Fiduciary Duties
62 A person who occupies a fiduciary position may not use that position to gain a profit or advantage for himself, nor may he obtain a benefit by entering into a transaction in conflict with his fiduciary duty, without the informed consent of the person to whom he owes the duty (per Gibbs CJ in Hospital Products Limited v United States Surgical Corporation (1984) 156 CLR 41 at 67).
63 The rule that a person in a fiduciary position is not entitled to make a profit without the knowledge and assent of the person to whom the fiduciary duty is owed is not limited to cases where the profit arises from the use of the fiduciary position or of the opportunity or knowledge gained from it. The basis of the rule is that a person in a fiduciary position may not place himself in a situation where his duty and interest conflict (per Gibbs J in Consul Development Pty Limited v D.P.C. Estates Pty Limited (1975) 132 CLR 373 ('Consul') at 393).
64 A person under a fiduciary obligation shall not put himself in a position where his interests and duty conflict or, if conflict is unavoidable, shall resolve it in favour of duty and shall not, except by special arrangement, make a profit out of his position (per Dawson J in Hospital Products at 142).
65 A fiduciary can defeat a claim to account for profits acquired by reason of his fiduciary position and by reason of the opportunity resulting from it only on the ground that the profits were made with the knowledge and assent of the person to whom the fiduciary obligation was owed (per Gibbs CJ in Hospital Products at 73).
66 The equitable rules are exceedingly strict (per Gibbs CJ in Hospital Products at 73).
67 The archetype of a fiduciary is the trustee but it is recognised that there are other classes of persons who normally stand in a fiduciary relationship to one another - eg partners, principal and agent, director and company, master and servant, solicitor and client, tenant-for-life and remainderman. There is no reason to suppose that these categories are closed (per Gibbs CJ in Hospital Products at 68).
68 The principle, so far as it applies to directors, was expressed by Lord Cranworth L.C. in Aberdeen Railway Co v Blaikie Brothers (1854) 1 Macq. 461 at 471 as follows:
'A corporate body can only act by agents, and it is of course the duty of those agents so to act as best to promote the interests of the corporation whose affairs they are conducting. Such agents have duties to discharge of a fiduciary nature towards their principal. And it is a rule of universal application, that no one, having such duties to discharge, shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound to protect.'
In Phipps v Boardman [1967] 2 AC 46 Lord Hodson suggested that the phrase 'possibly may conflict' as used by Lord Cranworth may require consideration.
69 Hurley v BGH Nominees Pty Ltd (1984) 10 ACLR 197 was a decision of Walters J in the Supreme Court of South Australia. There are aspects of his Honour's judgment with which I respectfully disagree.
70 The first defendant, BGH Nominees Pty Ltd was a company in which there were six shares on issue, two of which were held by Noel Joseph Hurley, whom I would understand to have been the first plaintiff and one of which was owned by Noel J Hurley Pty Limited which I would understand to have been the second plaintiff. The other three shares were held by the second defendant, Robert Brian Heath. BGH Nominees Pty Limited carried on business as trustee of a trading trust of which the beneficiaries were Mr Hurley, Noel J Hurley Pty Ltd and Robert Heath Nominees Pty Ltd.
71 BGH Nominees Pty Limited carried on its business from premises occupied pursuant to a lease which expired on 30 June 1981.
72 Mrs Heath would appear to have been the third defendant and another company controlled by Mr Heath, Mr Yipod Pty Ltd, the fourth defendant.
73 The plaintiffs suing as shareholders in BGH Nominees Pty Limited claimed that Mr Heath had breached his fiduciary duty as a director of BGH Nominees Pty Limited in that while holding office as a director he entered into a transaction for the purchase of the freehold of the premises which were occupied by BGH Nominees Pty Limited under the lease. It was claimed that Mrs Heath and Mr Yipod Pty Limited participated in and took advantage of Mr Heath's breach of fiduciary duty to the company.
74 As it transpires the matter was heard by Walters J over a protracted period of time. The hearing occupied two days in May 1982 after which the matter went to the Full Court of the Supreme Court of South Australia on an interlocutory appeal brought against the decision of Walters J dismissing an application on the part of the defendants that the action be dismissed on the plaintiffs' opening and the pleadings. The appeal was heard on two days in June 1982 after which the Full Court delivered its reserved judgment on 23 July 1982 dismissing the appeal. Thereupon the trial resumed before Walters J on a series of dates in March, June and July 1984, following which his Honour delivered his reasons for judgment on 18 July 1984. At 201 Walters J found that
'… because of his position as a director of [BGH Nominees Pty Ltd] and of the knowledge and opportunity acquired by him as a director of [BGH Nominees Pty Ltd] … Mr Heath was able to purchase the property in question for the benefit of Mr Yepod (sic) [Pty Ltd], in other words, for the benefit of himself and his wife. In that situation, it seems to me that he acquired the property in a fiduciary capacity and as a constructive trustee for [BGH Nominees Pty Ltd], and I so find.'
