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University of Technology Sydney Law Research Series |
Last Updated: 7 April 2017
Examining breaches of fiduciary duty by
solicitors in
commercial arrangements †
Dr Philippa Ryan*
This article will identify two key distinctions that need to be made in order to understand the consequences of breach of fiduciary duty by solicitors operating under different circumstances. These distinctions are between (i) solicitors acting as a trustee in relation to an express trust and those assisting their clients with commercial transactions; and (ii) breaches of fiduciary duty by solicitors that involve dishonesty and those that do not. Of particular interest is the different approaches taken in English and Australian courts with respect to the question of causation. This paper will focus on breach of custodial fiduciary duties where the solicitor acts on behalf of a client. However, it will also touch on the implications for solicitors who are directors of an incorporated legal practice and whose breach is in the course of his or her duties as a director. It will conclude that while a solicitor’s obligation to account follows from a breach of trust, the remedial consequences of a breach of fiduciary duty in commercial relationships demand an inquiry into whether the breach was fraudulent.
Introduction
As well as owing professional and statutory obligations, solicitors owe contractual duties (for example, a duty to keep their client’s confidence) and they also owe fiduciary duties. The role of the solicitor has changed significantly over the past 200 years. The work that modern solicitors do can now include acting as a trustee in relation to traditional express trusts or assuming trust-like obligations in relation to their client’s assets when facilitating commercial transactions.
In recent years, the Courts have decided a number of civil disputes arising from alleged breaches of these duties by solicitors in the course of executing a client’s instructions with respect to commercial transactions. An Australian example of a breach of fiduciary duty in the context of a commercial trust is Youyang Pty Ltd v Minter Ellison Morris Fletcher.[1] In the United Kingdom, two such cases are Target Holdings v Redferns[2] and AIB v Mark Redler & Co Solicitors.[3] All three of these cases were appealed to higher courts and all three wrestle with the distinction between breaches of trust by solicitors in traditional trust relationships and breaches of trust-like obligations arising from commercial transactions. This paper will explore these cases and the distinctions drawn between them. The approaches taken by the Courts in Australia and the United Kingdom differ with respect to innocent and fraudulent breaches and the question of whether an inquiry into causation is appropriate when determining liability.
An additional question that arises from this discussion is the changing nature of the solicitor’s fiduciary obligations in a modern commercial world. These changes are driven in part by the incorporated legal partnership, which has only recently become possible and is gaining popularity in Australia and the United Kingdom.[4] Traditionally, solicitors practised within the framework of either the sole practitioner or a firm of lawyers, headed up by its partners. Since the amendment of legislation regulating the practice and conduct of solicitors, a corporation may engage in legal practice in a number of jurisdictions, as long as (among other conditions) one of the directors holds an unrestricted legal practising certificate.[5] It is useful to keep in mind the different professional and statutory obligations imposed on solicitors who are also directors, in light of the expanding role of solicitors both in their clients’ businesses and in the commercial interests of the incorporated entity of which they are a director. A number of key statutory instruments regulate the conduct of solicitors,[6] trustees[7] and directors.[8] Each act has its own approach to determining liability for innocent or fraudulent breach of trust, or for breach of trust-like and fiduciary duties.
It is not the purpose of this paper to catalogue all of the different duties imposed on solicitors. However, reference will be made to these statutory duties as an indication of the complexity facing courts when asked to determine the liability of a solicitor for breach of trust or breach of fiduciary duty. A starting point will be to ask whether the solicitor was acting in the course of their role as a legal practitioner on behalf of a client or as a director of the legal practice, or both. These distinctions must be kept in mind when examining remedies that may be imposed on solicitors for these different types of breach.
This main focus of this paper is those circumstances when a solicitor has control over a client’s assets or property for the purposes of assisting in a commercial transaction and the solicitor misdirects those assets or the property in breach of their duty to the client.
Solicitors as trustees and fiduciaries
A trust is as an institution developed by equity and recognised in the court of equity as imposing obligations enforceable in equity.[9] A trustee holds property on trust for the beneficiaries for a particular purpose.[10] The express trustee is the paradigm custodial fiduciary. Most custodial fiduciaries are trustees or executors.[11] Trustees are under a duty to account for the trust fund.[12] As Rickett notes, this duty arises immediately upon receipt of the relevant property.[13] When a solicitor receives its client’s property for the purposes of assisting its client in a transaction or commercial arrangement with a third party, this non-trust (but trust-like) property is held pursuant to the solicitor’s contractual arrangement with the client, as well as the solicitor’s fiduciary duties to the client. If a solicitor misdirects a client’s property, it is important for the purposes of deciding which remedy to impose that the Court determines whether the property was the subject of legal or equitable obligations, or both.[14]
A fiduciary relationship is a ‘trust-like’ relationship and a fiduciary is a person whose position is ‘trustee-like’.[15] The feature that marks the fiduciary out for special scrutiny is the obligation of loyalty reflected in various aspects of the relationship, the most important of which are the duty to avoid a conflict of duty and interest and the duty not to misuse the fiduciary position.[16] What lies at the heart of the fiduciary obligation is a standard of conduct that requires the fiduciary to act selflessly and with undivided loyalty in the interests of the other party. The fiduciary’s standard of conduct is a very high standard. The effect of the standard is to limit the way in which the fiduciary may use a discretion or power over another party.[17]
Trusts in commercial relationships
Traditionally, arm's-length commercial transactions were not amenable to fiduciary obligations.[18] Commercial arrangements where the parties dealt with each other freely and on an equal footing were historically regarded by the Australian courts as important, if not decisive, in indicating that no fiduciary duty arose.[19] However, it is a matter of reasonable expectation that there is scope for fiduciary obligations to arise in a commercial setting, as the consequence of a contract or business arrangement. Under this approach, fiduciary obligations will arise when it is necessary to give effect to the expectations that the parties properly entertain of each other within the particular business setting. Where the conscience of equity so demands, because of the nature or circumstances of the relationship, the court should not shrink from imposing appropriate standards of conduct in the pursuit of those commercial relationships.[20] Here, the imposition of such standards turns on whether the relationship meets the criteria for characterisation as fiduciary in nature. This is why commercial transactions falling outside the accepted traditional categories of fiduciary relationship often do not give rise to fiduciary duties. It is not that they are commercial in nature, but that they do not meet the relevant criteria.[21]
In Hospital Products Ltd v United States Surgical Corporation,[22] the High Court of Australia recognised that fiduciary relationships could extend into commerce, citing by way of example the fiduciary’s obligation not to profit from their position or to let their interests conflict.[23] What was attempted in this case was to address a fraudulent course of conduct and a gross breach of contract by imposing equitable sanctions. Contractual and fiduciary relationships may co-exist between the same parties. Indeed, the existence of a basic contractual relationship has in many situations provided a foundation for the creation of a fiduciary relationship.[24] Gibbs CJ held that there had been a fraudulent course of conduct and a gross breach of contract, but no breach of fiduciary duty.[25] His Honour concluded that the defendant did not stand in a fiduciary relation to USSC and that the only relief to which USSC was entitled in the circumstances of the case was an award of damages for breach of contract. In these situations it is the contractual foundation that is all-important, because it is the contract that regulates the basic rights and liabilities of the parties.[26]
Until the 18th century, private trusts remained relatively simple affairs, established to ensure that real property remained in the family. A traditional trust will typically govern the ownership-management of property for a group of potential beneficiaries over a lengthy number of years. If the trustee makes an unauthorised disposal of the trust property, the obvious remedy is to require them to restore the assets or their monetary value. It is likely to be the only way to put the beneficiaries in the same position as if the breach had not occurred. It is a real loss, which is being made good.[27] As Lord Wilkinson-Browne observed in Imperial Group Pension Trust v Imperial Tobacco,[28] the traditional trust is one under which:
The settlor, by way of bounty, transfers property to trustees to be administered for the beneficiaries as the objects of his bounty. ... The beneficiaries have given no consideration for what they receive.[29]
In the last 40 years or so, Australian courts have come to recognise fiduciary obligations in commercial arrangements. It is this feature that has seen the extension of the trust relationship into commercial arrangements. Identifying when a commercial arrangement gives rise to a trust relationship is a key consideration for the determination of whether a breach of duty will result in an order to restore the trust moneys or an order for compensation. Whether the breach was innocent or fraudulent will determine whether there are statutory mechanisms for granting relief to the fiduciary and – arguably – whether it is appropriate to inquire as to whether there was a causal link between the fiduciary’s breach and their client’s loss.
