LAWS5015 - Equity Notes€¦ · (ii) Trust & Bailment! ... The Beneﬁt Element ... o The...

FACULTY OF LAW

LAWS5015EQUITY

Topics:

(1) The History & Nature of Equity (6) Trustees’ Powers & Duties & the Rights of Beneficiaries regarding Administration

(2) The Conscience of Equity (7) Resulting Trusts

(3) Remedial Equity (8) Constructive Trusts

(4) The Nature and Classification of Trusts (9) Tracing, the In Personam Claim & Accountability

(5) Charitable & Non-Charitable Purpose Trusts

Raffael Maestri! ! 1

Table of Contents

(1) THE HISTORY & NATURE OF EQUITY(I) WHAT IS EQUITY .........................................................................................................................................?! 6(II) THE EFFECTS OF THE JUDICATURE ACT AND THE ‘FUSION FALLACY ....................................................’! 6

....................................................................................................................................................................(a) The Judicature Acts! 6......................................................................................................................................................................(b) The Fusion Fallacy! 6

(III) THE MAXIMS OF EQUITY ..........................................................................................................................! 9(2) THE CONSCIENCE OF EQUITY(I) FIDUCIARY OBLIGATIONS ..........................................................................................................................! 11

......................................................................................................................................(a) Does a fiduciary relationship exist?! 12................................................................................................................................(i) Status-Based (presumed) Fiduciaries! 12

.........................................................................................................................................................................................Trustee/Beneficiary! 12..........................................................................................................................................................................................Director/Company! 12

...............................................................................................................................................................................................Solicitor/Client! 13

...............................................................................................................................................................................................Agent/Principal! 14.....................................................................................................................................................................................Employees/Employer! 14

..............................................................................................................................................................................................Partner/Partner! 15........................................................................................................................................................(ii) Fact-Based Fiduciaries! 16

......................................................................................................................................................................................Civil servant/Crown! 16............................................................................................................................................................................Commercial Relationships! 17

..................................................................................................................................................................................................Joint Ventures! 17................................................................................................................................................................................................Doctor/Patient! 17

....................................................................................................................................................................................................Parent/Child! 17................................................................................................................................................................................Financial adviser/Client! 18

....................................................................................................................................................................................................Bailee/bailor! 18..............................................................................................................................................................................Crown/indigenous people! 18

...................................................................................................................(b) What is the scope of the fiduciary relationship! 19............................................................................................(c) Has the fiduciary breached any duty to which he is subject?! 19

.........................................................(d) Does the fiduciary have any defence to an allegation that he breached his duty?! 20......................................................................................................................................(i) The defence of informed consent! 20

....................................................................................................................................................(ii) Chan v Zacharia defence! 21...............................................................................................(e) What are the remedies that are available to the principal?! 22

............................................................................................................................................................Rescission of a Contract! 22.............................................................................................Constructive trust (gain based remedy): Proprietary Claim ! 22

...............................................................................................Account of Profits (gain based remedy): Personal Remedy! 23....................................................................................Equitable compensation (loss based remedy): Personal Remedy! 24

.........................................................................................................................................................................Other Remedies! 24(II) BREACH OF CONFIDENCE .........................................................................................................................! 25

..............................................................................................................................................................................(a) The Elements! 25...............................................................................................................................................................(i) Req 1 — Specificity! 25

........................................................................................................................................(ii) Req 2 — Quality of Confidence! 26..............................................................................................................................................................Information in the Public Domain! 26

.....................................................................................................................................................................................Personal information! 26...................................................................................................................................Employment information (employee ‘know-how’)! 27

..............................................................................................................................................................................Professional Confidences! 28

..............................................................................................................................................................................Government Information! 28........................................................................................................................................................................................Private Confidences! 28

........................................................................................................(iii) Req 3 — Importing an Obligation of Confidence! 29..........................................................................................................................(iv) Req 4 — Actual or Threatened Misuse ! 29

......................................................................................................................................................................................(b) Defences! 31.....................................................................................................................................................................................(c) Remedies! 32

(III) ESTOPPEL..................................................................................................................................................! 34.............................................................................................................................................................(a) Common law estoppel! 34

....................................................................................................................................................................(b) Equitable Estoppel! 34............................................................................................................................................................(i) Promissory Estoppel! 34...........................................................................................................................................................(ii) Proprietary Estoppel! 35

.............................................................................................................................(iii) Consolidation of Equitable Estoppel! 36.......................................(c) Relief - What should the extent of the remedy be, and what form should the remedy take?! 38

(3) REMEDIAL EQUITY(I) SPECIFIC PERFORMANCE............................................................................................................................! 40

Raffael Maestri! (1) Table of Contents! 2

...................................................................................................................(a) Req 1 — The Need for an Enforceable Contract! 40............................................................................................................................................(b) Req 2 – Ready, Willing and Able! 40

......................................................................................................................................................(c) Req 3 – Breach of Contract! 40..................................................................................................................................................(d) Req 4 – Inadequate Damages! 41

......................................................................................................................................................................................(e) Defences! 45.................................................................................................................................................................................Supervision! 45..................................................................................................................................................................................Uncertainty! 46

.....................................................................................................................................................................................Mutuality! 46......................................................................................................................................................................................Hardship! 46

(II) INJUNCTIONS.............................................................................................................................................! 48......................................................................................................................................................(a) Preliminary Requirements! 48

..........................................................(i) Legal or equitable right that is protected: exclusive & auxiliary jurisdiction! 48.................................................................................(ii) Inadequacy of common law damages: *auxiliary jurisdiction*! 48

....................................................(iii) The legal right to be protected is proprietary in nature: auxiliary jurisdiction! 49......................................................................................................(b) Additional requirements for interlocutory injunctions! 50

........................................................................................................................................................(i) Req 1: Prima facie case! 50.............................................................(ii) Req 2: Balance of convenience must favour the granting of an injunction! 50

.................................................................................................................................(iii) Req 3: Undertaking as to damages! 51.........................................................(iv) ex parte (cf inter-partes) interlocutory injunction: in the absence of the dft! 51

.........................................................................................................................................................................(c) Final injunction! 52...................................................................................................................................................................................(i) Licences! 52

.......................................................................................................(ii) Negative Covenant (i.e. restraint of trade clauses)! 52............................................................................................................................................................(d) Prohibitory Injunction! 53

..............................................................................................................................................................(e) Mandatory Injunction! 53

..............................................................................................................................................................(f) Quia Timet Injunction! 54..............................................................................................................................(g) Asset Freezing order: Mareva Injunction! 54

....................................................................................................................................................................(h) Anton Piller Order! 54(III) EQUITABLE COMPENSATION ..................................................................................................................! 55

.............................................................................................................................................(a) The Quantum of Compensation! 55...........................................................................................................................................................(b) The Date of Assessment ! 55

............................................................................................................................................(c) Causation vs Question of breach! 56..................................................................................................................................................(d) Remoteness & Foreseeability! 58

..........................................................................................................................................................(e) Contribution to the Loss! 59..................................................................................................................................................................(f) Exemplary Damages! 59

....................................................................................................................................................................................(g) Rationale! 59...............................................................................................................................................................(h) Alternative Remedies! 59

.........................................................................................................................................................(i) Lord Cairns Act damages! 59

(4) THE NATURE & CONSTITUTION OF TRUSTS(I) NATURE & CLASSIFICATION OF TRUSTS ..................................................................................................! 60(II) DISTINCTION BETWEEN TRUSTS AND OTHER LEGAL RELATIONSHIPS — CONSTRUING DISPOSITIONS..................................................................................................................................................! 62

...................................................................................................................(a) Distinction from other equitable relationships! 62............................................................................................................................(i) Trust & Equitable Personal Obligation ! 62

.....................................................................................................................................................................(ii) Trust & Charge! 63.............................................................................................................................(iii) Trust & Condition (i.e. ‘subject to...’)! 63...........................................................................................................................(b) Distinction from other legal relationships! 63

............................................................................................................................................................(i) Trust & debt/contract! 63.................................................................................................................................................................(ii) Trust & Bailment! 64

...................................................................................................................................................................(iii) Trust & Agency! 64(III) THE THREE CERTAINTIES........................................................................................................................! 66

..............................................................................................................................................................(a) Certainty of Intention! 66................................................................................................................................................................(b) Certainty Of Subject ! 67

..................................................................................................................................................................(c) Certainty Of Object! 69............................................................................................................................................................................(i) Fixed Trusts! 69

