendant.

• The defendant must comply with the order, or else be in contempt of court. • The award of a personal remedy has no direct impact on the defendant’s

property. • Examples in equity include equitable compensation, account of profits and

injunction. Proprietary Remedies Directed to property to which the defendant holds title.

• Order may declare that identified property belongs to the plaintiff in equity (constructive trust).

• A court may also direct the sale of property in order to satisfy the plaintiff’s judgement, unless the defendant satisfies the judgement out of other resources he possesses (equitable lien).

There are two types of proprietary remedies: a constructive trust and an equitable lien (or 'charge'). Constructive Trust (Chapter 23); [Resulting Trust: CH22]

• An order that the defendant hold property on trust for the plaintiff. • The plaintiff will be entitled to the property in equity, or to a proportionate

interest in that property assessed by the court. • If the property appreciates in value the plaintiff will be entitled to that benefit

but equally, they bear the risk of depreciation. Equitable Lien (or charge)

• A security interest over property. • Plaintiff does not obtain a share of the property (as above), instead it acts

similarly to a mortgage, to secure a debt. • If the defendant does not discharge the debt to the plaintiff out of other funds,

the property in question will eventually be sold and the plaintiff paid out of its proceeds.



• As in Giumelli v Giumelli, a lien may be imposed as security for payment of the personal remedy of equitable compensation.

Comparing proprietary remedies and personal remedies Advantage 1: a plaintiff can make a claim to the property that is the subject-matter of a proprietary remedy. Advantage 2: proprietary remedies are enforceable against third parties who have received the property in question from the defendant. Subject to the “good faith purchaser” exception. Proprietary remedies enjoy important advantages over personal remedies: Insolvency

• Principle advantage is that a plaintiff can make a claim to the property that is the subject-matter of a proprietary remedy.

o This is crucial if the defendant is a bankrupt or insolvent company because the property will vest (go to) the plaintiff rather than the trustee in bankruptcy or liquidator and therefore the defendant’s unsecured creditors will not have access to it.

• The award of personal remedy entitles the plaintiff only to the status of an unsecured judgement creditor in the event of the defendant’s insolvency.

o If the defendant has insufficient assets to discharge his debts, the plaintiff will only recover, at best, a proportion of the debt, in common with other unsecured creditors.

Third Parties • The second advantage of proprietary remedies is that they are enforceable

against third parties who have received the property from the defendant. o Subject to the limitation that the right to recover the property is not

enforceable against a good faith purchaser of the property, without notice of the plaintiff’s rights.

• A personal remedy is enforceable only against the party against whom the remedy was ordered.

Non-monetary value • Proprietary remedies entitle the plaintiff to claim specific property to which they

attach special value, for which money cannot provide adequate compensation. Main Limitation

• A proprietary remedy to specific property cannot be awarded if the defendant no longer has property over which it can be imposed.

The objectives of equitable remedies

• Coercion. (eg. Specific performance; injunctions; see later chapters) • Compensation. (equitable compensation e.g for breach of trust see CH4) • Disgorgement. (give up profits e.g breach of confidence, or breach of fiduciary

duty) • Restitution. (eg. Rescission, see CH5) • Nullification. (eg. The legal consequences of a transaction; read the

“nectarines” case) • Reformation. (see CH5) • Vindication. (see CH5)



Chapter 3: Specific performance, injunctions and equitable damages Introduction Specific performance and injunctions are equitable remedies. Equitable damages is a creature of statute. Discuss and understand “dualist nature” of our legal system. Personal remedies, (such as specific performance and injunctions), have the principle function of enforcing personal rights, such as performance of a contract.

• Over time equity proved willing to award personal relief almost routinely, not only against owners of property but also against third parties who had received the property.

• Eventually, these developments were perceived as having created a proprietary interest in favour of the party entitled to the relief.

o E.g. if A signs a contract to purchase land from B, but B refuses to complete the contract, equity will grant the remedy of specific performance against B and B will have to transfer the land to A.

§ This happened so often that A was treated in equity as having a property interest once the contract was signed.

§ Similarly, the regular awards of personal relief against trustees in breach of trust gave rise to a proprietary interest in the beneficiary.