A trustee or custodial fiduciary has control over their principal’s funds or assets. Using the label ‘trustee’ to describe a manager of another’s property in this way reflects a general recognition of fiduciary obligations in modern commercial arrangements. Here, the term ‘trustee’ reflects the personal and fiduciary obligations owed to a client or principal with respect to assets or other property, which are analogous to the personal obligations owed by a trustee with respect to trust property. This arrangement is particularly common in modern commercial and banking relationships. For example, in addition to contractual obligations, directors are said to have trustee-like responsibilities in respect of company property.[30] By contrast, finance companies and directors manage assets, money, and property on behalf of their principals for short periods of time or pursuant to objectives other than merely preserving the corpus of the trust. Modern commercial trust arrangements can arise out of very different relationships and expectations among the key players to the trust.[31]
Solicitors as directors
As a direct result of the emergence of the incorporated legal partnership, many solicitors are now directors of the company in which they practice. In Australia, directors owe positive duties of care and diligence, and to act in good faith and in the company’s best interest, pursuant to sections 180 and 181 of the Corporations Act 2001 (Cth). Directors owe other duties under the general law and in Equity. For example, the duty owed by a director not to act in conflict of interest will be a fiduciary duty.[32]
Solicitors (whether or not they are also directors) also owe duties to avoid conflicts and profits. Like directors, solicitors owe other contractual and statutory obligations. In some cases, they might also owe trustee duties. A close analysis of the nature of the obligations and the alleged breach will determine whether the Court will need to inquire into the nature of the breach.
The importance of drawing distinctions
The important distinction to be drawn is whether the Court will characterise the duty that has allegedly been breached as “fiduciary”; and whether or not the breach will be excused as innocent. As will be seen below, depending on how these questions are answered and the jurisdiction in which the matter is heard may result in very different outcomes for quite similar factual circumstances. For example, statutory provisions in trustee and corporations legislation may excuse liability where a breach of duty is innocent.[33] However, this statutory jurisdiction may not extend to non-trustee fiduciaries.[34] In the context of companies, officers or employees of corporations may be excused from liability if the breach of trust is innocent.[35] It is important to note that the Courts in Australia and the United Kingdom have been reluctant to exercise the power to grant relief where the obligation is imposed by legislation other than corporations law. However, it is applicable to general law duties.[36]
It is useful to recognise these distinctions when determining whether a defaulting trustee or fiduciary acting in a commercial arrangement will be entitled to due allowance for their skill and expertise; and also if there is to be wider acceptance of the English application of the rules of causation for measure of compensation, which depends on whether the equitable breach was fraudulent.[37] Both of these considerations will be explored in this paper.
Recent developments in ‘commercial trusts’
It is trite that entirely innocent breaches of trust and the analogous rules relating to directors’ fiduciary duties and the related corporate opportunity rules can sound in liability. So much was made clear by Regal (Hastings) Ltd v Gulliver.[38] But there are moves in the law to recognise that the full suite of strict remedial doctrines should be dependent upon the presence or absence of dishonesty.[39] There is much to be said for such developments. Particularly in relation to ‘commercial trusts’ of the type under discussion in Target Holdings Ltd v Redferns,[40] Youyang Pty Ltd v Minter Ellison Morris Fletcher,[41] and AIB v Mark Redler & Co Solicitors,[42] to impose the full range of equitable remedies on trustees who are innocent seems contrary to concepts of proportionality.[43]
Target Holdings Ltd v Redferns
In Target Holdings Ltd v Redferns,[44] the House of Lords held that where a breach of trust occurred in the context of a commercial transaction equitable principles of compensation ‘although not employing precisely the same rules of causation and remoteness as the common law, do have the capacity to recognise what loss the beneficiary has actually suffered from the breach of trust and to base the compensation recoverable on a proper causal connection between the breach and the eventual loss.’[45] This result is in stark contrast to the position taken by the High Court of Australia in Youyang Pty Ltd v Minter Ellison Morris Fletcher.
Youyang Pty Ltd v Minter Ellison Morris Fletcher
In Youyang Pty Ltd v Minter Ellison Morris Fletcher, a firm of solicitors paid away their client’s money without receiving in return for the money a deposit certificate in the correct form. The plaintiff’s investment was ultimately lost. Youyang did not put a case that there had been a breach of one of the fiduciary duties, but instead sought to have the trust fund replenished on the basis that the firm had breached a custodial duty.[46] The type of trust in question is far removed from the traditional trusts for widows and orphans that were the subject matter of early trusts law cases and from which the relevant trusts principles emerged. Similarly, at no time would the parties have suggested that the trust relationship bore any resemblance to the traditional trustee/beneficiary relationship that would give rise the custodial duties relied upon here.
For Youyang’s case to succeed, the High Court would have to accept that a breach of a custodial duty could attract the remedy sought. Youyang’s complaint was that the money was held on ‘trust terms’, which obliged Minters to hold the moneys absolutely for Youyang at its direction. This was an adaption of Fry LJ’s description of the trustee’s obligation in Webb v Stenton,[47] so that Minters had made itself ‘personally liable to pay money to Youyang by reason of some breach of trust or default in the performance of its duties as trustee’.[48] The firm defended the proceedings on the basis that the relevant duty was fiduciary; and that there had been no such breach. Finding for Youyang, the High Court held that whether or not there is a compensable loss was not a relevant consideration, as the funds were held on trust. ‘The trust moneys were lost when paid out in breach of trust. That is the injuria with which equity is concerned, not the failure of the investment transaction’.[49]
Tempering and modifying this strict approach is a key argument in this article.
AIB Group (UK) Plc v Mark Redler & Co Solicitors
AIB involved the question of what remedies in equity were available to a bank against a firm of solicitors, where the firm had breached its custodial duties in relation to money held by the firm on trust for the purpose of a loan to be secured by a charge over property. In short, this was a case very like Target Holdings and with similarities to the facts in Youyang. In the first paragraph of the judgment Lord Toulson recognised that:
140 years after the Judicature Act 1873, the stitching together of equity and the common law continues to cause problems at the seams.[50]
The solicitors had released loan funds before ensuring that a prior charge to another bank was discharged. When this error was detected the lending bank was able to register its charge only as a second charge on the borrowers’ property. The borrowers defaulted and the bank sued the solicitors for the shortfall. The bank claimed the full amount of the loan less that which it recovered under the second charge (a total of £2.5 million). The solicitors argued that their liability should be limited to the loss, about £275,000, the bank would have suffered if it had paid out the first ranking bank.
The bank’s case was that it was entitled to have the trust fund reconstituted, to be paid equitable compensation for breach of trust and fiduciary duty and for breach of contract and negligence. The solicitors admitted negligence and breach of contract but disputed the other claims. They argued further that if they were found to have acted in breach of trust they were entitled to relief under s 61 of the Trustee Act 1925 (UK).[51] The trial judge found that while the solicitors had acted in good faith, they were in breach of trust.[52]
At first instance the solicitors’ argument on remedy was accepted. The judge found that if the error had been detected there would have been a short delay, but the lending bank would have released funds to pay out the first charge and it would have become registered as the first charge. Judgment was given for £273,000.[53]
The Court of Appeal agreed with the trial judge’s finding and it purported to apply Target Holdings in that case’s treatment of a breach of trust occurring in a commercial transaction.[54] Lord Toulson recognised that the debate about Target Holdings:
Is part of a wider debate, or series of debates, about equitable doctrines and remedies and their inter-relationship with common law principles and remedies, particularly in a commercial context.[55]
Lord Toulson then identified the main criticisms of Target Holdings citing leading critics such as Professor Charles Mitchell.[56] The view was that it was a ‘false step’, that ‘introduced an inapt causation requirement’ into the law relating to substitutive performance claims for breach of trust. If the proper remedy was seen as being too harsh, section 61 of the Trustee Act 1925 (UK) should have been used to relieve the solicitors of some or all liability.