..............................................................................................................................................................(ii) Discretionary Trust! 69............................................................................................................(d) Constitution in the property vested in the trustee?! 70

................................................................................................................................................(e) Administrative unworkability! 70............................................................................................................................................................(f) Powers of Appointment! 71

(5) CHARITABLE & NON-CHARITABLE PURPOSE TRUSTS(I) CHARITABLE PURPOSES .............................................................................................................................! 72

........................................................................................................................................................(a) The Beneficiary Principle! 73


(II) PUBLIC BENEFIT.........................................................................................................................................! 73...................................................................................................................................(a) The Benefit Element (qualitative test)! 73

.........................................................................................................................................(b) Public Element (quantitative test)! 73(III) POVERTY (...TRUSTS FOR THE RELIEF OF POVERTY .............................................................................)! 74

.......................................................................................................................................................................Charitable purposes! 74..........................................................................................................................................................................Public Benefit Test ! 74

(IV) EDUCATION (...TRUSTS FOR THE ADVANCEMENT OF EDUCATION ....................................................)! 76.......................................................................................................................................................................Charitable Purposes! 76

......................................................................................................Public Benefit (same for the ‘and other...’ i.e. fourth class)! 77(V) RELIGION (...TRUSTS FOR THE ADVANCEMENT OF RELIGION .............................................................)! 78

................................................................................................................................................................The Meaning of Religion! 78...........................................................................................................................................................................Religious Purpose! 78

..................................................................................................................................................................................Public Benefit ! 78(VI) FOURTH CLASS (...TRUSTS FOR OTHER PURPOSES ..............................................................................)! 79

........................................................................................................................................Public Benefit (same as for education)! 79(VII) POLITICAL TRUSTS.................................................................................................................................! 80(VIII) SCHEMES ...............................................................................................................................................! 80(IX) MIXED PURPOSES.....................................................................................................................................! 81(X) NON-CHARITABLE PURPOSE TRUSTS......................................................................................................! 82

.........................................................................................................Trusts for unincorporated non-charitable organisations! 82........................................................Trusts which, properly construed, are for legal beneficiaries but that state a motive! 84

......................................................................Trusts which are for the direct or indirect benefit of identifiable individuals! 84....................................................Trusts of imperfect obligation (‘concessions to human frailty’) – monuments, pets, etc! 84

(6) TRUSTEES’ POWERS AND DUTIES AND THE RIGHTS OF BENEFICIARIES REGARDING ADMINISTRATION(I) THE DUTIES, POWERS, RIGHTS & LIABILITIES OF TRUSTEES.................................................................! 86

...........................................................................................................................................................................(a) General duties! 86..........................................................................................................................................................The duty to give reasons! 86

.................................................................................................................................The duty to learn the terms of the trust! 86

.................................................................................................................................The duty to obey the terms of the trust! 86................................................................................................................The duty to keep accounts and give information! 87

..................................................................................................................................The duty to Exercise Reasonable Care ! 87...The duty to exercise power of investment in the best interests of present and future beneficiaries of the trust! 88

...........................................................................................................................................................The duty not to delegate! 89................................................................................................................................................................(b) Rights and liabilities! 89

(II) THE RIGHTS OF BENEFICIARIES...............................................................................................................! 91(7) RESULTING TRUSTS(I) AUTOMATIC RESULTING TRUST: NON-DISPOSAL OF BENEFICIAL INTEREST.......................................! 94(II) PRESUMED RESULTING TRUSTS ..............................................................................................................! 98

..................................................................(a) Presumption of advancement (as a presumption of the absence of a PoRT)! 99......................................................................................Rebuttal of Presumption of advancement: onus on transferor! 100

.............................................................................................................................................(b) Presumption of resulting trust ! 100...................................................................................Rebuttal of Presumption of Resulting trust: onus on transferee ! 101

.............................................................................................................................................(c) Resulting Trusts and Illegality! 102(III) THE QUISTCLOSE TRUST ......................................................................................................................! 104(8) CONSTRUCTIVE TRUSTS(I) CONSTRUCTIVE TRUSTS FOLLOWING BREACH OF FIDUCIARY DUTY .................................................! 108(II) CONSTRUCTIVE TRUSTS AND THIRD PARTIES.....................................................................................! 109

..........................................................................................................(a) Trustee de son tort (‘a trustee of youe own wrong’)! 109..........................................................................................................................................................(b) Barnes v Addy liability! 110

.............................................................................................................................................................First & Second Limbs! 111.................................................................................................................................................First limb: Knowing Receipt! 111

......................................................................................................................................Second limb: Knowing Assistance! 112(III) CONSTRUCTIVE TRUSTS AND UNCONSCIONABLE CONDUCT ..........................................................! 114(IV) REMEDIAL CONSTRUCTIVE TRUSTS ....................................................................................................! 115(9) TRACING, THE IN PERSONAM CLAIM AND ACCOUNTABILITY


(I) TRACING....................................................................................................................................................! 116.................................................................................................................................................(a) Property or Personal claims! 116

...............................................................................(i) Property Claim (‘in rem’) & proprietary right to trace in equity! 116.......................................................................................................................................(ii)Personal Claim (‘in personam’)! 117

................................................................................................................................................................(b) The Tracing Process! 117.............................................................................................................................................(c) Mixed trust and trustee money! 118

.....................................................................................................Unauthorised mixing of trust money from two trusts! 118........................................................................Property is purchased with mixed trust funds/trustee personal funds! 118

.............................................................................(d) Trustee has mixed trust funds (i.e. where the interests rank equally)! 120..........................(i) Property purchased with mixed funds where interests rank equally: beneficiary/beneficiary! 120

.......................(ii) Conflict between Re Hallet & Clayton’s Case: Trustee/beneficiary/beneficiary moneys mixed ! 120......................................................................................(iii) Trustee pays beneficiary’s money to innocent volunteer...! 120

.....................................................................................................................................................................(e) Tracing Remedies! 121(II) THE RE DIPLOCK ‘IN PERSONAM’ CLAIM .............................................................................................! 122


(1) The History & Nature of Equity(I) WHAT IS EQUITY?

• Equity refers to the cases, maxims, principles and remedies which were established by the Court of Chancery in England.

• The court attempted to soften the injustices of the common law and provide equitable remedies which were not available (e.g. the common injunction and specific performance).

‣ The Earl of Oxford’s Case in Chancery (1615) Mich 13 Jac 1, 21 ER 485o When the common law produces one result, but equity requires another result, equity will prevail.o The Office of the Chancellor is to correct men’s consciences for frauds, breach of trusts, wrongs

and oppressions…and soften the harshness of the common law.✦ Supreme Court Act 1970 (NSW)

o s57: The Court shall administer concurrently all rules of law, including rules of equity.✦ Law Reform (Law & Equity) Act 1972 (NSW)

o s5: In all matters in which there was immediately before the commencement of this Act or is any conflict or variance between the rules of equity and the rules of common law relating to the same matter, the rules of equity shall prevail.

(II) THE EFFECTS OF THE JUDICATURE ACT AND THE ‘FUSION FALLACY’(a) The Judicature Acts✦ The Judicature Act (1873) sought to ensure that a single tribunal in a single proceeding would

administer both the common law and equitable jurisdictions. o s24(1) – the court has the power to administer equitable remedies.o s24(2) – the court has the power to determine equitable defences.o s24(4) – the court must recognise all equitable estates, titles, rights, duties and liabilities. o s24(7) – all matters in dispute between the parties must be completely and finally determined…o s24(7) – the duplication of legal proceedings concerning such matters should be avoided.o s25(11) – where there is a conflict between the common law and equity… the latter shall prevail.

(b) The Fusion Fallacy• The fusion fallacy involves

(a) the administration of remedies which are not available either at common law or equity.(b) the modification of principles in one branch by concepts which are imported from the other.

• The fusion fallacy assumes that both the principles and procedures of the two jurisdictions have merged.• The Judicature Act (1873) has created a new system of law which contains elements of the common law

and equity, but is in character quite different from its components.o The judicature system has two essential and conceptually different effects:

๏ It ‘fuses’ the procedures of the old common law and equity jurisdictions ๏ It embodies in statutory mandate the supremacy of equity over law in cases of conflict

betwen rules.o The same result will obtain but now issue directly and w/o risk of passage from one court to

another to bring the dispute b/w the parties to conclusion. The results have been called ‘fusion fallacies’, meaning that they are explicable by application of neither law nor equity and can only be the product of a fallacious belief that the substance of law and equity has merged.

o Law and equity now ‘flow in the same channel’ (in the same court system) but they do not mingle their waters — the outcome of a case pre/post fusion should be exactly the same, it should just be more efficiently.