Specific performance General considerations

• Fairness to both parties of the contract (mutuality) • Supervision • Discussion of Co-operative Insurance v Argyll Stores (deeper discussion over) • Construction contracts • Personal services • Fairness and mutuality.

Cooperative Insurance v Argyll Stores

• "An order with liberty to apply" p.6 B-D-E à "an engine of injustice” • What kind of change of circumstance would count? • Do more and complete justice p.9F • Contempt p.12G • No way to run a business p.13B • Use of certificates p.13f – can you explain? • Imprecision p13 H • Injustice p 15cff – “bound hand and foot.” • G-H à purpose of contract is not to punish but to satisfy expectations • P.16 “yokes the parties together in a continuing hostile relationship.” • 17G ‘in terrorem’ • 18D ethical content of equity • Compare Victorian railway examples • Broken promises and adjectives to spare



Price v Strange [1978] Ch 337. See Burton and Winton article at http://www.austlii.edu.au/au/journals/SydLRev/1979/13.pdf Note: Both second year law students at that time! See now: http://5wentworth.com.au/senior-counsel/gregory-burton-sc ‘Mutuality’ and ‘ready and willing to perform’ are both examples of the broader principle that ‘a plaintiff who comes to equity must do equity’ (see maxims, above). Supervision – Key issue: can the court determine whether this order has been broken? Failure to comply is a contempt of court. See Co-operative Insurance v Argyll Stores [1998] AC 1. H of L held no specific performance of a contract to “carry on a supermarket” under a lease agreement. Particular kinds of contracts: (A) Construction contracts. (https://en.wikipedia.org/wiki/Australian_Construction_Contracts) Three conditions (Page 35): Wolverhampton v Emmons [1901] 1 KB 515, 524-5. 1. Contract sufficiently precise to be enforced 2. Plaintiff has substantial interest in performance, which cannot be

compensated by damages 3. Defendant has possession of the land on which the work is to be done. (B) Contracts for the performance of personal services – not enforceable – for moral and pragmatic reasons. Exception 1. Where no cooperation required from employer (Patrick Setvedores) Exception 2. Lumley v Wagner. THREE prerequisites to an award of specific performance: 1. Specifically enforceable contracts. 2. Valuable consideration. 3. Inadequacy of damages. Bars to specific performance. Injunctions (and their classification) (a) Mandatory. (b) Perpetual, interim and interlocutory. (c) Ex parte. (d) Quia temet. Injunctions

• Types (note: Quia timet: “because he fears” (“kwia tim-et”) • Jurisdiction; s. 37(1) Supreme Court Act (Vic)

Criteria for the award of an injunction: 1. Plaintiff shows defendant has committed a legal, equitable or statutory wrong. 2. The wrong is likely to continue or be repeated.



3. Plaintiff must show that damages (or some other common law remedy) are inadequate. Interlocutory injunctions. These are ordered during proceedings. Mandatory and prohibitory injunctions. Injunctions to restrain breach of contract: the correlation with specific performance.

– Beecham v Bristol (penicillin) – ABC v O’Neill (“The Fisherman”)

Courts prefer prohibitory over mandatory?

– Redland Bricks v Morris (cost of restoring land was disproportionate to the loss)

– Wrotham Park Estate v Parkside Homes (no order to destroy much-needed housing; but a deliberate breach of covenant may give a different result. Why?)

Injunctions and specific performance

• Sometimes injunctions are available where specific performance is not • E.g. negative injunctions awarded more readily (for example, to restrain an

employee from working for a competitor) • Lumley v Wagner applied in Curro v Beyond Productions. See top of p.46 of

textbook Injunctions to restrain commission of a tort.

• Trespass to land • Los or damage to chattels • Other torts

Bendal v Mirvac

• Injunction granted to stop encroaching screens even though no financial loss suffered through the encroachment

Restrain loss or damage to chattels (Not usually granted) • Aristoc v Wenham

To restrain other torts • Parry v Crooks (to restrain assault - refused)

Public interest.