After reviewing the law of account and principles of equitable compensation Lord Toulson concluded that whilst there were ‘powerful arguments’ advanced against Target Holdings, it would be ‘a backward step’ to depart from Lord Browne-Wilkinson’s fundamental analysis or to re-interpret the decision.[57] Lord Toulson held that a monetary award that reflected neither loss caused nor profit gained by the wrongdoer would be penal.[58] His Lordship characterised the purpose of a restitutionary order as being to replace a loss to the trust fund ‘which the trustee has brought about’.[59]
These three cases evidence a marked difference in the application of common law and equitable principles, as well as differences in the way that breaches of trust by solicitors have been treated in Australia and the United Kingdom. This disparity in approaches offends Birks’ notion that “Like cases should be treated alike”.[60] It has also led to debate in both jurisdictions as to which approach should prevail.
Distinguishing types of breach
By distinguishing between types of breach of trust, it is possible to explore the principles applied by the courts when determining the liability to impose on defaulting fiduciaries. A key discriminator in the exercise of working out what causal connection is required is based upon a distinction between the duty in question being classified as essentially one involving duties of skill and care and those involving the ‘core’ fiduciary duties.
An important part of the debate about convergence between analogous rules of the common law and equity relates to the question of whether duties owed by a fiduciary are closer to a breach of the tortious notion of skill and care, rather than a duty of loyalty and its two core proscriptive duties. A full analysis of that debate has been provided by Heydon J, in his extra-curial contribution to Equity in Commercial Law.[61] The argument, which Heydon rejects, is that the law should recognise such duties as having in effect the same remedial consequences as at common law. This would allow persons in breach of such duties, even if fiduciaries, to rely on concepts such as remoteness, novus actus interveniens and contributory negligence. Absent fraud, common law rules relating to causation could be applied to breaches of skill and care. Meanwhile, the stringent rules would apply to breaches of the ‘core’ fiduciary duties.
Traditional and commercial Trusts
Trustees owe duties to beneficiaries to account for any loss to the trust. If a trustee fails to perform a positive duty, or fails to maintain a negative duty, and a ‘wrong’ thereby occurs, that wrong may be remediable by means of an order for compensation of the loss suffered by the beneficiary, or an order mandating the stripping of gains made by the trustee.
As well as owing custodial duties, trustees also owe non-custodial duties: for example, duties of loyalty and fidelity, which are embodied in the rules prohibiting profit-making at the expense of the beneficiary, and prohibiting activity which causes a conflict with the trustee's requirement to be loyal and faithful.[62] Fiduciary duties of loyalty and fidelity are usually owed by custodial fiduciaries in addition to duties of trust and confidence. The relation of trust and confidence is nowadays usually thought to consist in a cluster of duties emanating from the core requirement of loyalty.[63]
In AIB v Mark Redler & Co Solicitors, Lord Toulson expressly accepted that ‘commercial trusts’ differed from ‘a typical traditional trust’.[64] The difference bore on ‘the appropriate relief’ in the event of breach. His Lordship went on to find that in circumstances such as those in Target Holdings, the extent of equitable compensation should be the same as if damages for breach of contract were sought at common law.[65] The rationale for this view was that the trust there was part of the ‘machinery for performance of the contract’ and thus it would be ‘artificial and unreal to look at the trust in isolation from the obligations for which it was brought into being’.[66]
For these reasons Lord Toulson agreed with the trial judge and found that the bank’s appeal should be dismissed. Lord Reed substantially agreed with Lord Toulson[67] but added his own reasoning. Lord Reed accepted that traditional trusts differed in important respects to commercial trusts.[68] Whilst taking pains to say that there was no categorical distinction, or trusts to which fundamental principles of equity do not apply:
It is, on the other hand, to recognise that the duties and liabilities of trustees may depend, in some respects, upon the terms of the trust in question and the relationship between the parties.[69]
Unlike Lord Toulson, Lord Reed discussed Youyang and that review along with his Lordship’s analysis of the approach in other jurisdictions, led him to conclude that:
As the case law on equitable compensation develops, however, the reasoning supporting the assessment of compensation can be seen more clearly to reflect an analysis of the characteristics of the particular obligation breached. This increase in transparency permits greater scope for developing rules which are coherent with those adopted in the common law.[70]
Lord Neuberger, Lady Hale and Lord Wilson agreed with the reasons of Lords Toulson and Reed.[71]
The characterisation of a solicitor’s role in executing a commercial trust as being part of the ‘machinery for performance of the contract’ is central to the argument that the strict liability of trustees should not be imposed on solicitors in the performance of their trust-like or fiduciary duties in commercial transactions on behalf of their clients.
Innocent and dishonest breaches of trust
Breaches of trust and breaches of fiduciary duty vary greatly in their seriousness. Some breaches are well-intentioned, some are trivial. In Maguire v Makaronis,[72] four members of the High Court observed that the stringency apparent in some of the nineteenth century breach of trust cases displayed what Lord Lindley called 'a very hard state of the law, and one which shocked one's sense of humanity and of fairness'. As a consequence, legislation was introduced to relax the law, by conferring a power of curial relief in respect of breach of trust where the trustee had acted 'honestly and reasonably' and 'ought fairly to be excused'.[73] However, as the High Court noted in Maguire v Makaronis:
There is no such general power of dispensation in respect of loss caused by breach of duty owed by other fiduciaries.[74]
Equally, some breaches of fiduciary duty by company officers and others may be excused if they acted honestly and, in all circumstances, the Court thinks it appropriate to grant them relief.[75]
Courts have the power to relieve a trustee either wholly or partly from personal liability for a breach of trust.[76] However, relief may not be given unless it appears to the Court that the trustee has acted honestly and reasonably, and ought fairly to be excused.[77] For example, the discussion in AIB concentrates much more on the precise context of the trustee and the characteristics of the breach in determining whether the full suite of equitable remedies should be available. As has been identified, some breaches of trust are dishonest and some are not. If there has been a breach of trust by a trustee, then the court must have regard to the type of breach in order to determine its consequences.
The rule of liability for breach of a traditional trust is therefore strict. This rule has also been applied to breach of fiduciary duty by trustees in commercial trust arrangements. However, English courts have introduced another layer to the analysis with respect to commercial trusts and non-fraudulent breaches of non-fiduciary duty. As Lord Browne-Wilkinson noted in Target Holdings v Redferns,[78] in such cases ‘there does have to be some causal connection between the breach of trust and the loss to the trust estate for which compensation is recoverable, viz the fact that the loss would not have occurred but for the breach.’[79] This qualification distinguishes liability for losses suffered as the result of entering into a transaction, as distinct from liability for the consequences of a particular breach. When the liability is strict, the remedy will be for losses suffered, however not all breaches will give rise to strict liability.