‣ Redgrave v Hurd (1881) 20 Ch D 1o Fusion Fallacy — damages for innocent misrepresentation: Sir George Jessel Mr suggested that the

difference between equity and the common law had disappeared with the passing of the Judicature Acts and that damages might thus be obtainable for innocent misrepresentation.

Raffael Maestri! (1) The History & Nature of Equity! 6

๏ Before the Judicature Acts, innocent misrepresentation was not recognized as a cause of action at common law. It was recognised in equity, but only as a ground for rescission, subject to the proviso that restitutio ab initio was possible (i.e. the parties could be restored to their original positions.)

• At common law, you can get damages for misrepresentation. But, that misrepresentation either has to be included as a term in the contract (i.e. breach of the term) or the misrepresentation has to be fraudulent.

• Common law: there is no common law cause of action for innocent misrepresentation.• Equity: You could rescind a contract for innocent misrepresentation.

‣ Canson Enterprises v Boughton (1991) (SCC)o “My first concern with proceeding by analogy with tort is that it overlooks the unique

foundation and goals of equity...๏ 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 and preserving optimum freedom for those involved in the relationship in question.

๏ The essence of a fiduciary relationship, by contrast, is that one party pledges herself 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 (McLachlin J)

‣ Walsh v Lonsdale (1882) 21 Ch D 9o The tenant has an agreement for a lease…equity will regard that a lease has been granted at

common law [Fusion fallacy — the ability of being able to a rectify a lease the same as having a legal lease].o The fact that the lease was not under seal did not mean that its obligations could not be fulfilled

through equity.o There is one court… and there the rules of equity shall prevail.o [The defendant granted a lease which was not under seal… the tenant went into possession — A landlord granted a 7

year lease to a tenant. But, the lease did not satisfy legal formalities and was therefore ineffective at common law. The tenant entered the premises, the landlord demanded a year’s rent in advance as the agreement provided for. The tenant refused on the basis that the lease was not a legal lease. The landlord seized the tenant’s goods. The tenant sued the landlord for wrongful distress of goods.]

‣ Chan v Cresdon Pty Ltd (1989) 168 CLR 242o An equitable right is not equivalent to a legal right…

๏ There is no authority for the principle that an equitable lease is equivalent to a lease at law.

๏ The notion that…by reason of the judicature system…there is no distinction between an agreement for a lease and an actual lease…is incorrect.

o HC held that the obligation of the lessee was not an obligation under the unregistered lease and thus did not attract the guarantee. The contention that the unregistered lease amounted to an equitable lease and that the obligation of the lessee under the agreement was within the terms of the guarantee; was unsuccessful.

๏ The court’s willingness to treat the agreement as a lease in equity, based on the fact that equity regards as done what ought to be done and equity looks to intent rather than form rests upon the specific enforceability of the agreement

๏ An agreement for a lease will be treated by a court administering equity as an equitable lease for the term agreed upon, and as between the parties, as the equivalent of a lease at law, although the lessee does not have a lease at law in the sense of having a legal interest in the term.

o [Due to a guarantee in an unregistered lease, a surety guaranteed the performance by the lessee of its obligations ‘under’ this lease. Under common law, entry into possession of the unregistered lease and payment of rent only gave rise to a tenancy at will. When the lessee defaulted, the lessor sought to enforce the guarantee. Held: The lessee did not have an obligation under the lease. The guarantee was attached to an un-registered lease. Even though the lease might be recognised in equity, it’s not the same as if it was a common law lease — only a lease at law would meet the description of ‘obligations under this lease’ for the purposes of the guarantee]


‣ Day v Mead [1987] 2 NZLR 443o The New Zealand Court of Appeal held that an award for equitable compensation for breach of

a fiduciary duty can be reduced by way of contributory negligence.o This decision was rejected by the High Court of Australia…

‣ Harris v Digital Pulse (2003) 56 NSWLR 298o The law does not recognise an award of exemplary damages for equitable wrongs…(it would be a fusion

fallacy)๏ There is an assumption that the joint administration of two distinct bodies of law means

that the doctrines of one are applicable to the other… which is incorrect… the two remain conceptually distinct. [However, aggravated damages have been awarded for breach of confidence (Giller v Procopets)]

o No jurisdiction in equity to punish. Therefore, exemplary damages are not available in equity.o It is unnecessary and undesirable to decide this case on the basis that a punitive monetary

award can never be awarded in Equity — remedial flexibility is a characteristic of Equity jurisprudence.


(III) THE MAXIMS OF EQUITY

‣ Corin v Patton (1990) 169 CLR 540o “[A maxim] is not a specific rule or principle of law. It is a summary statement of a broad theme

which underlies equitable concepts and principles’ (Mason CJ and McHugh J)He who seeks equity must do equity• Emphasises distinction between Common law and Equity.He who comes to equity must come with clean hands• Under this maxim, equity examines the conduct, in the transaction or arrangement which is the subject of the suit, of the aprty

seeking relief. Should a petitioner be guilty of some impropriety — in the legal, not the moral sense — in some matter pertinent to the suit, then equity may refuse the decree sought.

‣ Nelson v Nelson (1995) 184 CLR 538o A finding of illegality does not operate as an automatic bar to relief. Equity can give conditional relief moulded to suit the

circumstances of the case and, in particular, shaped so that the party guilty of illegality does not obtain any advantage from his or her illegal conduct. In doing so the court will not necessarily hold the impugned transaction to be unenforceable provided the relevant illegality can be dealt with in some other way.

o [A woman put property into the name of her son and daughter in order to obtain a subsidised war service loan at a reduced rate. That loan would not have been available if a domestic property were already owned by her — the woman lied about having a halfshare in the house. Later the parties fell out and the daughter claimed a beneficial half-share in the proceeds of sale of the property. Despite findings that the common intention of all parties was that the woman should have the sole beneficial interest, it was held both at first instance and at the Court of Appeal that the woman’s misstatement on the loan application was sufficient to disentitle her from proving her beneficial ownership. An appeal to the HC was allowed unanimously.]

Where the equities are equal the law prevails• Governs the law of equitable priorities.Where the equities are equal the first in time prevails• Governs the law of equitable priorities.Delay defeats equity‣ Smith v Clay (1767) 27 ER 419

o In seeking equitable relief a plaintiff must act promptly and diligently. Equity will not allow defendants to remain for too long in a position of not knowing whether equitable relief will be ordered against them because it would be unconscientious to do so.

Equity looks to intention rather than form‣ Parkin v Thorold (1852) 51 ER 698

o Courts of equity make a distinction in all cases between that which is a matter of substance and that which is a matter of form; and if it finds that by insisting on the form, the substance will be defeated, it holds it to be inequitable to allow a person to insist on such form, and thereby defeat the substance.

Equity presumes equality• Proportional equality — profits and losses are proportionately distributed. In the absence of contrary evidence equity will start off

from the presumption that parties start off from an equal (proportional) share and then move from there with evidence.Equity regards as done that which ought to be done‣ Frederick v Frederick (1721) 24 ER 582

o Where one for valuable consideration agrees to do a thing, such executory contract is to be taken as done; and...the man who made the agreement shall not be in a better case, than if he had fairly and honestly performed what he agreed to’

Equity will not assist a volunteer• Equity will not assist a party that has not provided consideration in a transaction.

o Exception: the assistance provided by equity for beneficiaries of trusts, who are usually volunteers.‣ Corin v Patton (1990) 169 CLR 540

o Equity will not assist a volunteer…๏ There are no equitable remedies to support a volunteer to perfect an imperfect gift.๏ A voluntary covenant is not enforceable in equity.

Raffael Maestri! (1) The History & Nature of Equity! 9(III) THE MAXIMS OF EQUITY

Equity acts in personam• Equitable rights are personal rights not proprietary rights. Equity acts in personam rather than in rem. But really, neither is

correct.• An equitable interest can be both personal and proprietary. Whether an equitable interest survives a transfer depends on whether

the transaction is to a bona fide purchaser for value without notice.