• “Injuncting” the factory o Stop the smoke and pollution o … And people lose jobs

• So, recent approach o Allow the nuisance but control the effects o House near lake: Boat races: timing, number, decibels etc. o See Kennaway v Thompson [1981] QB 88



The exercise of discretion. • Fairness • Ability to supervise (c/f futility) • Lumley v Wagner • Operas singer could not sing for rival opera house but could sing for other

parties Plaintiff’s remedy if specific performance or injunction are denied

• Remission to a common law damages claim • Summers v Cocks (19127) 40 CLR 321 • Awarded damages for breach of contract

Equitable damages Chancery Amendment Act 1858 (Imp.) and derivative statutes. “Equitable Damages” (from statute, since Equity does not really “know” about damages – they were always a creature of the common law)

• Equity has no jurisdiction to award damages. • Litigants often had to go back to the common law courts – waste of time. • Lord Cairns’ Act solved the problem • See s38 of Vic Supreme Court Act 1986 • Even available where the wrong is only threatened

Are equitable damages available for equitable wrongs? Giller v Procopets (2008) 24 VR 1, (2008) 24 VR 1; (2008) 40 Fam LR 378; (2008) 79 IPR 489; [2008] VSCA 236; BC200810874.

• Not so clear. One view: Act only applies where pl. could apply for an injunction / to prevent a tort / for specific performance of a contract – but NOT for an equitable wrong

• See reasons on page 53 • Contra: HCA support in Wentworth. See now Giller v Procopets (damages

ARE available for equitable breach of confidence in VIC) NOT available where: (a) Common law damages are adequate. (b) No likelihood of repetition of the alleged tort. (c) Where plaintiff is attempting to enforce a contract of personal service. (d) Where it was impossible to grant equitable relief at the commencement of the action, and it is still impossible at the date of judgment. How are equitable damages assessed? Flexibly (a) Damages in addition to injunction or specific performance. (b) Damages in substitution for injunction or specific performance.



I/SP or damages? Magnitude of injury; measurable in $ terms?; oppressive to the def.?; unjust to award more than equitable damages?

• Equitable damages frequently assessed as at the date o judgment not as at date of breach.

• Damages for mental distress can be awarded. • The discretionary bars to the award of specific performance or an injunction

(such as hardship and unclean hands) can also be bars to the award of equitable damages.

In addition… A. Equitable damages frequently assessed at date of judgment (not breach) thus making them a “proper substitute” for the remedy sought. B. Damages for mental distress (Giller) C. The discretionary bars to I or SP (hardship, unclean hands) can also be a bar to the award of equitable damages.

Chapter 4: Monetary remedies in equity

“Accounts of profits” Generally NOT available at common law. An ancient remedy. A discretionary remedy. A remedy that is subject to equitable bars (e.g. laches, unclean hands, see CH6). Used in response to:

(i) breaches of trust (ii) breaches of fiduciary obligations and (iii) breach of the obligation of confidence

Has the defendant “usurped a profit-making opportunity that should have come to the plaintiff alone? – [if to anyone at all]”. FOCUS: On the profit that has been made via the equitable wrong. à Not designed as a “punishment” but as corrective justice between the parties (hello Aristotle). Only net profits are stripped (not gross profits). Irrelevant:

• Plaintiff has not suffered any loss (remember, the focus is on the PROFIT!) • Plaintiff could never have made a profit itself (focus on the defendant’s profit) • Defendant’s motives are honest (“not dishonest”)(i.e. we don't care why the

profit was made). • Plaintiff might have made more profit than the defendant from exploiting the

opportunity.



Major case: Warman v Dwyer (1995) 182 CLR 544. Agency agreement, gearboxes etc. Facts: Warman was a company that had an agency agreement with an Italian manufacturer of gearboxes, Bonfiglioli. Dwyer was general manager at a branch of Warman. Bonfiglioli unsuccessfully approached Warman in August 1986 to set up a joint venture with it. Shortly after, Dwyer informed Bonfiglioli that he planned to leave Warman and set up his own business. He poached Warman’s staff to work in his new venture and Dwyer terminated tis agency agreement with Warman, entering into a 20 year contract with Dwyer’s company to assemble and distribute its gearboxes in Australia. The trial judge held that there was a clear breach of fiduciary duty by Dwyer, resulting in Warman losing the opportunity to retain the agency agreement. Compensation to cover the loss but the court denied Warman an account of profits. Held: The High Court reversed the decision, holding that Warman was entitled to elect between equitable compensation and an account of profits. The court made the following points:

§ As account of profits is difficult to calculate, mathematical exactness is not called for, a reasonable approximation is acceptable.

