The latest on fiduciary relationships

In the Citigroup Case referred to in the next post, Justice Jacobsen summarised the law relating to fiduciary duties. I have reproduced the whole of the relevant passage, which includes a restatement of the law (at [297]ff) relating to solicitors’ fiduciary duties to give prospective clients full disclosure about the disadvantages of time costing if such a course is proposed.  In my experience, those principles lie gathering dust in real life, and it is a harsh decision maker who trots them out to shaft some poor solicitor who really gets up his nose.  In summary, the principle is:

‘298 A solicitor who wishes to enter into a time charging costs agreement with the client must make full disclosure to the client of all the implications of such an agreement: see Foreman at435-437 per Mahoney JA; Re Morris Fletcher v Cross’ Bill of Costs [1997] 2 Qd R 228 at 243 per Fryberg J; McNamara Business & Property Law v Kasmeridis [2007] SASC 90 at [28] – [31] per Doyle CJ.

299 This principle applies whether or not the costs agreement is made before the solicitor is instructed: see Symonds v Raphael (1998) 148 FLR 171 at 186-187 per Baker and Burton JJ; see also McNamara at [38] per Doyle CJ.’

But here’s the entire exegisis of the law of fiduciary relationships, as applied specifically, to the general case of adviser and client:

The Identification of a Fiduciary Relationship

270 As Gaudron and McHugh JJ observed in Breen v Williams (1996) 186 CLR 71 at 106, “Australian courts have consciously refrained from attempting to provide a general test for determining when persons […] stand in a fiduciary relationship”. It may be, as their Honours said, that the term “fiduciary relationship” defies definition. This is because of the difficulty of stating a comprehensive principle suitable for application to different types of relationships that carry different obligations: see Hospital Products at 69 per Gibbs CJ; News Limited v Australian Rugby Football League Limited (1996) 64 FCR 410 at 538 per Lockhart, von Doussa and Sackville JJ.

271 The courts have recognised certain classes of persons as falling within established categories of fiduciary relationships. Examples of these include trustee and beneficiary, agent and principal, solicitor and client, director and company, employee and employer, and partners: see Hospital Products at 68 per Gibbs CJ, at 96 per Mason J.

272 Apart from the established categories, perhaps the most than can be said is that a fiduciary relationship exists where a person has undertaken to act in the interests of another and not in his or her own interests but all of the facts and circumstances must be carefully examined to see whether the relationship is, in substance, fiduciary: see Hospital Products at 71-72 per Gibbs CJ; News Limited at 541 per Lockhart, von Doussa and Sackville JJ.

273 Other factors that have been referred to in the authorities as pointing to the existence of a fiduciary relationship will also be important. But they will be so only to the extent that they disclose an expectation in one party that the other will act in his or her interests.

274 This is encapsulated in the following remarks of Professor Finn (as his Honour then was) in “The Fiduciary Principle”: see Youdan TG (ed), Equity Fiduciaries and Trusts (Law Book Co, 1989) at p 46-47:

“What must be shown, in the writer’s view, is that the actual circumstances of a relationship are such that one party is entitled to expect that the other will act in his interests in and for the purposes of the relationship. 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 relationship suggesting that entitlement. The critical matter in the end is the role that the alleged fiduciary has, or should be taken to have, in the relationship. It must so implicate that party in the other’s affairs or so align him with the protection or advancement of that other’s interests that foundation exists for the ‘fiduciary expectation.”

275 Lockhart, von Doussa and Sackville JJ considered that these remarks contain an important question “if not the question”: see News Limited at 541. La Forest J also agreed with Professor Finn’s remarks in Lac Minerals Limited v International Corona Resources Limited (1989) 61 DLR (4th) 14 at 26.

The Co-existence of Contractual and Fiduciary Relationships and the Effect of Exclusion Clauses

276 In Hospital Products, Mason J observed at 97 that “contractual and fiduciary relationships may co-exist”. His Honour said that if a fiduciary relationship is to exist between parties to a contract, the fiduciary relationship must conform to the terms of the contract. He went on to say that:

“The fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according to its true construction.”