• Trust beneficiaries have rights that are enforceable over the trust assets - i.e. they have rights in respect of the trust property. Two types of rights in respect of trust property:

(1) Entitlement of beneficiary to get property returned to the trust if wrongfully disposed of (right of recoupment): If the trustee wrongfully disposes of the trust assets to a third party, the beneficiaries of the trust can get those trust assets returned to the trustee. That right, to get the property back from someone who shouldn’t have it, is a proprietary right (i.e. a right ‘in rem’) in the sense that it is enforceable against third parties (nb not all third parties — e.g. bona fide purchaser without notice is protected from that right) and not merely against the trustee (an in personam right)

(2) Claim to equitable ownership of trust property: Trust beneficiaries may have a right to assert that part or possibly all of the trust property is theirs in equity - they are the equitable owner of that property - don’t need this right to exercise the first type of right above. This type of claim claim depends on the terms of the trust (e.g. Baker v Archer-Shee)

• Example - extent of the ‘in rem’ right: • T holds shares on trust for B, and B is named as the only beneficiary. If T transfers those shares to X, and X is a donee (not

paid for the shares), then the beneficiary can enforce their rights in respect of the shares against X and force X to give the shares back to T (trustee) - (i.e. beneficiary's rights enforceable against third parties) — If the transfer of the legal title is not made for value, then the property is still encumbered with the trust interest

• If X were a purchaser of the shares, but X knew that they were held in trust for B (i.e. X has notice of the trust), X can also be forced by B to transfer the shares back into the trust.

• In personam: o Bona fide purchaser rule: If on the other hand X purchases the shares from T and has no idea that T was holding them in

trust for B, there B’s rights end - B cannot get those shares back from X o NB: If the transfer was in breach of Trust X may have a personal right against T.

Raffael Maestri! (1) The History & Nature of Equity! 10(III) THE MAXIMS OF EQUITY

(2) The Conscience of Equity(I) FIDUCIARY OBLIGATIONS

Trusts & Fiduciary RelationshipsTrusts Relationship• A trust is a relationship between two parties in respect of an item of property• Trusts have terms: The trustee has certain acts they can perform that are within the terms of trust and acts that are without the

terms of the trust.o E.g.The trustee can as a matter of capacity can invest in X despite the terms of the trust prohibiting investment in X,

although the trustee would be in breach of trust if it did so.o Difference between something being in breach of trust, and something being invalid (i.e. beyond the capacity of the

trustee).• Trustees can do anything with the property that any other legal owner can do with the trust property.Fiduciary Relationship• A fiduciary relationship is a relationship between two people (not necessarily in respect of an item of property) that historically the

equity courts have recognised as deserving of special protection - i.e. equity will prevent a party to that relationship making an unauthorised profit or acting in a conflicted position.

o The only thing that you can do is give historical examples - cannot get an overarching definition that is satisfactory for all purposes of when a fiduciary duty arises - can describe when it arises, but cannot have a one of definition that you can ‘plug in’ and see what the outcome is.

Raffael Maestri! (2) The Conscience of Equity! 11(I) FIDUCIARY OBLIGATIONS

Problem(Ques,on• The$conceptual$approach…

(a) Is$ there$ a$ rela3onship$ which$ which$ would$ reasonably$en3tle$ one$ to$ expect$ that$ fiduciary$obliga3ons$

would$be$owed?

(b) What$is$the$scope$of$the$fiduciary$rela3onship?

(c) Has$the$fiduciary$breached$any$duty$to$which$he$is$subject?

๏ No$unauthorised$profit

๏ No$unauthorised$conflict

(d) Does$the$fiduciary$have$any$defence$to$an$allega3on$that$he$breached$his$duty?

(e) What$are$the$remedies$that$are$available$to$the$principal?

(a) Does a fiduciary relationship exist?• Is there a relationship in which one could reasonably entitle one to expect that fiduciary obligations

would be owed?(i) Status-Based (presumed) Fiduciaries• The fiduciary obligations which arise by virtue of status and function…

๏ Trustee/beneficiary (Youyang v Minter Ellison Morris Feltcher)๏ Director/Company๏ Legal practitioner/Client (Maguire v Makaronis)๏ Agent/Principal (Lister v Stubbs)๏ Employees/Employer (Warman International v Dwyer)๏ Partner/Partner (UDC v Brian)

o Not an exhaustive list — ‘ the categories of fiduciary relationships are infinitely varied and the duties of the fiduciary vary with the circumstances which generate the relationship’: Hospital Products v United States Surgical Corporation

Trustee/Beneficiary• E.g. A trust the terms of which permit an investment in X. In making a perfectly valid disbursement within the terms of the trust,

may have acted in a way in which there is a conflict - breach of fiduciary duty but not breach of trust.• Something can be within the terms of the trust and be a breach of fiduciary and something can be a breach of fiduciary duty but

not necessarily a breach of trust.

‣ Youyang Pty Ltd v Minter Ellison Morris Fletchero Monies were paid in breach of trust when the solicitors did not obtain a deposit certificate on the

purchase of the shares.o Other events which contributed to the loss were not relevant if there was a sufficient connection

between the breach and the damages.o [Youang was a discretionary trust. Money was deposited in Minters’ trust account as part of a subscription agreement

for shares - later the investment went bad. It was argued that the breach of trust did not cause any damage.]

Director/Company• English courts have found that directors must disclose past wrongdoing to their companies, even where

that wrongdoing had no negative effect on the company’s position: Item Software (UK) Ltd v Fassihi [2004] EWCA 1244. This argument was rejected in Australia in P & V Industries v Porto [2006] VSC 131, by Hollingworth J, who found that such a duty was prescriptive and outside fiduciary principles.

• Directors and Shareholderso Directors do not ordinarily owe fiduciary duties to shareholders: Joinery Products Pty Ltd v Imlach

(2008) 67 ACSR 520.o However, if ‘a special factual relationship between the directors and the shareholders’ exists, the

directors may also owe fiduciary duties to shareholders: Peskin v Anderson [2011] 1 BCLC 372, [33]; St George Soccer Football Association Inc v Soccer NSW Ltd [2005] NSWSC 1288.

‣ Mills v Mills (1938) 60 CLR 150o Directors of a company are fiduciary agents, and a power conferred upon them cannot be

exercised in order to obtain some private advantage or for any purpose foreign to the power.

Raffael Maestri! (2) The Conscience of Equity! 12(I) FIDUCIARY OBLIGATIONS: STATUS-BASED FIDUCIARIES

Solicitor/Client• Solicitor might sometimes hold on trust. Even when they are not holding on trust, they are still a fiduciary - a solicitor cannot

make a personal profit or act in conflict.

‣ Boardman v Phipps [1967] 2 AC 46, CB 11.25C o Fiduciary relationship

๏ The source of Boardman’s duty, in the eyes of the majority, lay in his position as a solicitor, even though it was conceded that there was no such position as ‘solicitor to the trust’, and despite the fact that most of Boardman’s activities clearly fell outside the scope of the work normally done by a solicitor for a client.

๏ Fusion fallacy: Boardman employed by trustees, yet sued by beneficiaries — Beneficiaries had no relationship with Boardman. Although Boardman wasn’t an actual trustee, he inter-meddled and took on the role of trustee.

o On the issue of breach (no single ratio as to why Boardman was liable)๏ The appellants obtained knowledge by reason of their fiduciary position and they cannot

escape liability. ... Whether or not the trust or the beneficiaries in their stead could have taken advantage of the information is immaterial...(Lord Hodson).

• The fact that Boardman and Phipps had acted honestly was irrelevant.• Approval by two of the thee trustees was ineffective

๏ Even if the possibility of conflict is present between personal interest and the fiduciary position the rule of equity must be applied — It was a remote possibility that Mr Boardman would never be asked by the trustees to advise on the desirability of an application to the court in order that the trustees might avail themselves of the information obtained.

๏ It was irrelevant that the trustees were in no position to acquire the shares in the company — a breach of fiduciary duty may arise even though the principal would not, or perhaps could not, have sought the benefit which the fiduciary has obtained.

๏ There is no need to show detriment to the plaintiff to establish a breach of the no profit rule. There is strict liability.

o On misuse of trust property — can’t be a question of pure evidence - must be more.๏ Boardman did not mis-use trust money to make personal gain. Whether Boardman mis-

used trust property to make a personal gain depends on whether the information about the trust property was secret/confidential.

• Lord Hodson and Lord Guest expressed the view that the confidential information about L & H acquired by Boardman was property of the trust.