English authority supports the proposition that the stringent rule of causation for measure of damages does not apply to breaches of certain equitable duties unless the breach can properly be regarded as the equivalent of fraud.[80]
According to Lord Millett in Bristol and West of England Building Society v Mothew:
The defendant had not breached his duties of loyalty and fidelity to his principal and so he could not be held to be liable for losses suffered as the result of entering into the transaction, as distinct from the consequences of the particular breach.[81]
Importantly, a breach of contract or tort by a fiduciary cannot be made to become a breach of fiduciary duty.[82] For example, a breach of their duty of care is a tort committed by the fiduciary and not a breach of their fiduciary duty. If the breach committed is a breach of a common law duty then the plaintiff will need to show that but for the breach, the alleged losses would not have been suffered. This might include that the plaintiff would not have made certain decisions made after the defendant’s breach.[83] If the breach is a breach of fiduciary duty, then the plaintiff will be entitled to compensation without having to embark on the same level of enquiry as to whether there was a direct causal link between the fiduciary’s breach and the loss suffered by the plaintiff. Whether the detailed rules of equity as to causation are different from those applicable at common law remains controversial.[84]
However, the leading statement on this point remains Lord Millett’s speech in Bristol and West Building Society v Mothew [1998] Ch 1, where Lord Millett held that:
Equitable compensation for breach of the duty of skill and care resembles common law damages in that it is awarded by way of compensation to the plaintiff for his loss. There is no reason in principle why the common law rules of causation, remoteness of damage and measure of damages should not be applied by analogy in such a case. It should not be confused with equitable compensation for breach of fiduciary duty, which may be awarded in lieu of rescission or specific restitution.[85]
Whether the common law rules of causation should be applied to equity is controversial. When considering issues of causation ‘there is support for the view that lack of any dishonesty in the defendant’s conduct can be relevant’.[86] This recognition underpins the argument for causal inquiry when determining equitable compensation for some non-fraudulent breaches.
Breach by a solicitor and breach by a director
There is little difference between the role of the solicitor who is not a director and the role of the solicitor who is a director. A breach of trust by either is a wrongful act.[87] If a solicitor is found to be in breach of an express trust as trustee, he or she will have to account to the trust fund for any loss. The purpose of this discussion is to highlight the variety of different obligations that may be imposed on a solicitor, depending on the circumstances and context of their legal practice.
If the solicitor is also a director and the breach is of one of their duties as a director, then strict standards may also apply.[88] In the context of corporations, other wrongful acts may include, breach of duty, neglect, error, misstatement, misleading statement, omission and breach.[89] In O’Halloran v R T Thomas & Family Pty Ltd, Spigelman CJ held that:
The strict standard applicable to the trustee of a traditional trust with respect to improper application of trust property...applies equally to the case of a director of a company.[90]
This strict standard applies at least where the director has the power to dispose of company property and does so for an improper purpose. It can be suggested that the strict approach to a trustee's obligation in respect of the trust property is best understood as founded upon the trustee's general duty of strict compliance with the trust deed or other testamentary document. The essential distinguishing feature of a custodial fiduciary is the existence of property belonging in equity to others.[91] At this point, the duties of solicitors who are also directors substantially overlap. The control they exert over their client’s assets – if exploited – will excite statutory liability in both their corporate and professional capacities. If they are found to have acted dishonestly, no grant of relief will be available.
Remedies for breach of fiduciary duty in commercial relationships
Characterising the type of fiduciary duty breached by a director or solicitor will have important remedial consequences for an aggrieved plaintiff. In the case of traditional trusts, a plaintiff will have recourse against the trustee who must account for any loss to the trust.
Fiduciary duty is properly confined to those duties which are peculiar to fiduciaries and the breach of which attracts legal consequences differing from those consequent upon the breach of other duties.[92] A breach of fiduciary obligation ‘connotes disloyalty or infidelity’.[93] Elliott argues that there is obviously good sense in allowing ‘a wider net of recovery where the fiduciary has acted with patent disloyalty’.[94]
It is clear that some breaches of fiduciary duty are more serious than others. At one end of the spectrum, some breaches may be of the sort that would be excusable under statute (if committed by a trustee); while at the other end of the spectrum are dishonest and fraudulent designs.[95] This distinction is well-established when considering the accessorial liability of third parties. Nothing falling short of dishonest conduct by the fiduciary is sufficient to engage the second limb of Barnes v Addy,[96] innocent breach of trust will not suffice.
In Australia, knowing assistance makes a defendant liable if that defendant assists a trustee or fiduciary with the requisite knowledge of a dishonest and fraudulent design on the part of the trustee or fiduciary.[97] Harpum describes the foundation of assistance liability as being based on an implication in a fraud by the trustee. If that fraudulent element is lacking, the stranger will not be accountable.[98] Just as innocence plays a significant role in determining the liability of strangers under knowing assistance, so too should it be a factor in determining the extent of liability of self-appointed or self-constituted trustees.
Equitable compensation
Equitable compensation for breach of fiduciary duty is designed to achieve exactly what the word compensation suggests: to make good a loss in fact suffered by the beneficiaries and which, using hindsight and common sense, can be seen to have been caused by the breach. Equitable compensation as a modern remedy is available where there has been a breach of a fiduciary’s custodial duties (especially, but not limited to express trustees) in respect of the property in their custody; and where a fiduciary has breached their duties of loyalty and fidelity (usually owed by custodial fiduciaries and some who are not custodial fiduciaries). Equity will grant compensation where a breach of equitable duty by the owner of the duty has resulted in loss to the person owed the duty.[99]
Equitable rules of compensation for breach of trust are said to have been largely developed in relation to traditional trusts, where the only way in which all the beneficiaries' rights can be protected is to restore to the trust what ought to be there.[100] In such a case, according to Lord Browne-Wilkinson, the basic rule is that a trustee in breach of trust must either restore to the trust the assets which have been lost by reason of the breach of trust or pay monetary compensation to the trust estate.[101] In so doing, courts of equity did not award ‘damages’ but would make an in personam order for the payment of equitable compensation.[102]
Errant fiduciaries may be made liable to account for gains
Whether an errant fiduciaries has committed a fraudulent or non-fraudulent breach, they may be made liable to account for any unauthorised gains.[103] In Australia, fiduciary duties are confined to the ‘no conflict’ and ‘no profit’ rules.[104] Finn argues that there are a number of quite discrete fiduciary obligations each of which, within its own province, makes its own demands of a fiduciary.[105] Despite attempts to expand these duties to prescriptive custodial obligations (for example, a duty of skill and care),[106] they remain proscriptive.[107] In the judgment of Mason J in Hospital Products Ltd v United States Surgical Corporation,[108] the point is made that whether the advantage gained by the errant fiduciary was as the result of fraudulent or non-fraudulent breach of duty, there is no difference in equity for the restitutionary relief, which should be given because:
In every case the wrongdoer's underlying liability is to account for the gain that he has made.[109]
However, as his Honour went on to illustrate, even in cases where a constructive trust over the entire asset derived by the errant fiduciary is the chosen relief, as it was in Timber Engineering Co Pty Ltd v Anderson,[110] the rationale must be that the subject matter of the constructive trust represented the measure of the profit or benefit which was obtained in breach of fiduciary duty.[111] This is because the imposition of the constructive trust is merely a means of giving effect to the fiduciary's basic liability to account.
Causal inquiry
A key question emerging from modern developments in the types of work done by solicitors is whether a breach of a trust-like duty by a solicitor will always result in their strict liability to account; or should there be a causal inquiry into the type of breach and the loss suffered. The latter approach would reflect the way that liability would be assessed in contract and tort and, by introducing proportionality to the treatment of the trustee, it is arguably more appropriate in purely commercial trust and trust-like relationships. This would seem particularly applicable in cases where the breach is innocent. English and Australian authorities have diverged on this point, with the latter preferring to impose a strict liability upon fiduciaries whether or not the breach was fraudulent.