277 The observations of Gummow J in Breen v Williams at 132-133 are to the same effect. But his Honour also pointed out that a contractual term may be so precise in its regulation of what a party may do that there is no scope for the creation of a fiduciary duty.

278 It follows from these statements of principle that it is open to the parties to a contract to exclude or modify the operation of fiduciary duties. This was the view of the Law Commission Consultation Paper which was reached after a careful examination of the authorities: see at [3.3.12].

279 That view is supported by both Australian and English authority: see Chan v Zacharia (1984) 154 CLR 178 at 196 per Deane J; News Limited at 539 per Lockhart, von Doussa and Sackville JJ; Noranda Australia Limited v Lachlan Resources NL (1988) 14 NSWLR 1 at 17 per Bryson J; Woolworths Limited v Kelly (1991) 22 NSWLR 189 at 225 per Mahoney JA; Kelly v Cooper [1993] AC 205 at 213-214 per Lord Browne-Wilkinson. See also Henderson v Merrett Syndicates Limited [1995] 2 AC 145 at 206 per Lord Browne-Wilkinson.

280 It may well be that a fiduciary cannot exclude liability for fraud or deliberate dereliction of duty but beyond that there appears to be no restriction in the law to prevent a fiduciary from contracting out of, or modifying, his or her fiduciary duties, particularly where no prior fiduciary relationship existed and the contract defines the rights and duties of the parties: see Law Commission Consultation Paper at [3.3.13]; see also Law Commission, United Kingdom, Fiduciary Duties and Regulatory Rules, Report No 236 (1995) at [2.11], [7.3].

281 The effect of the Australian and English authorities referred to above is that where a fiduciary relationship is said to be founded upon a contract, the ordinary rules of construction of contracts apply. Thus, whether a party is subject to fiduciary obligations, and the scope of any fiduciary duties, is to be determined by construing the contract as a whole in the light of the surrounding circumstances known to the parties and the purpose and object of the transaction: see Pacific Carriers Limited v BNP Paribas (2004) 218 CLR 451 at [22] per Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ; Toll (FGCT) Pty Limited v Alphapharm Pty Limited (2004) 219 CLR 165 at [40] per Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ; Lion Nathan Australia Pty Limited v Coopers Brewery Limited (2006) 156 FCR 1 at [46] per Weinberg J. The same approach applies to exclusion clauses: see Darlington Futures Limited v Delco Australia Pty Limited (1986) 161 CLR 500 at 510 per Mason, Wilson, Brennan, Deane and Dawson JJ; Andar Transport Pty Limited v Brambles Limited (2004) 217 CLR 424 at [122] per Callinan J.

An Adviser May Have Fiduciary Obligations

282 In Hadid v Lenfest Communications Inc [1999] FCA 1798 at [817], Lehane J observed that advisers may, and often do, have fiduciary obligations.

283 A fiduciary relationship arises between a financial adviser and its client where the adviser holds itself out as an expert on financial matters and undertakes to perform a financial advisory role for the client: see Daly v The Sydney Stock Exchange Limited (1986) 160 CLR 371 at 377 per Gibbs CJ, 385 per Brennan J; Aequitas v Sparad No 100 Limited (formerly Australian European Finance Corporation Limited) (2001) 19 ACLC 1006 at [307] per Austin J.

284 The same principle will usually apply to financial advisers and corporate advisers. Each will owe fiduciary obligations to the client because each undertakes to act in the client’s interests and not solely in its own interests: see Aequitas at [310] per Austin J. This is consistent with the principle stated by Mason J in Hospital Products at 96-97.

285 A person may be in a fiduciary relationship as to some aspects of the relationship but not others: see New Zealand Netherlands Society ‘Oranje’ Incorporated v Kuys [1973] 2 All ER 1222 at 1225-6 per Lord Wilberforce; see also Noranda Australia v Lachlan Resources at 15-17 per Bryson J. Thus, a bank which gives its customers financial advice in the course of a transaction that includes an advance of money to the client may be in a fiduciary relationship with the client in its role as adviser. The bank may be expected to act in its own interests in ensuring the security for the loan but it will undertake fiduciary obligations to the client if it creates an expectation that it will advise in the customer’s interests on the wisdom of the investment: see Commonwealth Bank of Australia v Smith (1993) 42 FCR 390 at 391 per Davies, Sheppard and Gummow JJ.