• Viscount Dilhorne, in dissent, agreed that the appellants’ relationship with the trust was fiduciary, but took the view that, because the information they acquired was not property of the trust, as the trust did not contemplate purchasing further shares at any stage, no conflict between duty and interest arose when the appellants acquired shares in their own names:

o ‘There is...no general rule that information learnt by a trustee during the course of his duties is property of the trust and cannot be used by him...unless it is confidential information which is given to him (1) in circumstances which, regarldess of his position as a trustee, would make it a breach of confidence for him to communicate to anyone for it has been given to him expressly or impledly as confidential; or (2) in a fiduciary capacity, and its use would place him in a position where his duty and his interest might possibly conflict.

o Remedy (see below)o [Solicitor acting for trustees…used information to purchase shares in a company and make a profit — Boardman acted as

a solicitor for a trust. He attended the annual general meeting of Lester & Harris, a company in which the trust had a substantial shareholding. Boardman and Tom Phipps, one of the beneficiaries under the trust, were unhappy with the state of the company. Together they planned to acquire shares to take over the company. Boardman was able to assess the viability of the takeover because of information about the company he gained whilst acting as solicitor for the trust. Boardman advised the beneficiaries of the trust of these plans and no objection was made by any of them. He also had the consent of two of the three trustees, the third, being senile, was not advised of these plans (i.e. problematic - where there are two or more trustees to act they must act unanimously - no informed consent). The takeover was successful and resulted in profits to the trust in relation to its shareholding in the company as well as for Boardman and Tom Phipps in relation to the shares they had personally acquired. John Phipps, one of the beneficiaries under the trust, sought an account of the profits made by Boardman and Tom Phipps on the grounds of breach of fiduciary duties.]

o [NB: Decision seems harsh — Boardman acted honestly and (arguably) did not mis-use trust property. Cf Chan v Zacharria defence.]


‣ Nocton v Lord Ashburton o The intent to defraud is irrelevant… equitable fraud has a broad meaning. No actual intention to

cheat need be proven. It was sufficient if a person misconceived the extent of an obligation imposed by equity, the fault being that the person violated, however innocently,an obligation which he or she must be taken by the court to have known.

o [Solicitor defrauded his client over a mortgage.]

‣ Canson Enterprises v Boughton [1991] 3 SCR 534o SC of Canada did not award recovery in respect of the later consequential losses.

๏ Four judges: The losses were too remote — the contractors negligence was an intervening cause and cannot be said to have been in the reasonable contemplation of the solicitor (applied common law claims for equitable compensation).

๏ McLaughlin J (affirmed in by HC in Youyang): Based the result in equity — ‘When the plaintiff, after due notice and opportunity, fails to take the most obvious steps to alleviate his or her losses, then we may rightly say that the plaintiff has been ‘the author of his own misfortune’. At this point the plaintiff's failure to mitigate may become so egregious that it is no longer sensible to say that the losses which followed were caused by the fiduciary’s breach [i.e. the solicitor only ever promised to look after the client’s interests at the purchasing stage].. But until that point, mitigation will not be required.

o [A solicitor breached his duty to a client by failing to disclose that land his client’s were buying was being flipped (a secret intermediate deal which inflates the purchase price i.e. where the vendor sells to an intermediate purchaser who inflates the price who sells it on to the real buyer). Agreed facts: solicitor failed in his duty of disclosure to his client. The purchaser bought the land at a higher value than it was actually worth. After buying the land, the purchaser redeveloped it as a shopping centre, and the purchaser suffered losses because the contractors engaged for redevelopment were negligent. The purchaser sued for breach of fiduciary duty resulting in consequential loss (redevelopment, delays and costs not recouped from contractors]

Agent/Principal‣ Lister v Stubbs (1890)

o An agent owes fiduciary obligations to his principal.o [Agent taking secret commission, without the knowledge or consent of the principal, was found to owe a debt to his

principal.]Employees/Employer‣ Warman International v Dwyer (1995) 182 CLR 544

o Employee had breached his fiduciary duty as he had used his knowledge and position in Warman to advance his own commercial interests.

o Remedy — Account of Profits๏ Where the fiduciary has abused his position to make a profit, he will be ordered to

account for those profits as an equitable debtor. However, the court will make allowances for the effort and skill expended by the fiduciary.

o [Employee used information to establish a rival business — Bonfiglioli made gear boxes in Italy and used Warman as its agent to sell them in Australia. Warman was asked to enter into a joint venture to make the gearboxes in Australia but declined. Dwyer was a manager at Warman which ran the agency side of the business.Dwyer was thinking of leaving and Warman offered to sell him the agency. Dwyer declined. Before leaving Dwyer undermined Warman’s relationship with Bonfiglioli, set up a new business, and took up the joint venture with Bonfiglioli, which then took over the agency business.]

‣ Harris v Digital Pulse (2003) 56 NSWLR 298, CB 1.24Co On the scope of the fiduciary relationship

๏ The obligations owed will be defined by the scope of the undertaking and terms of any contract will be relevant in determining this — [‘The fiduciary duties in the present case are derived from the existence of the contract of employment. The ‘undertaking or agreement’ of the employees to act in the interests of the employer, and the employer’s ‘entitlement to expect’ that that will occur - imputed to the relationship by equity - is much closer to a contractual relationship than it is to circumstances creating obligations in tort....where...the essential basis of the fiduciary duties is a contractual relationship this Court should not develop for the first time a remedy (i.e. exemplary damages) which is not available in the law of contract.’]


o [An employee, in defiance of an express term in his employment contract, secretly worked for the benefit of his own business and competed with his employer during the course of his employment. The employee was fired and the employer sought exemplary damages from him for breach of fiduciary duty.]

Partner/Partner‣ Chan v Zacharia (1984) 154 CLR 178, CB 11.3C

o Fiduciary relationship๏ Partners owe a fiduciary relationship towards each other in respect of the conduct of the

business and the assets of the partnership.๏ The trustee cannot renew a lease for his own benefit… this creates a conflict between his

duty to do his best to obtain a renewal and his own interest.o [Partnership…trustee executed a lease in his own favour — The parties had conducted a medical practice in partnership

at premises of which they held a lease for a three-year term with an option of renewal for a further two years by notice given to the lessor not later than three months before the end of the term. During the third year of the term the partnership was determined and a receiver was appointed by the SCSA to wind up the partnership. The parties could not agree to the joint exercise of the option of renewal. The appellant, Dr Chan, within the option period, sought a renewal for himself and later the lessor granted a lease to him for two years, on payment of a premium. Held: The appellant was bound to account in the winding up of the partnership as a constructive trustee for any benefit he received from the new lease.]


(ii) Fact-Based FiduciariesSome fiduciary formulations• The$fiduciary$rela3onship…is$a$rela3onship$of$trust$and$confidence…or$confiden3al$rela3ons.

‣ Breen%v%Williams%(1996)%186%CLR%71o The$ law$has$ not$ formulated$ ‘any$precise$or$ comprehensive$defini3on$ of$ the$ circumstances$ in$ which$ a$

person$is$cons3tuted$a$fiduciary$in$his$or$her$rela3ons$with$another’$(Dawson$&$Toohey$JJ)

‣ Bristol%&%West%BS%v%Mothewo The$dis3nguishing$obliga3on$of$a$fiduciary$is$the$obliga3on$of$loyalty...

๏ A$fiduciary$must$act$in$good$faith;$he$must$not$make$a$profit$out$of$his$posi3on...

๏ He$must$not$place$himself$in$a$posi3on$where$his$duty$and$his$interest$may$conflict...

๏ He$ may$ not$ act$ for$ his$ own$ benefit$ or$ the$ benefit$ of$ a$ third$ person$ without$ the$ informed$

consent$of$his$principal.

‣ Hospital%Products%Ltd%v%United%States%Surgical%CorporaFon%(1984)%156%CLR%41o On%fiduciary%relaFonships

๏ The$cri3cal$feature$of$these$rela3onships…$is$that...

• the$fiduciary$undertakes$to$act$on$behalf$of$another$person…• in$ the$ exercise$ of$ a$power% or% discreFon$ which$ will$ affect$ the$ interests$ of$ that$ other$

person…$in$a$legal$or$prac3cal$sense.

• ...rela3onship$ between$ the$ par3es$ is...one$ which$ gives$ the$ fiduciary$ a$ special$

opportunity$to$exercise$the$power$or$discre3on$to$the$detriment$of$that$other$person…$

who$is$accordingly$vulnerable$to$abuse.‣ CNShirt%Pty%Ltd%v%BarneO

o ...‘vulnerability’,$though$it$may$be$a$characteris3c$of$some$of$those$to$whom$fiduciary$du3es$are$owed, $is$

[not]$the$touchstone$of$fiduciary$obliga3on:$the%fundamental%quesFon%is% for% what% purpose,%and% for% the%promoFon%of%whose%interests,%are%powers%held.