Historically, a closer causal relationship between the wrong committed and the harm or loss suffered has been required at law than in equity. In common law cases where there is a breach of contract or tort, a claim for damages will require that the plaintiff show that the loss suffered was caused by the breach of contract or tort. However, in equity the situation is different. The object of equity is not to punish, but to remedy. In this way, equity is different from the common law.[112] In equity, as in common law, the defendant is only liable for the consequences of the legal wrong he or she has done to the plaintiff and to make good the damage caused by such wrong.[113] He or she is not responsible for damage not caused by his wrong or to pay by way of compensation more than the loss suffered from such wrong.[114]
The High Court of Australia took a different approach in Youyang to the House Lords approach in Target Holdings. In Target, the House of Lords held that even though the common law rules of remoteness of damage and causation do not apply, there should be a causal connection between the breach of trust and the loss to the trust estate for which compensation is recoverable.[115]
In Permanent Building Society v Wheeler,[116] the Full Court of Western Australia formed the view that duties analogous to a duty to exercise skill and care, whilst equitable, were not properly to be characterised as fiduciary. This was adopted and taken further by Millett LJ in Bristol and West Building Society v Mothew,[117] who found that it was ‘inappropriate’ to treat such duties as fiduciary in nature, adding that equitable compensation for breach of the duty of skill and care should not be confused with breach of fiduciary duty. The High Court of Australia has in Youyang Pty Ltd v Minter Ellison Morris Fletcher affirmed Lord Millett’s view that the goals of equity (which are based on the institution of the trust) do not warrant its assimilation with the measure of compensatory damages in tort and contract.[118]
As well as the United Kingdom’s acceptance of a causal enquiry in some instances of breach of trust and breach of fiduciary duty, the Court of Appeal in New Zealand has supported the contention that the stricter view of liability for breaches of trust causing loss to the trust estate and for breaches of the fiduciary duties of loyalty and fidelity is not required where the complaint concerns failure to exercise the necessary degree of care and diligence.[119] As “a failure to exercise the necessary degree of care and diligence” is not a breach of fiduciary duty, this leaves breaches of the “no conflict, no profit” (fiduciary) duties subject to the stricter approach to determining liability.
Treating all breaches of fiduciary duty as giving rise to equal treatment is to ignore the different types of duties and the different types of breach. The United Kingdom approach – where a causal inquiry is applied to certain breaches – would arguably be fairer. The words hindsight and common sense are clues to the causal inquiry that should form part of the assessment as to the calculation and quantum of loss to be compensated. Compensation is an equitable monetary remedy that is available when the equitable remedies of restitution and account are not appropriate.[120] The object of equitable compensation is to restore persons who have suffered loss to the position in which they would have been if there had been no breach of the equitable obligation. A defendant is responsible for the plaintiff's actual loss caused by the breach.[121] Without a causal inquiry, proportionality is lost.
Due allowance for skill and expertise
It is not controversial that as well as accounting to the trust for any losses, a fiduciary must also account for any secret profits gained as a result of a breach of duty. In Regal (Hastings) v Gulliver,[122] Lord Wright summarised the principle that an agent must account for unauthorised gains or secret profits, acquired by him in the course of his agency. Equity’s stringent approach to fiduciaries not being permitted to profit from their trust is designed to serve two purposes (i) to make the fiduciary account for what he/she has ‘acquired at the expense of the trust’; and (ii) to ensure that fiduciaries generally conduct themselves ‘at a level higher than that trodden by the crowd’.[123]
In Chan v Zacharia,[124] Deane J acknowledged that according to general principles, a fiduciary must account for a personal benefit or gain and that this duty has traditionally been framed in absolute terms – ‘inflexible’, ‘inexorably’, ‘however honest and well-intentioned’, and with ‘universal application’. But his honour went on to identify a number of circumstances where equity has resisted ‘unreasonable and inequitable applications’[125] of those doctrines.[126] In some cases, it is necessary to be satisfied that the value of the subject matter of the constructive trust is directly attributable to the claimant and was not formed in part from resources and benefits provided, or time and effort expended, by the errant fiduciary or others. This approach was adopted by Deane J in Chan v Zacharia[127] and by the entire court in Warman v Dwyer.[128]
The allowance of a just amount to an errant fiduciary is discretionary. The thorny questions are how to calculate such an allowance and whether certain types of wrong-doing by the fiduciary are so egregious as to preclude due allowance. In Warman v Dwyer,[129] the High Court revisited the problem of determining the fiduciary's liability and whether there should be two approaches.[130] Importantly, due allowance is usually only available to a defaulting fiduciary who breaches a duty not to profit at the expense of his or her principal, without dishonesty.[131]
Mason and Carter say that the allowance is ‘invariably withheld against the dishonest fiduciary’.[132] As Spigelman CJ noted in Harris v Digital Pulse,[133] equity has fashioned remedies with what could be characterised as penal consequences. The first is the determination of just allowances for a defaulting fiduciary, whose egregious behaviour is taken into account to assess such allowances on a less liberal scale, or perhaps denied altogether.[134]
The calculation of due allowance is to be applied more or less favourably to a fiduciary based on whether their breach of fiduciary duty was fraudulent or not. A dishonest breach of fiduciary duty may disentitle a fiduciary from claiming due allowance for the skill and expertise they exerted in making a secret profit or unauthorised gain. This rule applies equally to solicitors in breach of their fiduciary duties owed to their clients and to those who are directors in breach of fiduciary duties.[135]
The rules are designed to dissuade fiduciaries from being swayed by considerations of personal interest.[136] However, this rule does not stop all defaulting fiduciaries from retaining some of their gains made as a result of the breach of their duties. This due allowance arises from the recognition that but for the fiduciary’s skill and expertise, the profits would not have been achieved.[137] This question requires a clear determination of whether the breach was innocent or not.
In determining the calculation for due allowance to the defaulting fiduciary, in Warman v Dwyer, the High Court invoked the common law language of causation, holding that the evidence supported the conclusion that ‘but for’ Dwyer’s conduct Warman’s business would not have been as profitable. The court determined that due allowance should be made for the expenses, skill, expertise, efforts, capital and resources contributed by Dwyer.[138] Here, the analysis of dishonesty, causation and entitlement to due allowance converges.
The work done by solicitors on behalf of their commercial clients may be more lucrative than managing the estates of widows and orphans, but it also gives rise to greater risk of breach of fiduciary duty. In light of the contractual arrangements that underpin these relationships, it seems appropriate to apply the common law tests for causation to determining whether a solicitor is to be made liable for the losses suffered by their clients. This is particularly so when the contract regulates the basic rights and liabilities of the parties. Such an inquiry would take into consideration whether the solicitor’s breach of fiduciary duty was fraudulent and, if so, this finding should support the strict application of liability and any decision not to allow the defendant due allowance for their skill and expertise in making an unauthorised gain.
Conclusion
Although the law is dynamic and must be able to respond to social and commercial changes, it is also important to establish the key features of any legal obligation or liability, so that the community can commit to the rule of law.[139] While the practice of law precedes its description and systemisation, description and systemisation also has an effect on practice.[140]
This paper has focused on breaches of trust and fiduciary duty by solicitors acting for the clients in commercial transactions. What lies at the heart of this analysis, is the remedial consequences that may flow from a breach of trust or breach of fiduciary duty by a solicitor, particularly where the impugned transaction arose in a commercial context. As observed in Hasler v Optus Singtel Pty Ltd, not all breaches of fiduciary duty are of equal gravity.[141] Breaches of fiduciary duty ‘vary greatly in their seriousness’; some are well-intentioned and some are trivial, but others amount to serious fraud.[142] Solicitors owe many more duties to their clients than other fiduciaries in commercial arrangements, but the role of the solicitor and the context in which modern lawyers practice is changing and expanding, particularly as more legal practices incorporate and globalise. For this reason, it is useful to distinguish between different types and consequences of obligation and breach.
Australian equitable principles do not follow the English approach with respect to causal inquiry for non-fraudulent breaches of trust and breach of fiduciary duties. But there is authority for distinguishing between fraudulent and non-fraudulent breaches. It seems likely that the changes seen in the English authorities with regard to questions of causation will eventually take hold in Australia. However, for now, the liability of solicitors for a breach of trust and breach of fiduciary duty (whether innocent or dishonest) in commercial and traditional contexts remains strict.
† This article published by LexisNexis in the Australian Journal of
Corporate Law on 28 November 20[1]6.
Citation: PA Ryan, ‘Examining breaches of fiduciary duty by solicitors in
commercial arrangements’ (2016) 31 AJCL 209. URL -
http://lexisweb.lexisnexis.com.au
/JournalOverview.aspx?id=31AJC209.