286 Vulnerability of the client is one of the indicia of the fiduciary relationship. But this would appear to flow from the special opportunity of the adviser to abuse the expectation of loyalty: see Breen v Williams at 134 per Gummow J; Aequitas at [313] per Austin J; cf News Limited at 541 per Lockhart, von Doussa and Sackville JJ; Hospital Products at 97 per Mason J.

The Scope of the Fiduciary Obligations

287 The subject matter over which any fiduciary obligations will extend must be determined by the character of the venture or undertaking: see Birtchnell v The Equity Trustees, Executors and Agency Company Limited (1929) 42 CLR 384 at 408 per Dixon J; United Dominions v Brian at 13 per Mason, Brennan and Deane JJ; News Limited at 539 per Lockhart, von Doussa and Sackville JJ. This is to be ascertained from the terms of the agreement and the course of dealing between the parties: see News Limited at 539 per Lockhart, von Doussa and Sackville JJ; Australian Breeders Co-operative Society Limited v Jones (1997) 150 ALR 488 at 514 per Wilcox and Lindgren JJ; Beach Petroleum NL v Kennedy (1999) 48 NSWLR 1 at [194] per Spigelman CJ, Sheller JA and Stein JA.

288 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: see Hospital Products at 69 per Gibbs CJ, 102 per Mason J.

289 The distinguishing or over-riding duty of a fiduciary is the obligation of undivided loyalty: see Gibson Motorsport Merchandise Pty Limited v Forbes (2006) 149 FCR 569 at [11] per Finn J; Beach Petroleum at [201] per Spigelman CJ, Sheller JA and Stein JA; Bristol and West Building Society v Mothew [1998] Ch 1 at 18 per Millett LJ.

290 In Australia, the duty of loyalty is proscriptive rather than prescriptive in nature: see Breen v Williams at 113 per Gaudron and McHugh JJ, 137-138 per Gummow J; Pilmer v Duke Group Limited (In Liq) (2001) 207 CLR 165 at [74] per McHugh, Gummow, Hayne and Callinan JJ.

291 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: see Chan v Zacharia at 198-199 per Deane J; Gibson Motorsport at [12] per Finn J.

292 The nature of the fiduciary obligation is encapsulated in the following remarks of Millett LJ in Bristol and West Building Society v Mothew at 18:

“The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position 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. This is not intended to be an exhaustive list, but it is sufficient to indicate the nature of fiduciary obligations. They are the defining characteristics of the fiduciary. As Dr. Finn pointed out in his classic work Fiduciary Obligations (1977), p. 2, he is not subject to fiduciary obligations because he is a fiduciary; it is because he is subject to them that he is a fiduciary.”

Informed Consent

293 A person occupying a fiduciary position will be absolved from liability for what would otherwise be a breach of duty by obtaining a fully informed consent: see CBA v Smith at 393 per Davies, Sheppard and Gummow JJ.

294 There is no precise formula for determining whether fully informed consent has been given; it will be a question of fact in all the circumstances of each case: see Maguire v Makaronis (1997) 188 CLR 449 at 466 per Brennan CJ, Gaudron, McHugh and Gummow JJ; see also CBA v Smith at 393 per Davies, Sheppard and Gummow JJ.

295 In order to be exonerated, a fiduciary must give full and frank disclosure of all material facts: see Kuys at 1227 per Lord Wilberforce. Consent need not be given expressly; it may be implied in all the circumstances: see Woolworths v Kelly at 212 per Samuels JA, at 234 per Mahoney JA; see also Our Lady’s Mount Pty Limited (as trustee) v Magnificat Meal Movement International Inc (1999) 33 ACSR 163 at [128] per Muir J.
296 The sufficiency of disclosure may depend on the sophistication and intelligence of the person to whom disclosure is required to be made: see Farah Constructions Pty Limited v Say-Dee Pty Limited [2007] HCA 22 at [107] per Gleeson CJ, Gummow, Callinan, Heydon and Crennan JJ.