§ Liability to account does not depend on detriment to the plaintiff; or dishonesty or lack of bona fides on the part of the defendant.

§ It is no defence that the plaintiff was unwilling, unlikely or unable to make the profit itself.

§ The fiduciary is usually ordered to account for profits made within the scope and ambit of the fiduciary duty.

§ If the loss suffered by the plaintiff exceeds the profit made by the fiduciary, the plaintiff may elect a compensatory remedy against the fiduciary. The plaintiff is entitled to elect which ever remedy reaps the highest return.

§ A distinction can be drawn between cases where a fiduciary acquires a specific asset and where the fiduciary establishes and operates a business to exploit an opportunity. In the latter, it may be inappropriate to require the fiduciary to account for the whole of the business profits for an indefinite time, especially where profits can be attributed to its own inputs.

§ The defendant bears the burden of showing that it should not account for the whole of the profits.

§ As a general rule, a court will not apportion the profit made between fiduciary and the principal; but if it is inequitable for the fiduciary to account for the whole of the profits, the court will make allowance for the fiduciary’s skill, effort and expenses.

Applying these principles, the High Court held that Warman was likely to have lost its distributorship, probably within a year. An order for account of profits was limited to the initial period of two years, less an allowance for the skill, expertise, effort and resources contributed by them.



SELF-TEST QUESTIONS:

1. Do I understand basic facts? 2. What was the main difference between the QCA and HCA ruling? 3. Why is this “difficult in practice”? 4. Who bears the burden of proof? 5. What is the significance of “taking a specific asset”? 6. What is the significance of setting up a business based the breach of a

fiduciary duty? 7. Why net profits (and not gross profits)?

How are accounts of profits calculated? See HCA - eight points (p.59 of text). (http://www.bonfiglioli.com.au/en-au/) Allowances Victoria University of Technology v Wilson

Facts: Two academics owed fiduciary obligations to their employer, a university. A former student came to them with a money-making opportunity which they exploited in breach of fiduciary duty. The trial judge appointed a special referee to determine the amount of allowance to be made to the fiduciaries, who had put in a significant amount of time, effort and money into the venture. The referee set an extremely low figure and the fiduciaries successfully appealed. Issue: Calculation of allowances. Held: Harper J held that the starting point for the calculation should have been the terms the university and the academics were most likely to have agreed at the outset, assuming they were at arm’s length, fully informed, properly advised and willing to be reasonable. The university itself had policies in place for similar situations, which allowed profits to be shared between the university and its employees, and these policies were highly relevant indicators of what would have been agreed. The resulting figure would be reduced if the fiduciary’s behaviour had in any way disadvantaged the principal (for example, neglecting their teaching duties in order to exploit the opportunity).

• Starting point should have been the terms the university and the academics were most likely to have agreed at the outset. See university policies.

A 'dishonest fiduciary will not be given an allowance at all or will be given a reduced allowance. Dishonesty may not be relevant, as in Warman, it may be more important that in the interests of justice between the parties, not all of the profit is attributed to the breach of fiduciary duty.

• Honest or well-intentioned defendants are sometimes given allowances on a liberal or generous scale.

• Parties frequently settle figures between themselves.



Equitable compensation • Comparable to but not equivalent of common law damages. • Addresses loss following breach. • Available for breach of purely equitable duties such as

o Breach of trust o Fiduciary duty and obligations of confidence

Emergence Arose in cases involving breach of trust Caffrey v Darby Re Dawson Youyang v MFC Nocton v Lord Ashburton How is equitable compensation calculated?