* Barrister and Lecturer, Faculty of Law, University of Technology Sydney.
1 [2003] HCA 15; (2003) 212 CLR 484.
[2] [1995] UKHL 10; [1996] 1 AC 421.
[3] [2014] UKSC 58 (5 November 2014)
[4] Incorporating law firms is also popular in the United States of America and Canada. See, C Parker, ‘Law Firms Incorporated: how Incorporation Court and Should Make Law Firms More Ethically Responsible’ [2004] UQLawJl 27; (2004) 23 UQLJ 347 at 348.
[5] For example, in New South Wales, the amending legislation commencing on 1 July 2001 is found in Schedule 1 to the Legal Profession Amendment (Incorporated Legal Practices) Act 2000 (NSW) No.73. Similar amendments have been made in other jurisdictions in Australia.
[6] For example, in New South Wales, solicitors are regulated by the Legal Profession Uniform Law Application Act 2014 (NSW); known in Victoria as Legal Profession Uniform Law Application Act 2014 (Vic).
[7] For example, in Queensland, the Trusts Act 1973 (Qld); and in South Australia, the Trustee Act 1936 (SA).
[8] In Australia, the Corporations Act 2001 (Cth); and, in the United Kingdom, the Companies Act 2006 (UK).
[9] JD Heydon and M Leeming, Jacobs' Law of Trusts in Australia (7th edn, Butterworths 2006) at 1.
[10] JD Heydon and M Leeming, Jacobs' Law of Trusts in Australia (7th edn, Butterworths 2006) at 10.
[11] CEF Rickett, ‘Equitable Compensation: Towards a Blueprint?’ (2003) 25 Syd Law Rev 31 at 47.
[12] ‘Custodial fiduciary’ is a term used in Steven Elliott, Compensation Claims Against Trustees (DPhil thesis, University of Oxford, 2002) Ch II, ‘Fiduciaries and Claims’ at 1. The Custodial Fiduciary Relation. Dr Elliott states: ‘A custodial fiduciary may be tentatively defined as any person who receives property in circumstances binding him in equity to apply it for the benefit of another.’
[13] CEF Rickett, ‘Equitable Compensation: Towards a Blueprint?’ (2003) 25 Syd Law Rev 31 at 35.
[14] See, P Millett: 'Tracing the Proceeds of Fraud' (1991) 107 LQR 71 at 82.
[15] P Birks, ‘Equity in the Modern Law, An Exercise in Taxonomy’ [1996] UWALawRw 1; (1996) 26 UWALR 1 at 17.
[16] See, Breen v Williams [1996] HCA 57; (1996) 186 CLR 71 at [27] (Gaudron and McHugh JJ), citing Lord Hershell in Bray v Ford (1896) AC 44 at 51-52, that “it is an inflexible rule of a Court of Equity that a person in a fiduciary position is not unless otherwise expressly provided, entitled to make a profit; he is not allowed to put himself in a position where his interest and duty conflict.” See also, Chan v Zacharia [1984] HCA; [1984] HCA 36; (1984) 154 CLR 178 at 198-199.
[17] M Cope, ‘A Comparative Evaluation of Developments in Equitable Relief for Breach of Fiduciary Duty and Breach of Trust’ (2006) QUTLJJ 7.
[18] Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41 at 70 (per Gibbs CJ) and at 118 (per Wilson J).
[19] Jones v Bouffier [1911] HCA 7; (1911) 12 CLR 579 at 599-600, 605; Dowsett v Reid [1912] HCA 75; (1912) 15 CLR 695 at 705; Para Wirra Gold & Bismuth Mining Syndicate No Liability v Mather [1934] HCA 46; (1934) 51 CLR 582 at 592; Keith Henry & Co Pty Ltd v Stuart Walker & Co Pty Ltd [1958] HCA 33; (1958) 100 CLR 342 at 351. A similar view was taken in Canada in Jirna Ltd v Mister Donut of Canada Ltd (1971) 22 DLR (3d) 639; affirmed (1973) 40 DLR (3d) 303. The courts of equity have been reluctant to find a fiduciary relationship in circumstances where the parties contract with each other freely and more or less on an equal footing in a commercial dealing: Scandinavian Trading Tanker Co AB v Flota Petrolera Ecuatoriana [1983] 2 AC 694, at pp.703-704, per Lord Diplock; News Limited v Australian Rugby Football League Ltd [1996] FCA 870; (1996) 64 FCR 410; 139 ALR 193 at 538 (FCR); see Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Limited (ACN 113 114 832) (No 4) [2007] FCA 963; (2007) 160 FCR 35; (2007) 241 ALR 705.
[20] Duke Group Limited (In liq) v Pilmer & Ors [1999] SASC 97 (20 May 1999) at 748.
[21] John Alexander's Clubs Pty Ltd v White City Tennis Club Ltd [2010] HCA 19; (2010) 241 CLR 1 at [90] (French CJ, Gummow, Hayne, Heydon and Kieffel JJ).
[22] Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41.
[23] Barnes v Addy is cited in Hospital Products, but not in relation to the liability of third parties. Wilson and Deane JJ each refer to Lord Selborne’s judgment in Barnes v Addy in support of the contention that courts should be cautious when considering any extension of equitable principles into the domain of commercial relationships, so as ‘not to strain (them) beyond (their) due and proper limits’ (Barnes v Addy (1874) LR 9 Ch App 244 at 251), Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41, per Wilson J at [6] and Deane J at 149.
[24] Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41 at [38], per Gibbs CJ.
[25] Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41 at [39], per Gibbs CJ.
[26] Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41 at [70], per Mason J.
[27] AIB Group (UK) Plc v Mark Redler & Co Solicitors [2014] UKSC 58 (5 November 2014).
[28] Imperial Group Pension Trust v Imperial Tobacco [1991] 1 WLR 589.
[29] Imperial Group Pension Trust v Imperial Tobacco [1991] 1 WLR 589 at 597
[30] Youyang Pty Ltd v Minter Ellison Morris Fletcher [2003] HCA 15; (2003) 212 CLR 484.
[31] Imperial Group Pension Trust v Imperial Tobacco [1991] 1 WLR 589.
[32] For example, In the matter of Hopetoun Kembla Investments Pty Ltd - Hopetoun Kembla Investments Pty Ltd v JPR Legal Pty Ltd [2011] NSWSC 1343 (7 November 2011), where there was an allegation against a solicitor who was a director of an incorporated legal practice of a breach of fiduciary duty (not to act in conflict of interest).
[33] For example, section 85 of the Trustee Act 1925 (NSW); and similar provisions in corresponding legislation in other Australian jurisdictions. See also, the power to grant relief in section 1318 of the Corporations Act 2001 (Cth); and similar provision in section 1157 of the Companies Act 2006 (UK).
[34] See Jalmoon Pty Ltd (in liquidation) v Bow [1977] 2 Qd R 62 at 72–73. Meanwhile, the English Law Commission has recommended the extension of the relief jurisdiction to all fiduciaries: see Fiduciary Duties and Regulatory Rules (Law Com No 236, 1995) at 90–96.
[35] See section 1318 of the Corporations Act 2001 (Cth). Compare section 376 of the Companies Act 1993 (NZ). See full discussion in J Lowry and R Edmunds, ‘Excuses’ in Peter Birks & Arianna Pretto (eds), Breach of Trust (2002) at Ch 9.
[36] See, Deputy Commission of Taxation v Dick [2007] NSWCA 190 (3 August 20017) at [31] (Spigelman CJ). With respect to the application of s1318 to contraventions of corporations legislation, it is worth noting the significant difference between the Australian legislative history in corporations law and that of England. Commencing with the Companies Act of Victoria in 1958, some aspects of the general law duties of company directors, both tortious and fiduciary obligations, were incorporated as statutory provisions. This kind of provision has been developed and modified in a number of respects in subsequent Australian corporations legislation. It was not a feature of the English company law legislative history, until the Companies Act 2006 (UK); at [29] (Spigelman CJ).