A Special Instance of Conflict

297 The authorities which deal with time charging by solicitors reveal a special instance where a solicitor has a conflict between his or her own interest in earning fees, and the duty to the client. A central question in these proceedings is whether the principles stated in the authorities on solicitors apply where the alleged fiduciary relationship is not one of the established categories.

298 A solicitor who wishes to enter into a time charging costs agreement with the client must make full disclosure to the client of all the implications of such an agreement: see Foreman at435-437 per Mahoney JA; Re Morris Fletcher v Cross’ Bill of Costs [1997] 2 Qd R 228 at 243 per Fryberg J; McNamara Business & Property Law v Kasmeridis [2007] SASC 90 at [28] – [31] per Doyle CJ.

299 This principle applies whether or not the costs agreement is made before the solicitor is instructed: see Symonds v Raphael (1998) 148 FLR 171 at 186-187 per Baker and Burton JJ; see also McNamara at [38] per Doyle CJ. The reason given in those authorities for the proposition that the solicitor must make full disclosure even before the contract of retainer is that the fiduciary relationship may arise before the solicitor is actually retained: see United Dominions v Brian at 11-12 per Mason, Brennan and Deane JJ.

300 In Foreman, Mahoney JA said at 435 that fiduciary obligations, including full disclosure, exist not only in the carrying out of an agreement already made between a solicitor and client “but also in respect of the making of it.”

301 Mr Walker submitted that this observation by Mahoney JA indicates that the disclosure obligation applies to the making of a contract where a person who would otherwise be in a fiduciary relationship seeks to exclude fiduciary obligations in the terms of the contract.

302 However, I do not consider that this submission provides an answer to the conundrum presented by the apparent exclusion of the fiduciary relationship in the present case. There are two reasons for this.

303 First, the authorities dealing with solicitors’ costs agreements have, as their foundation, the Court’s inherent jurisdiction over solicitors and the fiduciary nature of the solicitor and client relationship as an established fiduciary category: see McNamara at [29] per Doyle CJ.

304 Indeed, in Foreman at 435, Mahoney JA specifically pointed out that a solicitor is in a fiduciary position vis-à-vis the client and/or in a position of influence. Hence the need for the solicitor to give the client advice that would enable a proper understanding of the operation and effect of a time based costs agreement: see McNamara at [28] per Doyle CJ.

305 This points to a limitation of the principle to those who fall within an established category of fiduciary relationship or, at very least, to those who carry fiduciary obligations before the execution of the contract, as in United Dominions v Brian.

306 The second reason why the principle is not applicable in the present proceedings is that ASIC’s case was that the fiduciary relationship between Citigroup and Toll arose from the mandate letter. ASIC specifically eschewed any suggestion that the fiduciary relationship arose prior to the execution of the mandate letter on 8 August 2005.

307 It follows that there is no place in these proceedings for the application of the principle that a person who is already subject to fiduciary obligations must obtain the client’s fully informed consent to the exclusion or modification of those obligations.

Chinese Walls

308 A favoured technique for dealing with conflicts of interest which arise from the carrying on of business by large financial institutions is the use of Chinese walls. They are widely used by institutions in Australia, the United Kingdom, the United States and Canada: see Prince Jefri Bolkiah v KPMG [1999] 2 AC 222 at 238 per Lord Millett; see also Law Commission Consultation Paper at [4.5].

309 Chinese walls are a means of restricting the flow of information between different departments of the same organisation: see Bolkiah at 238 per Lord Millett; see also Law Commission Consultation Paper at [4.5.1].

310 In Bolkiah at 238, Lord Millett described Chinese walls as a technique for “managing” conflicts of interest. The use of this word is significant because it suggests that Chinese walls do not eliminate conflicts; they are no more than a technique for managing conflicts of interests which continue to exist.

311 Indeed, this is a distinction which is recognised in s 912A(1)(aa) of the Corporations Act. It imposes a duty upon a financial services licensee to have in place adequate arrangements for “the management of conflicts of interest”. The statutory requirement is to be contrasted with the duty in equity of a fiduciary to eliminate or avoid conflicts: see Breen v Williams at 108 per Gaudron and McHugh JJ. Of course, one way of managing conflicts would be to eliminate them but s 912A(1)(aa) does not require a licensee to take that step: see the discussion by Mr Tuch, 29 MULR at 514-515.