• Calculated in response to the duty breached • Aim: Put Pl. in the position they would have occupied had the defendant not

wronged them. • Not punitive but to “do justice” between the parties. • Calculate at date of trial; Must be causative link between wrong and the loss –

but do not apply foreseeability or novus actus. Equitable compensation is calculated in response to the duty breached and aims to put the plaintiff in the position they would have been in had the defendant not wronged them. It is not intended to be punitive, only to effect justice.

§ It is assessed with the benefit of hindsight and is therefore usually judged at the date of trial rather than at the date of breach.

§ There must be a causative link between the wrong and the claimed loss but common law concepts such as reasonable foreseeability and novus actus interveniens are not applied. (The claim may still be affected by the discretionary bars to relief such as laches, hardship and unclean hands).

§ Traditionally, equitable compensation relieved economic losses and was regarded as not being available for personal losses such as distress.

§ However, in Giller v Procopets[12] the Victorian Court of Appeal allowed equitable compensation for distress following a breach of confidence.

§ To calculate compensation, specific attention must be given to the type of breach.

Calculating equitable compensation for breach of trust The trustee is strictly responsible to reinstate the trust in full. Considerations of remoteness not apply. It is also irrelevant that there might have been some loss anyway, had the breach not occurred. Calculating equitable compensation for breach of trust

• Re Dawson (deceased) [1966] 2 NSWR 211 • Youyang v. Minter Ellison Morris Fletcher (2003) 212 CLR 484 • If Trustee cannot account to the beneficiaries - Trustee must reinstate the find

in full. • Remoteness is irrelevant and so is “loss anyway”and so is “foreseeability. All

these pleas (by the Trustee) are rejected.



REMEMBER… Equitable compensation is the equitable “cousin” of common law damages. -> Comparable to, but not the equivalent of… It addresses loss following breach

• Available for breaches of PURELY equitable duties (breaches of trust, fiduciary duty and obligations of confidence)

Nocton v Lord Ashburton

• The “story” of the case: • http://www.supremecourt.wa.gov.au/_files/Directors_and_Fiduciary_Duties_20

120523.pdf • Nocton (solicitor) was in a position of conflict (of duty and interest) when he

gave advice to Lord Ashburton to release the mortgage. o Ashburton was in a worse position, so Nocton was liable to compensate

him. Re Dawson (HCA): Repay the greater amount.

• Restitution in equity is “of a more absolute nature” that the common law obligation to pay damages for tort or breach of contract.

• A trustee must restore assets “notwithstanding that market values have increased in the meantime.”

• Assess asset value as at the date of restoration and not at the date of deprivation.

• 5% interest also ordered (remember to ask!) But for test…

• “The principles embodied in {the Caffey v Darby (1801) 6 Ves Jun 488 [31 ER 1159]} approach do not appear to involve any inquiry as to whether the loss was caused by or flowed from the breach.

• Rather the inquiry in each instance would appear to be whether the loss would have happened if there had been no breach (i.e. “but for” the breach)”

Youyang v MEMF (HCA): Lack of foreseeability irrelevant; establish quantum by reference to the simple ‘but for’ test. ONE SENTENCE WILL SAVE YOU LOTS OF TEARS AND HEARTACHE

Minters facts are complex…

• CD – certificate of deposit • One page summary of Youyang here • NSWCA is best on the facts • Briefly consider also the facts of Nocton v Lord Ashburton (it is a famous case) [4.9]

BREACH OF TRUST IN EQUITY

• “But for” is the only test. • Simple.



How is the above different from causation in torts? Tort: 1. “But for” 2. AND no supervening cause (novus actus interveniens) 3. AND reasonably foreseeable March v E & MH Stramare Pty Ltd [1991] HCA 12 4. AND not too remote. Calculating compensation in cases of breach of FIDUCIARY DUTY Two core fiduciary obligations:

(1) No illicit profit from position (the “no profit from position” rule). (2) No conflicts (specifically, no conflict of “duty and duty” and no conflict between

“duty and interest”). So, what of compensation? Equitable compensation only address LOSS so is of no use w.r.t. profit made under the profits rule above. But can be useful w.r.t conflicts Equitable compensation is not available as a remedy for a breach of the “no profit from position” rule, because it is inappropriate for such a breach – so à use “account of profits” or “constructive trust” instead. Equitable compensation addresses loss, and is not concerned at all with profits made by the fiduciary. To go after profit, use the remedies account of profits or constructive trust The principal cannot be seen to adopt the fiduciary’s wrongful act and thus “go after” the profits. See fn 56 AND later in this course Canson Enterprises v Boughton (1991) 85 CLR (4th) 129.