75 At 205 Walters J said:
'… it seems to me that a director must not disregard the interests of members of his company, or the interests of beneficiaries who are not shareholders but who are entitled to receive a benefit from the company's activities as a trustee of the relevant trust. I think it would be entirely unreal if a director were allowed to address his mind simply to the interests of the company and not to the additional consideration whether the transaction sought to be impugned was for the benefit of the shareholders or, indeed, the beneficiaries of a trust of which the company is trustee. …'
76 His Honour proceeded to refer to that passage in the judgment of Mason J, as his Honour then was, in Walker v Wimborne (1976) 137 CLR 1 at 7 where his Honour said:
'… the directors of a company in discharging their duty to the company must take account of the interest of its shareholders and its creditors. Any failure by the directors to take into account the interests of creditors will have adverse consequences for the company as well as for them. …'
77 Relying upon Mason J's reference to the need for directors to have regard to the interests of creditors, Walters J proceeded to say at 206, by way of obiter dicta and in my view incorrectly, at least in relation to fiduciary duties said to be owed by a director of a company to beneficiaries of a trading trust of which the company was trustee:
'I am disposed to think that the position of the beneficiaries of a trading trust company can be no lower than that of creditors of the company. And I do not think it can rightly be said that the fiduciary responsibility of a director is owed simply to the company by virtue of his status as a director and that it does not extend to responsibility to shareholders or, indeed, to beneficiaries of a trust of which the company is trustee. …'
78 Somewhat curiously, the last mentioned passage seems to fly in the face of the judgments of the Full Court on the interlocutory appeal then under consideration in Hurley v BGH Nominees Pty Ltd (1982) 6 ACLR 791 at 796 and 800. In the reasons for judgment of King CJ with whom Mitchell J agreed, his Honour said
'… there is no authority which establishes that a director of a trustee company is under a fiduciary duty to the beneficiaries of the trust in respect of property held by the trustee company in its capacity as trustee. …'
79 After referring extensively to Betts, Buchanan and Baxt on Corporate Trustees (1979) White J, as the third member of the Full Court, highlighted that to reach a conclusion such as that reached by Walters J, with which I respectfully disagree, would 'require a marked departure from current thinking and practice by the courts'.
80 White J said at 800:
'… The duty of the directors to the company is clear … but it is not at present clear what duty they owe to the beneficiaries. Any breach of duty by a director to the company is a breach of fiduciary duty, not a breach of trust. The director's duty to the company is quite separate and distinct from the company's duty to the beneficiaries. What of the director's duty to the beneficiaries? The law has not been fully developed in this area. … Whatever the future developments of the law may be, it is not clear now that the beneficiaries under this trust deed have a cause of action against these defendants (other than the company) …'
81 In Spies v The Queen (2000) 201 CLR 603 at [93] Gaudron, McHugh, Gummow and Hayne JJ recorded the view that:
'93 …it is "extremely doubtful" whether Mason J "intended to suggest that directors owe an independent duty directly to creditors" (Heydon, "Directors' Duties and the Company's Interests" in Finn (ed), Equity and Commercial Relationships (1987) 120, at p126)'
82 At [95] Gaudron, McHugh, Gummow and Hayne JJ went on to say:
'95 In so far as remarks in Grove v Flavel (1986) 43 SASR 410) suggest that the directors owe an independent duty to, and enforceable by, the creditors by reason of their position as directors, they are contrary to principle and later authority … and do not correctly state the law.'
83 In Cope v Butcher (1996) 20 ACSR 37 Acting-Master Johnston in the Supreme Court of Western Australia was unwilling to follow the passage in the judgment of Walters J, which, in my opinion, is plainly wrong. The learned Acting-Master said at 38:
'… the law in this State [Western Australia] must be that the directors of a trustee company owe no duty to unit holders of a unit trust solely because of the holding of [a] … directorship of the trustee company. …'
84 Inherent in the nature of the fiduciary relationship is a position, a disadvantage or vulnerability on the part of one of the parties which causes him to place reliance upon the other and requires the protection of equity acting upon the conscience of that other (per Dawson J in Hospital Products at p 142).
85 Contractual and fiduciary relationships may co-exist between the same parties. In situations where the basic contractual relationship has provided a foundation for the erection of a fiduciary relationship it is the contractual foundation which is all important because it is the contract that regulates the basic rights and liabilities of the parties. The fiduciary relationship, if it is to exist at all, must accommodate itself to the terms of the contract so that it is consistent with, and conforms to, them. The fiduciary relationship cannot be 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 (per Mason J in Hospital Products at 97 and 99; see also per Deane J in Moorgate Tobacco Co. Limited v Philip Morris Limited [No. 2] (1984) 156 CLR 414 at 436).