• Finn:

o What% must% be% shown...is% that% the% actual% circumstances% of% a% relaFonship% are% such% that% one% party% is%enFtled%to%expect%that%the%other%will%act%in%his%interests%in%and%for%the%purposes%of%the%relaFonship.

๏ I.e.$The$kind$of$rela3onship$where$you$would$expect$a$arty$not$to$make$a$profit$or$act$in$conflict

o Ascendancy,$influence,$vulnerability, $trust,$confidence$or$dependence$doubtless$will$be$of$importance$in$

making$ this$ out,$ but$ they$ will$ be$ important$ only $ to$ the$ extent$ that$ they$ evidence$ a$ rela3onship$

sugges3ng$that$en3tlement.

o The%criFcal%maOer% in%the%end% is%the%role%that%the%alleged%fiduciary%has,%or%should%be%taken%to%have,%in%the%relaFonship.%% It%must%so% implicate%that%party% in% the%other’s%affairs%or%so%align%him%with%the%protecFon%or%advancement%of%that%other’s%interests%that%foundaFon%exists%for%the%‘fiduciary%expectaFon’.

‣ Grimaldi%v%Chameleon%Mining%NL%(No%2)%[2012]%FCAFC%6o A$person$will$be$in$a$fiduciary$rela3onship$with$another$when$and$insofar$as$that$person$has$undertaken$

to$ perform$such$a$func3on$ for,$or$ has$assumed$such$ a$responsibility$to, $the$other$as%would%reasonably%enFtle% the%other% to% expect$ he$will$ act$ in$ that$ other's$interest$ to$ the$exclusion$ of$his$or$ a$third$ party's$interest.

Civil servant/Crown‣ A-G for Hong Kong v Reid (NZ)

o A senior crown servant is a fiduciary of the crowno [The deputy public prosecutor in Hong Kong was a New Zealander called Reid. Reid took bribes from the Hong Kong

mafia to impede prosecutions so that they would not get prosecuted. Reid took the bribe money from the Hong Kong mafia and used it to buy property in NZ. A body put a caveat on the farms in NZ and proclaimed an interest over the farms because they were purchased with bribe money. One way of getting the money back was to say that Reid was a fiduciary and that he had made an unauthorised profit from his position.]

Raffael Maestri! (2) The Conscience of Equity! 16(I) FIDUCIARY OBLIGATIONS: FACT-BASED FIDUCIARIES

Commercial Relationships‣ Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41, CB 11.5C

o Two companies looking out for their own interests - no fiduciary relationship.๏ There were no fiduciary obligations…the relationship between the parties was

commercial in nature…entered into by equal parties at arm’s length…with the intention that both parties would gain a profit.

o [Distributor established a business to compete with the supplier — Blackman had an exclusive distributorship arrangement for products manufactured by United States Surgical Corporation (USSC). Blackman’s Company, Hospital Products Ltd (HPL), was soon after substituted as the distributor for USSC in Australia. Soon after, HPL terminated the distributorship agreement. HPL, using USSC products as models, began to manufacture products that were essentially identical to those manufactured by USSC. HPL went into competition with USSC. Issue: Was HPL a fiduciary? Held: No, USSC’s right to relief rested in a claim for damages for breach of contract]

Joint Ventures‣ United Dominions Corporation v Brian (1985) 157 CLR 1, CB 11.13C

o The fiduciary relationship will arise during negotiations for a partnership or joint venture if the parties have acted upon the proposed arrangement… notwithstanding that a formal agreement has not been concluded.

o The HC equated the joint venture arrangement between the parties with the dealings of incipient partners, an established category of fiduciary relationship. It was held that the test of fiduciary status for any partnership or joint venture is whether a high degree of mutual trust and confidence exists between the parties.

o [Joint-venture partnership…one partner was not aware of a mortgage — Brian, UDC and a third company, SPL, had joint ventures in a land development project, mostly financed by borrowings from UDC. The project realised a substantial profit but UDC claimed to retain all profits. It relied on a ‘collateralisation clause’ in a mortgage given to it by SPL before the execution of the joint venture agreement. The collateralisation clause, then unknown to Brian, charged the joint venture with moneys advanced by UDC to SPL on a any account. The HC held that UDC could not rely on the clause when the share of Brian in the profits of the project were computed.]

Doctor/Patient‣ Breen v Williams (1996) 186 CLR 71

o The doctor-patient relationship is not to be considered as a status-based fiduciary.๏ However, there is an exception… for example, if the doctor prescribes drugs from which

he will obtain a secret profit.o The fiduciary relationship does not impose positive legal duties…it is a proscriptive obligation

(i.e. Fiduciary obligations in Australia are not framed positively, they are framed as ‘you must not do X‘ — proscriptive not prescriptive).

๏ NB: It is still possible for fiduciaries to owe positive duties, not pursuant to their fiduciary obligations, but under principles that include breaches of contractual or tortious obligations.]

o Breen did not have a fiduciary duty to act in the patients best interests (i.e it is not a breach of fiduciary duty to fail to act in the client’s best interest).

๏ The so-called ‘duty’ to disclose was not within the scope of the duty to advise, and for this reason was not fiduciary. This meant that failure to disclose was not in breach.

o [Patient sought to obtain her medical records—Breen wanted to join a class action but needed to get medical reports from her doctor. She claimed she was in a fiduciary relationship with her doctor which bound him to hand them over.]

Parent/Child‣ M(K) v M(H) (1992) 96 DLR (4th) 289

o The SC held that the relationship of parent and child was fiduciary, giving rise to a fiduciary duty to protect the child’s well-being and health; and that incest was a breach of that duty.

o Historically, fiduciary duties are about economic interestso [Incest by father]


Financial adviser/Client‣ Pilmer v Duke Group Ltd (2001) 207 CLR 165, note also CB 11.37

o On fiduciary relationship๏ An accountant does not enter into a fiduciary relationship with his client. There was no prior

or concurrent engagement or undertaking by any member of the accounting firm which presented an actual conflict or a real or substantial possibility of conflict in the acceptance and performance of the retainer by the provision of the report.

๏ Equity does not require the fiduciaries to act positively in the interests of their beneficiaries. Such positive duties are better regulated by contract, tort or other equitable doctrines.

o On Breach of Fiduciary Duty๏ There must be both a real and sensible possibility for conflict of interest before there can

be breach of fiduciary duty. If this level of conflict does not exist, and there is noo Contributory Negligence

๏ There is no principal basis whereby damages relating to breach of fiduciary obligations should be adjusted by reference to contributory negligence.

o [The appellants completed work for the respondents as financial and corporate advisors — Kia Ora Gold Corp was taking over Western United Ltd. Many Kia Ora directors had an interest in Western United. A report by ‘independent qualified persons’ for the information of shareholders whose approval was ultimately required at a general meeting was issued. The firm of chartered accountants (Nelson Wheeler) engaged by Kia Ora to prepare the report had, in fact, a long history of dealing with both Kia Ora and Western United. The report asserted that the price to be paid for the shares in Western United was fair and reasonable. This was not the case, with Kia Ora paying out around $26m for $6m worth of shareholdings and thus enabling huge personal profits to be made by the Kia Ora directors who held shares in Western United. Kia Ora subsequently brought an action against the partners of the accountancy firm to recover for its loss.]

‣ Daly v Sydney Stock Exchange (1986) 160 CLR 371o Whenever a stockbroker or other person who holds himself out as having expertise in advising

on investments is approached for advice on investments and undertakes to give it, in giving that advice the adviser stands in a fiduciary relationship to the person whom he advises. The adviser cannot assume a position where his self-interest might conflict with the honest and impartial giving of advice...His duty is to...

๏ furnish the client with all the relevant knowledge which the adviser possesses, concealing nothing that might reasonably be regarded as relevant to the making of the investment decision including the identity of the buyer or seller of the investment when that identity is relevant...

๏ give the best advice which the adviser could give if he did not have but a third party did have a financial interest in the investment to be offered,

๏ reveal fully the adviser’s financial interest, and to obtain for the client the best terms which the client would obtain from a third party if the adviser were to exercise due diligence on behalf of his client in such a transaction.

Bailee/bailor‣ Re Hallett’s estate (Eng)

o A bailment is a fiduciary relationship (Nb not definitive - treat with care).Crown/indigenous people‣ Guerin v R (1984) 13 DLR (4th) 321 [cf Australian position]

o The conclusion that the Crown is a fiduciary depends upon the further proposition that the Indian interst in the land is inalienable except upon surrender to the Crown. An Indian band is prohibited from directly transferring its interest to a third party.

o Any sale or lease of land can only be carried out after a surrender has taken place, with the Crown acting on behalf of the band’s behalf...The surrender requirement, and the responsibility it entails, are the source of a distinct fiduciary obligation owed by the Crown to the Indians.