• See facts p67. • What is a “secret commission”? • TIP: VERY BAD idea to act for both sides, see this case • ON issue of compensation – do not apply foreseeability; but do not disregard

causation altogether • Canson held –> take a “common sense” view of causation. (Sounds like

something from Rumpole) The causation standard: ‘but for’ or ‘common sense’?

• Use the two tests in tandem: a sufficient link between breach and loss. • Quantification of equitable compensation

– Identify the duty breached – Show sufficient connection between breach and loss – Apply “but for” test to losses sufficiently connected to the breach

• See a, b, c, on p.69 Common law adjustments to quantum



CBA v Smith 102 ALR 453 • Vendor and purchaser of hotel were both customers of same bank • Equitable compensation reduced on grounds

of laches Harris v Digital Pulse

• (2003) 56 NSWLR 298 • On appeal: Held no exemplary damages for breach of fiduciary duty. • Note comments on the “fusion fallacy” at 18 ff of the AUSTLII version à • 18 The heart of the "fusion fallacy" - as it has come to be called in Australia - is

the proposition that the joint administration of two distinct bodies of law means that the doctrines of one are applicable to the other. That is no more true of equity and common law than it was and is true of tort and contract within the common law context. That is not to say that one body of law does not influence the other. It is only to say that they remain conceptually distinct.

But in Giller v Procopets…

• The Victorian CA did order aggravated damages • Said to be “compensatory” • Maybe restricted to its facts • END CH 4

Why didn’t Minters rely on this section:

• TRUSTEE ACT 1958 - SECT 67 • http://www5.austlii.edu.au/au/legis/vic/consol_act/ta1958122/s67.html • Now that we’ve discovered the Trustee Act 1958, please skim read the

contents for now… Chapter 5: Rescission, rectification and declarations Rescission

• Meaning (here): the process for setting aside a voidable contract and restoring parties to their pre-contract position (RETROSPECTIVE)

• Compare “rescission” which is really just a repudiation for breach – where the innocent party exercises the right to terminate, sue for damages, and seek restitution of benefits conferred. (PROSPECTIVE – can enforce already accrued rights)

When can you rescind (in sense one)? (ie voidable in equity)

• Mistake • Misrepresentation • Duress • Undue influence • Unconscionable conduct • Breach of fiduciary obligation



• The rule in Yerkey v. Jones (only contracts of guarantee) Think about this…

• Above contracts can be said to be valid at common law – but rescission is available in equity

Why rescind?

• A “restitutionary remedy” (car example at [5.4]) • That is an executed contract - what of a contract that is still executory? • Less clear that such a case is restitutionary • Amadio! (just when you thought it was safe!) • An example of rescission of an executory contract. OR maybe we just say

“nullified”? Rescission at common law and in equity?

COMMON LAW EQUITY

- Fraudulent misrepresentation - Duress HAVE to restore parties to their PRECISE pre-contractual position (restitutio in integrum) e.g. Clarke v Dickson 120 ER 463 – no common law rescission given because shares now worthless. Contract eliminated – but you may still have to sue at common law to get your things back e.g. action in money had and received, or action in conversion)

- Fraudulent misrepresentation - Duress No need for precise restoration Equitable remedies are far more flexible (SEE OVER)

Advantages of equitable rescission A. Wider grounds than common law B. No need for precise restoration (‘practical justice’ is sufficient) C. Court can impose terms and conditions as part of ’practical justice’ (e.g. if cannot return property order to pay money instead) Alati v Kruger (15pp)

• Fruit shop case – fraudulent misrepresentation of the takings of the business • Held: Rescind in equity

– Restitution of price – Return of shop – Return chattels or pay their price – Defendant to repay conveyancing costs

@p223



@224

Some questions…

• How was the business described in the purchase contract? What is “walk in walk out”?