312 Support for the proposition that Chinese walls do not eliminate conflicts may be found in the Law Commission Consultation Paper. At [4.5.1], the UK Law Commission referred to a paper by Professor Finn, “Fiduciary Law and the Modern Commercial World”, Norton Rose Oxford Law Colloquium (1991) at p 13. Professor Finn pointed out that the vice is not the possibility of misuse of confidential information but, rather the “compromising of a fiduciary’s duty of loyalty.”

313 Further support may be found in the discussion of the authorities by the New South Wales Court of Appeal in Beach Petroleum at [199] – [206] per Spigelman CJ, Sheller JA and Stein JA. The duty of a fiduciary is one of undivided loyalty. The “no conflict” rule is based on practical considerations and recognises that the fiduciary’s over-riding duty may be swayed by a conflicting interest. The existence of a Chinese wall cannot, of itself, overcome the prohibition against a fiduciary acting at the same time both for and against the same client. Indeed, it exposes the vice to which Professor Finn referred.

314 However, as the UK Law Commission observed, a financial conglomerate may obtain protection against any allegation of breach of the duty of loyalty if the client consents to the company carrying on business using Chinese walls as part of its organisational structure. The extent of the duty of loyalty would then be determined according to the contractual arrangements between the parties: see Law Commission Consultation Paper at [4.5.1].

315 The scope of any duty, and the extent to which the existence of Chinese walls may protect against an allegation of breach would be determined not only by the express terms of the contract but also by any implied terms: see Kelly v Cooper at 213-215 per Lord Browne-Wilkinson.

316 Cases dealing with claims brought by former clients of solicitors and accountants to restrain the firm from acting against it show a willingness by the courts to accept the concept of Chinese walls as a means of quarantining information within the firm: see Bolkiah at 237-238 per Lord Millett; Photocure ASA v Queen’s University at Kingston (2002) 56 IPR 86 at [61] per Goldberg J.

317 The relief sought in those cases turned upon the question of whether there was a risk of disclosure or misuse of confidential information. Lord Millett said in Bolkiah at 237-238 that there is no rule of law that Chinese walls are insufficient to eliminate the risk of disclosure but the Court should restrain the firm from acting unless satisfied that effective measures have been taken to prevent disclosure.

318 Thus, the question of whether Chinese walls are effective will be a question of fact in each case, although Lord Millett emphasised that the wall must be “an established part of the organisational structure”, not created ad hoc: see Bolkiah at 239. The same approach must be taken in determining whether Chinese walls constitute adequate arrangements for the management of conflicts of interest within s 912(1)(aa) of the Corporations Act.

319 In Bolkiah, Lord Millett at 238 drew upon the observations in the Law Commission Consultation Paper to illustrate the type of organisational arrangements which would ordinarily be effective: see also Law Commission Consultation Paper at [4.5.2]. These are:

− the physical separation of departments to insulate them from each other;
− an educational programme, normally recurring, to emphasise the importance of not improperly or inadvertently divulging confidential information;
− strict and carefully defined procedures for dealing with situations where it is thought the wall should be crossed, and the maintaining of proper records where this occurs;
− monitoring by compliance officers of the effectiveness of the Chinese wall;
− disciplinary sanctions where there has been a breach of the wall.

320 Nevertheless, warnings have been sounded in other authorities about the risk of leakage through Chinese walls. Thus, for example, Bryson J said in D & J Constructions Pty Limited v Head & ors trading as Clayton Utz (1987) 9 NSWLR 118 at 123:

” …it is not realistic to place reliance on such arrangements in relation to people with opportunities for daily contact over long periods, as wordless communication can take place inadvertently and without explicit expression, by attitudes, facial expression or even by avoiding people one is accustomed to see, even by people who sincerely intend to conform to control.”

321 A reminder that Chinese walls may sometimes be porous is to be found in the recent decision of Bergin J in Asia Pacific v Optus.

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