‣ Mabo v Queensland (No 2) (1992)o [I]f the Crown in right of Queensland has the power to alienate land the subject of the Meriam people's traditional rights

and interests and the result of that alienation is the loss of traditional title, and if the Meriam people's power to deal with their title is restricted in so far as it is inalienable, except to the Crown, then this power and corresponding vulnerability give rise to a fiduciary obligation on the part of the Crown. The power to destroy or impair a people's interests in this way is extraordinary and is sufficient to attract regulation by Equity to ensure that the position is not abused (Toohey J)


‣ Wik Peoples v Queensland (1996):o [I]ndeed, the proposition that the Crown is under a fiduciary duty to the holders of native title to advance, protect or

safeguard their interests while alienating their land is self-contradictory. The sovereign power of alienation was antipathetic to the safeguarding of the holders of native title. In conferring the power of alienation, Parliament imposed no guidelines to be observed in its exercise...The power was not conditioned on the safeguarding or even the considering of the interests of those who would now be recognised as the holders of native title (Brennan CJ)

‣ Bodney v Westralia Airports (2000)o [T]he authorities from other jurisdictions do not provide a firm basis for the assertion of a fiduciary duty of the kind for

which the second applicants contend. The other is that the tendency of authority in the High Court - including, significantly, Breen - is against the existence of such a duty. That, of course, does not mean that circumstances will not arise in which the Crown has fiduciary duties, owed to particular indigenous people, in relation to the alienation of land over which they hold native title. Nor does it mean that where, in particular circumstances, a duty of that kind is breached (or a breach is threatened) a constructive trust might not appropriately be imposed (Lehane J)

(b) What is the scope of the fiduciary relationship• The obligations owed will be defined by the scope of the undertaking and terms of any contract will be

relevant in determining this: Harris v Digital Pulse Pty Ltd‣ ASIC v Citigroup (No 4) [2007] FCA 963 (paras 287-291)

o The subject matter over which any fiduciary obligations will extend must be determined by the character of the venture or undertaking. This is to be ascertained from the terms of the agreement and the course of dealing between the parties.

o The scope of the fiduciary duties will vary and is to be determined according to the nature of the relationship and the facts of the case.

o The distinguishing or over-riding duty of a fiduciary is the obligation of undivided loyalty. o In Australia, the duty of loyalty is proscriptive rather than prescriptive in nature. o This duty embodies "the twin themes" of preventing undisclosed conflict of duty and interest (or

of duty and duty), and of prohibiting misuse of the fiduciary position.(c) Has the fiduciary breached any duty to which he is subject?• The No Unauthorised Conflict Rule

o … a fiduciary must not place himself in a position where his own interest conflicts with that of the person on whose behalf the fiduciary is acting: Chan v Zacharia

• The No Unauthorised Profit Ruleo … a fiduciary must not profit from his position at the expense of his principal: Chan v Zacharia.o There is no need to show detriment to the plaintiff to establish a breach. There is strict liability:

Boardman v Phipps.• The Undivided Loyalty Rule

o … a fiduciary must not place himself in a position where his duty to one principal conflicts with his duty to another principal.

• The Duty of Confidentiality Ruleo … a fiduciary must not use confidential information obtained from his principal for his own

advantage or for the benefit of any other person.‣ Chan v Zacharia (1984) 154 CLR 178, CB 11.3C

o Deane J: A person who is under a fiduciary obligation must account to the person to whom the obligation is owed for any benefit or gain...

(i) which has been obtained or received in circumstances where a conflict or significant possibility of conflict existed between his fiduciary duty and his personal interest in the pursuit or possible receipt of such a benefit or gain [No Conflict Rule]; or

(ii) which was obtained or received by use or by reason of his fiduciary position or of opportunity or knowledge resulting from it [No Profit Rule].

Raffael Maestri! (2) The Conscience of Equity! 19(I) FIDUCIARY OBLIGATIONS: SCOPE & BREACH

(1) Mis-use of principal property: There is no doubt that mis-use of principal property to make a personal gain would amount to a breach of the no-profit rule.

(2) Mis-direction of opportunity: If the fiduciary has diverted an opportunity to himself/herself that would otherwise have gone to the principal, then that also is a breach of the no-profit rule (i.e. diverting property that would otherwise be the principal’s property).

(3) If neither obviously (1) or (2): If there has not been an obvious mis-use of principal property, the question is whether the property is ‘close enough’ so that it can be said to be the principal’s property. E.g., whether information received was principal property - was it confidential?

(d) Does the fiduciary have any defence to an allegation that he breached his duty?(i) The defence of informed consent‣ Maguire v Makaronis

o [A solicitor entered into a transaction with a client]o The fiduciary may not deal with those to whom he owes a duty… except in cases of informed

consent.๏ …the fiduciary cannot induce the decision to grant consent.๏ …the disclosure of all material facts that could affect the decision.๏ …the person must obtain independent skilled advice.

o What is required for a fully informed consent is a question of fact in all the circumstances of each case and there is no precise formula which will determine in all cases if fully informed consent has been given

‣ Chan v Zachariao The liability to account as a constructive trustee will not arise where the person under the fiduciary duty has been duly

authorised, either by the instrument or agreement creating the fiduciary duty or by the circumstances of his appointment or by the informed and effective assent of the person to whom the obligation is owed, to act in the manner in which he has acted.

‣ Kelly v Cooper [cf Stevens v Premium Real Estate]o Implied authorisation - real estate agency

๏ An agent’s fiduciary duty to his or her principal can be readily excluded by implication, particularly where it is common for the agent to have several principals with similar interests.

‣ Stevens v Premium Real Estate Ltd [2009] NZSC 15o A breach of the fiduciary duty of loyalty had been committed by the real estate agent...

(i) by concealing her knowledge that the purchaser was a person who frequently bought residential properties and shortly afterwards resold them at a profit, and

(ii) by actively misleading the vendors by giving the impression that the purchaser wished to buy the house as a private residence rather than for resale.

o An agent who puts himself in a position of having two irreconcilable duties cannot use that fact to exonerate himself from a breach of duty or to take the duty to either principal to be modified.

๏ The agent must have the informed consent of the principal to act with a potential conflict of interest: informed consent being consent given in the knowledge that there is a conflict of interest. Whether disclosure is sufficient depends upon the facts of the case. If the information the agent has about the purchaser is confidential, the agent can seek permission from the purchaser to tell the vendors and, if this is refused, should tell the vendors that the agent has information about the purchaser that the agent cannot reveal. In a case such as this, the mere information that the purchaser is a dealer in residential properties would suffice and is not confidential

o Remedy: Equitable Compensation๏ Premium was ordered to pay damages of $659,813 to the Stevens (the difference in net proceeds of a sale of

$3.25m and a sale at $2.575m). The High Court’s order for repayment of the commission of $67,050 is restored as Premium has not earned it by good faith performance (The dft had not adequately shown that the ptfs would have sold for $2.8m)

o [The Stevens wished to sell their property on the North Shore, which they believed was worth about $3m. They engaged Premium Real Estate Ltd as estate agents and Premium advised (not negligently) that the property worth $2.7m. Eventually, after there had been no offers, the Stevens agreed to it being advertised for ''offers over $2.7 million''. They received one offer of $2.2m and counter-offered $2.8m, but that was not accepted by the potential purchaser. A Mr Larsen then made an offer of $2.525m. Mr Larsen was known to Premium as someone who bought homes for resale at a profit after doing some work and investing more in marketing. The Stevens asked Premium about Mr Larsen and a Ms Riley told them that he could afford the money and gave the impression that Mr Larsen wanted to buy the house as a private residence. Mr Larsen raised the offer to $2.575m, which the Stevens accepted. Mr Larse sold the property five months later, after doing some work and advertising it overseas, for $3.555m. The Stevens claimed that Premium had acted in breach of fiduciary. The HC valued the house at $3.25m.]

Raffael Maestri! (2) The Conscience of Equity! 20(I) FIDUCIARY OBLIGATIONS: DEFENCE

‘Informed consent’ issues• Knowledge—What the deal is, and what the expected outcome is: Re Pauling (1962), CBA v Smith (1993),

Farah Constructions v Say-Dee (2007)• Benefit—Doesn’t have to be a benefit• Freedom of choice — Beneficiary has to have a freedom of choice.• Consent ex post facto— Can consent after the fact.