[37] Swindle v Harrison & Anor [1997] EWCA Civ 1339 (25th March, 1997); [1997] EWCA Civ 1339; [1997] 4 All ER 705 at 718 (All ER).
[38] Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134.
[39] Deeson Heavy Haulage Pty Ltd v Cox [2009] QSC 277; (2009) 82 IPR 521.
[40] Target Holdings v Redferns [1995] UKHL 10; [1996] 1 AC 421.
[41] Youyang Pty Ltd v Minter Ellison Morris Fletcher [2003] HCA 15; (2003) 212 CLR 484 at [39].
[42] AIB Group (UK) Plc v Mark Redler & Co Solicitors [2014] UKSC 58 (5 November 2014).
[43] In AIB Group (UK) Plc v Mark Redler & Co Solicitors, the solicitors admitted that they acted negligently and in breach of contract, but they denied the other allegations. They claimed relief under section 61 of the Trustee Act 1925 (UK), if found to have acted in breach of trust.
[44] Target Holdings Ltd v Redferns [1995] UKHL 10; [1996] AC 421.
[45] Target Holdings Ltd v Redferns [1995] UKHL 10; [1996] AC 421 per Patten LJ at [47].
[46] Youyang Pty Ltd v Minter Ellison Morris Fletcher [2003] HCA 15; (2003) 212 CLR 484 at [41].
[47] Webb v Stenton (1883) 11 QBD 518 at 530.
[48] Youyang Pty Ltd v Minter Ellison Morris Fletcher [2003] HCA 15; (2003) 212 CLR 484 at [43].
[49] Youyang Pty Ltd v Minter Ellison Morris Fletcher [2003] HCA 15; (2003) 212 CLR 484 at [69].
[50] AIB Group (UK) Plc v Mark Redler & Co Solicitors [2014] UKSC 58 (5 November 2014) at [1].
[51] AIB Group (UK) Plc v Mark Redler & Co Solicitors [2014] UKSC 58 (5 November 2014) at [9].
[52] AIB Group (UK) Plc v Mark Redler & Co Solicitors [2014] UKSC 58 (5 November 2014) at [10]-[11].
[53] AIB Group (UK) Plc v Mark Redler & Co Solicitors [2014] UKSC 58 (5 November 2014) at [15].
[54] AIB Group (UK) Plc v Mark Redler & Co Solicitors [2014] UKSC 58 (5 November 2014) at [17].
[55] AIB Group (UK) Plc v Mark Redler & Co Solicitors [2014] UKSC 58 (5 November 2014) at [47].
[56] AIB Group (UK) Plc v Mark Redler & Co Solicitors [2014] UKSC 58 (5 November 2014) at [50].
[57] AIB Group (UK) Plc v Mark Redler & Co Solicitors [2014] UKSC 58 (5 November 2014) at [63].
[58] AIB Group (UK) Plc v Mark Redler & Co Solicitors [2014] UKSC 58 (5 November 2014) at [64].
[59] AIB Group (UK) Plc v Mark Redler & Co Solicitors [2014] UKSC 58 (5 November 2014) at [65].
[60] P Birks, ‘Equity in the Modern Law, An Exercise in Taxonomy’ [1996] UWALawRw 1; (1996) 26 UWALR 1 at 17. Birks describes this principle as ‘intrinsic to the nature of law as we know it’.
[61] D Heydon, ‘Are the Duties of Company Directors to Exercise Care and Skill Fiduciary?’, in Equity in Commercial Law (Degeling, S & Edelman J, Eds), (LBC 2005) at 185.
[63] SB Elliott, Compensation Claims Against Trustees (DPhil thesis, University of Oxford, 2002) at 2.
[64] AIB Group (UK) Plc v Mark Redler & Co Solicitors [2014] UKSC 58 (5 November 2014) at [70].
[65] See also, D Hayton, ‘Unique Rules for the Unique Institution, the trust’ in in S Degeling and J Edelman (eds), Equity in Commercial Law (LBC 2005) at 279-308.
[66] AIB Group (UK) Plc v Mark Redler & Co Solicitors [2014] UKSC 58 (5 November 2014) at [71].
[67] AIB Group (UK) Plc v Mark Redler & Co Solicitors [2014] UKSC 58 (5 November 2014) at [78].
[68] AIB Group (UK) Plc v Mark Redler & Co Solicitors [2014] UKSC 58 (5 November 2014) at [102].
[69] AIB Group (UK) Plc v Mark Redler & Co Solicitors [2014] UKSC 58 (5 November 2014) at [102].
[70] AIB Group (UK) Plc v Mark Redler & Co Solicitors [2014] UKSC 58 (5 November 2014) at [124] & ff
[71] AIB Group (UK) Plc v Mark Redler & Co Solicitors [2014] UKSC 58 (5 November 2014) at [143].
[72] Maguire v Makaronis [1997] HCA 23; (1997) 188 CLR 449.
[73] Section 3 of the Judicial Trustees Act 1896 (UK).
[74] Maguire v Makaronis [1997] HCA 23; (1997) 188 CLR 449 at 473 (Brennan CJ, Gaudron, McHugh, Gummow JJ).
[75] Section 1318, Corporations Act 2001 (Cth).
[76] For example, in New South Wales, section 85(1) of the Trustee Act 1925 (NSW). Similar provisions can be found in corresponding legislation of the other Australian jurisdictions. See, Trustee Act 1893 (NT); Trusts Act 1973 (Qld); Trustee Act 1936 (SA); Trustee Act 1898 (Tas); Trustee Act 1958 (Vic); and Trustees Act 1962 (WA).
[77] Section 85(2) of the Trustee Act 1925 (NSW). See also, Trustee Act 1893 (NT); Trusts Act 1973 (Qld); Trustee Act 1936 (SA); Trustee Act 1898 (Tas); Trustee Act 1958 (Vic); and Trustees Act 1962 (WA).
[78] Target Holdings v Redferns [1995] UKHL 10; [1996] 1 AC 421.
[79] Target Holdings v Redferns [1995] UKHL 10; [1996] 1 AC 421 at 432.
[80] Swindle v Harrison & Anor [1997] EWCA Civ 1339 (25th March, 1997); [1997] EWCA Civ 1339; [1997] 4 All ER 705 at 718 (All ER).
[81] Bristol and West of England Building Society v Mothew [1996] EWCA Civ 533; (1996) 4 All ER 698 at 712.
[82] Bristol and West Building Society v Mothew [1998] Ch 1, per Millett LJ. Lord Millett allowed Mothew's appeal and held that a causal link needed to be established. Just because the solicitor himself had fiduciary duties to his clients, did not mean that every breach of duty of care was a breach of a fiduciary duty.
[83] This example of a distinction between the two types of breach is from Lord Millett’s speech in Bristol and West Building Society v Mothew [1998] Ch 1 at 16.
[84] Getzler writes in favour of keeping the two distinct; J Getzler, ‘Am I my Beneficiary’s Keeper? Fusion and Loss-based Fiduciary Remedies’ in S Degeling and J Edelman (eds), Equity in Commercial Law (LBC 2005) at 248-250.
[85] This speech has been recited (in whole or in part) by the High Court of Australia in in Maguire v Makaronis [1997] HCA 23; (1997) 188 CLR 449 at fn 68 and Youyang Pty Limited v Minter Ellison Morris Fletcher [2003] HCA 15; (2003) 212 CLR 484 at [38]. However, the High Court has yet to hear a case in which it can rule on the matter. See, further, SB Elliott, ‘Remoteness Criteria in Equity’ (2002) 65 MLR 588 at 591-593.
[86] Deeson Heavy Haulage Pty Ltd v Cox [2009] QSC 277; (2009) 82 IPR 521 at [124].
[87] Liability for wrong-doing gives rise to remedial rights which may be asserted against the wrong-doer. The obligation to repay a mistaken payment or to reinstate misapplied trust funds is a primary obligation. However, if there is to be an additional (secondary) amount payable that arises from the failure to repay the (primary) funds, the plaintiff would need to prove against the defendant an element of fault, recklessness or dishonesty, per P Birks, 'Equity in the Modern Law, An Exercise in Taxonomy' [1996] UWALawRw 1; (1996) 26 UWALR 1 at 12.