• What arrangements were made about the lease? • What was in the “Special Clause”? • Did the buyer have previous business experience? • Why was the “super-market” significant? • What 3 options were open to the buyer? • What is meant by “pedency of the action”? Why is that period important?



Per Fullagar J Note

• Distinguish rescission from discharge for faults in performance (by acceptance by the innocent party of the breach or repudiation)

• Such discharge terminates only for the future and not retroactively • YET there are superficial similarities which can lead to confusion of

terminology and understanding – so beware. • Contract lawyers: See Lord Wilberforce and Lord Diplock in Photo Production

[1980] AC 827 for clarity Total and Partial Recission

• Vadasz v Pioneer Concrete (1995) 184 CLR 102 – Concrete contracts – renegotiation of terms to include personal

guarantee. Directors signed guarantee. – Defendants represented that it covered only future debts, but in fact it

covered both past and future debts – Held: Plaintiff entitled to partial rescission of the guarantee. Future

indebtedness enforceable since would have agreed to this without the misrepresentation. (Compare Amadio where rescission was total)

Critics of Vadasz

• You can’t do this because the court is effectively rewriting the contract • SUPPORTERS say – no, it is just a “flexible response” to cases of

misrepresentation • The remedy is similar to RECTIFICATION (see below) • Most often used where

– Clear evidence of terms that would have been agreed – Easy severance of the part to be rescinded – (Clarify meaning of “severance” in this context…)

The election to rescind



• Plaintiff must ELECT to do this (rescind). • Thus, rescission is sometimes “described not as a remedy, but a form of self-

help” • Daly v Sydney Stock Exchange – facts • HCA held: NO constructive trust because NO election to rescind. It was a

LOAN and she would have to rescind the loan first (for breach of fiduciary obligation) an THEN argue the trust.

• Is this just a formality? Not if you have further purchasers down the line … Restoring to Pre-contractual position

• Either return the property or engage in financial adjustments (Alati’s case) • Court can impose terms on both parties • Maguire v Makaronis: - facts. • 24% - 22%! Breach of duty and interest • “The difficulty with such an order was that, unless it was ordered on terms of

repayment of the loan, the respondents would gain a windfall. On the other hand, if rescission was ordered on terms, it would have the effect of indirectly enforcing the very transaction that was sought to be set aside. Here lies the dilemma.” KL Liew Breach of Fiduciary Duties by a Solicitor

• Liew’s article recommended reading since it covers many useful cases. Maguire v Makaronis 23 “The point to remember is that, until the contract is rescinded, the contract is valid. It is a voidable contract and, until rescission, the obligations under the contract must be performed. It is therefore "plainest" equity that the party who is seeking to avoid the contract must be prepared to restore the parties to their pre-contract position. If this is not the case, the party seeking rescission would be in a position to wait until the other side has wholly or partly performed the contract before seeking rescission so as "to have his cake and eat it, too". Liew HELD: “(iv) Subject to the need for restitution, the mortgage was liable to be set aside at the suit of the respondents. The equity of the borrowers was to have the whole transaction rescinded so as to remit the parties to the original position, and for that reason the respondents must submit to the payment of the moneys borrowed as a condition of the order setting aside the mortgage.” 24 “Equity has, however, accepted that the notion of complete restitution required by the common law may create harsh results in that it may be impossible, in some circumstances, to bring the parties to the exact position they were in prior to the contract. Adopting a more flexible approach, equity has allowed rescission in circumstances where the parties can be restored substantially to their pre-contractual position (Alati v Kruger (1955) 94 CLR 216, at pp223-4.). Equity does not require that the status quo ante be restored in all respects, but rather that "practical justice" be done between the parties and, in so doing, restore the parties substantially to their original position. It is in this context that the equitable maxim: "He who seeks equity must do equity" is emphatically applied .” (K.Liew) The proprietary consequences of rescission

• Prior to election, the plaintiff has a ‘mere equity’. • After the election the plaintiff has an equitable interest in the property. • (Those terms should now make more sense.)

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