‣ Egg v Devey (1847)๏ By accepting the money from his mother subject to the condition condition, he had

given consent ex post facto to any breach the executors of his father may have made (he released the executors of his father’s will from any liability).

๏ [Somebody was left money by his mother on condition that he did not sue the executors of his father’s will. He accepted the money, and then tried to sue the executors of his father’s will.

(ii) Chan v Zacharia defence‣ Chan v Zacharia

o Judicial misgiving with Boardman v Phipps:๏ It may still be arguable in this Court that, notwithstanding general statements and

perhaps even decisions to the contrary in cases such as [Boardman v Phipps], the liability to account for a personal benefit or gain obtained or received by use or by reason of fiduciary position, opportunity or knowledge will not arise in circumstances where it would be unconscientious to assert it or in which, for example, there is no possible conflict between personal interest and fiduciary duty and it is plainly in the interests of the person to whom the fiduciary duty is owed that the fiduciary obtain for himself rights or benefits which he is absolutely precluded from seeking or obtaining for the person to whom the fiduciary duty is owed (Deane J).

Raffael Maestri! (2) The Conscience of Equity! 21(I) FIDUCIARY OBLIGATIONS: DEFENCE

(e) What are the remedies that are available to the principal?• The presence of a property link will invariably determine the remedy to be granted (i.e. if property link - constructive trust).• NB: It may be easier to rely on tort/contract claim and rely on damages rather than seek equitable compensation.Rescission of a Contract‣ Maguire v Makaronis

o The transaction was rescinded๏ The court held that there was a technical breach of the fiduciary duty, and the solicitor

hadn’t overly made a profit (fees for services only), so only ordered rescission of the contract.

o [Solicitor entered into a transaction with a client — A husband and wife executed a mortgage in favour of their solicitors to secure bridging finance for the purchase of a poultry farm. The trial judge found that the solicitors did not draw the clients’ attention to the fact that the solicitors were to be the mortgagees or tell them that they should obtain independent legal advice. The clients defaulted on the loan secured by the mortgage and the solicitors claimed possession of the mortgaged property. The clients sought by counter-claim a declaration that the mortgage was void. Held: Breach of fiduciary duty.]

Constructive trust (gain based remedy): Proprietary Claim• The law in Australia after the cases of Grimaldi and Chan v Zacharia suggests that a proprietary

constructive trust will very often be the appropriate remedy for a gain made in breach of the no profit and no conflict rules.

o Because the claimant/beneficiary acquires a proprietary right over the profits/gains, that claimant/beneficiary has a proprietary right over any property that is acquired with those profits.

o The constructive trust right also means that even if those profits are mixed with other money, then the beneficiary acquires a right to trace into that mixture or into any substitute property and to impose a proprietary right over it.

• Proprietary claim: Claim is ‘that money is mine’, or the proceeds of that money are mine. The court is recognising that you always had a constructive trust over the property (i.e. the constructive trust does not arise at the date of judgment - it is an after the fact recognition that it has existed since the start).

• Advantages: (1) Enforceable against third parties; (2) If you are suing someone who is impecunious (i.e. bankrupt), it can be advantageous to make a property claim.

‣ Keech v Sandford (1726)o A trustee of a tenancy who obtains a renewal of a lease for itself must hold that lease as part of

the trust estate.o [Trustee/beneficiary relationship. A trustee held a lease of land on trust for an infant beneficiary. The lease was running

out. The trustee spoke to the landlord and tried to renew it on the same terms on trust for the beneficiary. The landlord refused. The landlord did not want to renew the lease to a trustee on trust for an infant beneficiary because the landlord thought that if he didn’t get paid rent, he wouldn’t be able to sue the infant (nb. the fact that the tenant is a trustee is irrelevant - a fusion fallacy). Trustee took the lease on his own account. Sometime later, the infant beneficiary’s tutor sued the trustee on the basis that the trustee had only acquired the lease by reason of his position as trustee. Issue: did the trustee make a profit by virtue of his fiduciary relationship. Held: Yes. Remedy - the trustee held the lease on constructive trust for infant beneficiary.]

‣ Boardman v Phipps [1967] 2 AC 46, CB 11.25C o [Solicitor acting for trustees…used information to purchase shares in a company and make a profit.]o The fiduciary held the shares (and dividends) on constructive trust for the trustees.

๏ The respondent (John Phipps) obtained a declaration that(1) The appellants held a proportion of certain shares in Lester & Harris Ltd as

constructive trustees for the respondent (proprietary remedy);(2) An account should be taken of the profits made by the appellants from these

shares (personal remedy)... but with an allowance for the ‘work and skill’ of the appellants in obtaining the said shares.

๏ The remedy was a constructive trust — indicates that what Boardman had done is misused trust property - not easy to see a property link between the information that he obtained and his later share holding. Unless the information counted as property for the purposes of trust constructive trust remedy, it is not easy to find a property link...the information obtained by Boardman about investing in the company seems to have been sufficiently proprietary to warrant a property link to the shares.

Raffael Maestri! (2) The Conscience of Equity! 22(I) FIDUCIARY OBLIGATIONS: REMEDIES

๏ [CRITICAL COMMENT: ‘The ideal situation for the trustee would be a declaration of constructive trust. This would have advantages in the event that X went bankrupt. It may seem intellectually a little odd to award a constructive trust when there is not actually a mis-use of Principal property or a mid-direction of Principal opportunity. At most, X has come across the information with X’s fiduciary hat on. It is one thing to say that that still amounts to a breach of fiduciary duty, but it shouldn’t automatically mean that that basis of liability also provides a property link that would ground a constructive trust rather than a personal account of profits.]

๏ [CRITICAL COMMENT:Boardman’s case can be said to have been a hard case as regards the fiduciaries, whose integrity and honesty was not in doubt; and it well illustrates the rigours of the applicable equitable principle. The recovery by the trust of the shares was obviously a valuable benefit to it; and equity’s softer side was reflected in the making of an allowance to the fiduciaries for their work and skill in obtaining the shares and profits.

‣ Chan v Zachariao [partnership… trustee executed a lease in his own favour....Zacharia (presumably) lost the opportunity to bargain for

renewal in the dissolution of the partnership.]o The trustee held the renewed lease on constructive trust for the partnership.

๏ The principle governing the liability to account for a benefit or gain as a constructive trustee is applicable to fiduciaries generally...

Notwithstanding absence of property link...‣ A-G for Hong Kong v Reid (NZ)

o When a bribe is accepted by a fiduciary in breach of his duty then he holds that bribe in trust for the person to whom the duty was owed. If the property representing the bribe decreases in value the fiduciary must pay the difference between that value and the initial amount of the bribe because he should not have accepted the bribe or incurred the risk of loss. If the property increases in value, the fiduciary is not entitled to any surplus in excess of the initial value of the bribe because he is not allowed by any means to make a profit out of breach of duty.

‣ Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6o As a discretionary remedy, a money bribe received by a fiduciary in breach of his fiduciary duty

may be made subject of a constructive trust.Account of Profits (gain based remedy): Personal Remedy• ...There will in practice often be no identifiable property which can be declared by the court to be held upon such a constructive

trust, in which case no declaration will be made and the principal may at most be entitled to a personal remedy in the nature of an account of profits.

• A personal claim - the remedy is an order to pay an amount of money. Where that money comes from does not matter (an order to pay an amount of money). That amount will be calculated by how big the gain was.

Problems associated with the imposition of a constructive trust on a business carried on in breach of fiduciary duty‣ Hospital Products v USSC

o Problems associated with imposition of a constructive trust on a business carried on in breach of fiduciary duty...

๏ Mason J: [10] I should mention that a particular problem has arisen with respect to the declaration of a constructive trust of a competing business established and carried out by a fiduciary in breach of his duty...

o One approach, more favourable to the fiduciary, is that he should be held liable to account as constructive trustee not of the entire business but of the particular benefits which flowed to him in breach of his duty.

o Another approach, less favourable to the fiduciary, is that he should be held accountable for the entire business and its profits, due allowance being made for the time, energy, skill and financial contribution that he has expended or made…

• it is not possible to say that one approach is universally to be preferred over the other, for each case depends on its own facts and the form of inquiry which ought to be directed must vary according to the circumstances. In each case the form of inquiry to be directed is that which will reflect as accurately as possible the true measure of the profit or benefit obtained by the fiduciary in breach of his duty.

Raffael Maestri! (2) The Conscience of Equity! 23(I) FIDUCIARY OBLIGATIONS: REMEDIES

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