[88] Section 180 of the Corporations Act 2001 (Cth) directly contemplates that in determining whether a director has exercised reasonable care and diligence, the circumstances of the particular corporation concerned are relevant to the content of the duty.
[89] Corporations Act 2001 (Cth) s 601WBK; Rich v CGU Insurance Limited; Silbermann c CGU Insurance Limited [2005] HCA 16 (7 April [2005] HCA 16; 2005); 214 ALR 370 at 371.
[90] O’Halloran v R T Thomas & Family Pty Ltd [1998] NSWSC 596; (1998) 45 NSWLR 262 at 277.
[91] D Hayton, ‘Overview’ in P Birks and A Pretto (eds), Breach of Trust (Hart Publishing 2002) at 379-383. This analysis is largely taken from Rickett’s article, ‘Equitable Compensation: Towards a Blueprint?’ (2003) 25 Syd Law Rev 31 at 48
[92] Bristol and West Building Society v Mothew [1998] Ch 1 at 16.
[93] Bristol and West Building Society v Mothew [1998] Ch 1 at 18.
[94] Elliott, S & Edelman, J, ‘Target Holdings Considered in Australia’ (2003) 119 LQR 545, at 595.
[95] Hasler v Singtel Optus Pty Ltd;Curtis v Singtel Optus Pty Ltd;Singtel Optus Pty Ltd v Almad Pty Ltd [2014] NSWCA 266 (15 August 2014) at [9] per Gleeson JA.
[96] Barnes v Addy [1874] LR 9 Ch App 244.
[97] Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 at [160], per Gleeson CJ, Gummow, Callinan, Heydon and Crennan JJ.
[98] C Harpum, 'The Stranger as Constructive Trustee’ (1986) 102 LQR 114 at 116.
[100] AIB Group (UK) Plc v Mark Redler & Co Solicitors [2014] UKSC 58 (5 November 2014) at per Toulson LJ at [29].
[101] Target Holdings Ltd v Redferns [1995] UKHL 10; [1996] AC 421 at 431.
[102] Nocton v Lord Ashburton [1914] AC 932, at paras 952, 958, per Viscount Haldane LC
[103] This is analogous to a knowing recipient’s personal liability to account as a constructive trustee. See C Mitchell and S Watterson, 'Remedies for Knowing Receipt' in C Mitchell (Ed) Constructive and Resulting Trusts (Hart Publishing 2010).
[104] Breen v Williams (1996) 186 CLR 71 at 113, 137; and Pilmer v Duke Group Ltd (in liq) [2001] HCA 31; (2001) 207 CLR 165 at 197-199 at [74]-[78]; cf at 216-220 [134]-[136].
[105] PD Finn, ‘Fiduciary Obligations of Operators and Co-venturers in Natural Resources Joint Ventures’ (1984) Australian Mining and Petroleum Law Association Yearbook 160 at 160.
[106] Permanent Building Society v Wheeler (1994) 11 WAR 187 at 237-239 (Ipp J, Malcolm CJ & Seaman J agreeing).
[107] Breen v Williams [1996] HCA 57; (1996) 186 CLR 71 at 82 (Brennan CJ) and 92 (Dawson & Toohey JJ). Although there have been suggestions that the duty to disclose as expressed in Farah Constructions v Say Dee was characterised as ‘fiduciary’, as the High Court made clear in Farah, the duty on Farah to make that disclosure was the practical manifestation of its fiduciary duty to avoid a conflict between its own self-interest and its duty to SayDee.: Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 at [103]. See also, Collard v The State of Western Australia [No 4] [2013] WASC 455 (2 April 2014) at [1207].
[108] Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41.
[109] Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41 at [114].
[110] Timber Engineering Co Pty Ltd v Anderson [1980] 2 NSWLR 488.
[111] Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41 at [115].
[112] K Mason, 'Fusion, Fallacy, Future or Finished?' in S Degeling and J Edelman (eds), Equity in Commercial Law (LBC 2005) at 13.
[113] ASIC v Adler [2002] NSWSC 171; (2002) 168 FLR 253 at [71].
[114] Target Holdings Ltd v Redferns [1995] UKHL 10; (1996) 1 AC 421, per Browne-Wilkinson LJ at 432.
[115] Target Holdings Ltd v Redferns [1995] UKHL 10; (1996) 1 AC 421 at 8. Target Holdings is discussed in more detail in Part 3 of this paper.
[116] Permanent Building Society v Wheeler (1994) 11 WAR 187.
[117] Bristol and West Building Society v Mothew [1998] Ch 1 at 16.
[118] Youyang Pty Ltd v Minter Ellison Morris Fletcher [2003] HCA 15; (2003) 212 CLR 484 at [39].
[119] Bank of New Zealand v New Zealand Guardian Trust Co Ltd [1999] 1 NZLR 664 at 681.
[120] Canson Enterprises Ltd v Boughton & Co. (1991) 85 DLR (4th) 129 per McLachlin J at 163.
[121] Nocton v Lord Asburton (1914) AC 932 at 953; Target Holdings Ltd v Redferns [1995] UKHL 10; (1996) 1 AC 421 at 432, 439; Canson Pty Limited v Boughton & Co (1991) 85 DLR (4th) 129 at 163.
[122] Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134
[123] Warman v Dwyer [1995] HCA 18; (1995) 182 CLR 544 at 557-558; in turn quoting from Cardozo CJ in Meinhard v Salmon [1985] HCA 69; (1928) 62 ALR 1; 164 NE 545, at 546.
[124] Chan v Zacharia [1984] HCA 36; (1984) 154 CLR 178.
[125] Adopting here the language of Lord Selborne’s caution in Barnes v Addy (1874) LR 9 Ch App 244 at 251.
[126] Chan v Zacharia [1984] HCA 36; (1984) 154 CLR 178 at 199.
[127] Chan v Zacharia [1984] HCA 36; (1984) 154 CLR 178.
[128] Warman v Dwyer [1995] HCA 18; (1995) 182 CLR 544.
[129] Warman v Dwyer [1995] HCA 18; (1995) 182 CLR 544.
[130] Warman v Dwyer [1995] HCA 18; (1995) 182 CLR 544 at 557.
[132] Mason and Carter, Restitution Law in Australia (Butterworths 1995) at [1735].
[133] Harris v Digital Pulse Pty Ltd [2003] NSWCA 10; (2003) 56 NSWLR 298.
[134] Harris v Digital Pulse Pty Ltd [2003] NSWCA 10; (2003) 56 NSWLR 298 at [48].
[135] For example, in Fiduciary Ltd & Ors v Morningstar Research Pty Ltd & Ors [2004] NSWSC 664 (27 July 2004), Austin J considered the question of due allowance claimed by a defendant, against whom allegations of breach of directors’ duties had been made.
[136] Chan v Zacharia [1984] HCA 36; (1984) 154 CLR 178 at 198-199.
[137] Warman v Dwyer [1995] HCA 18; (1995) 182 CLR 544 at 561.
[138] Warman v Dwyer [1995] HCA 18; (1995) 182 CLR 544 at 570.
[141] Hasler v Optus Singtel Pty Ltd; Curtis v Singtel Optus Pty Ltd; Singtel Optus Pty Ltd v Almad Pty Ltd [2014] NSWCA 266 (15 August 2014); [2014] NSWCA 266; (2014) 311 ALR 494; (2014) 101 ACSR 167.
[142] Hasler v Optus Singtel Pty Ltd; Curtis v Singtel Optus Pty Ltd; Singtel Optus Pty Ltd v Almad Pty Ltd [2014] NSWCA 266 (15 August 2014) ; [2014] NSWCA 266; (2014) 311 ALR 494; (2014) 101 ACSR 167 per Leeming JA at [57].
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