86 Reliance is placed by the applicant upon James Birtchnell v The Equity Trustees, Executors and Agency Company Limited (1929) 42 CLR 384 ('Birtchnell'). In that case James Birtchnell and Lawrence Alfred Birtchnell (the appellants) brought an action against the respondents, The Equity Trustees Executors and Agency Company Limited and one Reginald Stanley Porter, as executors of the will of the late John Porter, claiming, firstly, an account of all monies paid by one Spreckley to the said John Porter in respect of and arising from sales of land and of all monies which the respondents had received or were entitled to receive in respect of or arising from such sales from Spreckley or his legal personal representatives, secondly, payment to each of the plaintiffs of one-third of such monies, and, thirdly, such other relief as might be just.
The appellants had alleged that they had been in partnership with the late John Porter.
The matter came before Irvine CJ in the Supreme Court of Victoria who held that the purchases and sales involved in the dealings under consideration were not part of the relevant partnership business, that the purchases and sales were carried through the books of the partnership for convenience and that there was no express or implied agreement that the scope of the business be extended to include the carrying on of a general business in land speculation and further that there never was any intention that a new partnership was to exist in such business.
By a majority the High Court allowed the appeal to it and ordered that the judgment of Irvine CJ be discharged. The High Court further ordered that an account should be ordered of monies derived by John Porter from his dealings with Spreckley in relation to three particular Estates.
The majority in the High Court consisted of Isaacs, Rich and Dixon JJ. Rich J's judgment included a short statement of his reasons. He did, however, indicate that he had read the judgment of Dixon J, as his Honour then was, and agreed with it.
87 Dixon J said at 409 that it was necessary to begin by ascertaining the subject matter over which the fiduciary obligations extended (see also per Gibbs CJ in Hospital Products at p73).
88 The partnership between the two Birtchnells and John Porter had been in relation to a land agency business, one of estate and financial agents and auctioneers, which they had carried on since 1889. After John Porter's death in 1927 the two surviving partners discovered that he was sharing in the profits arising from some speculations in land which were carried out through the firm's agency by one of its clients. They sued John Porter's executors to compel them to account as for profits obtained by him without disclosure by availing himself of his position as a partner.
89 Dixon J agreed with Irvine CJ's finding that the partners were not disabled from investing and speculating in land for their own separate advantage. However he observed that it did not follow that a partner could, consistently with his duty, secretly share with a client of the firm the profits of a speculation which the client employed the firm to carry out on his behalf.
90 The partnership agreement was varied in 1908 in a manner which supposed that the firm itself had acquired or would acquire interests in land. The partners acquired interests in the profits of 33 land speculations all save for three of which were entered into after discussion among and with the concurrence of all three partners. In the three remaining cases the approval of all the partners was subsequently given.
The partnership secured land for clients for the purpose of subdivision. It subdivided land for clients, and sold it in allotments, and it performed the perhaps more difficult service of collecting the purchase-money for which it accounted after deducting commission. In all such business the firm looked for opportunities to secure, in addition, a share of the proceeds, and it obtained such a share, sometimes as a further reward for services or as an incitement to additional exertion in realising the land, and sometimes as a result of investing capital in the speculation. It followed that the partnership was entitled to avail itself of any opportunity to embark upon such a transaction which came to the knowledge of the partners or any of them and knowledge and information acquired by a partner as to the readiness of a client to share such profits, as to the conditions upon which he would do so, and generally as to every fact bearing upon the terms which the partnership might negotiate with him, were all matters which no partner could lawfully withhold from the firm and turn to his own account. The relation between such a client and the partnership was a matter affecting the joint interests which each member was bound to safeguard and protect and no member could enter into dealings or engagements which conflicted or might conflict with those interests or which gave him a bias against a fair discharge of his duty in that respect (see per Dixon J at 410-412).
It appeared that John Porter and Spreckley arranged not later than 27 June 1925, and probably long before that date, to share the profits to arise from the realisation of land through the agency of the firm by subdivision, sale of allotments on terms, and collection of the instalments, and that much if not all of this land was acquired by Spreckley through the firm in order that it might be realised in that manner. It was implicit in Irvine CJ's judgment that he considered that John Porter had concealed from his partners the fact that he possessed or had acquired a special advantage over them in the transaction. Dixon J considered that the evidence left no doubt that this was so.
Dixon J observed that the specific occasion and cause of John Porter being admitted to participate in the profits of the real estate transactions involving Spreckley were not established. His Honour entertained a series of possibilities. At 417-8, he said:
· 'He may have acquired his right to share in the anticipated profits because he or his son Reginald Stanley invested funds in the transaction whether by loan or otherwise. If so, he took advantage for himself of an opportunity which arose in the transaction of the firm's business in connection with one of its clients and of a nature which the firm was entitled to consider, and use for itself. The knowledge of Spreckley's readiness to share profits at all was information to which the firm was entitled, and this information Porter failed to disclose. He pursued his separate interests, where the joint interests should have been consulted, and excluded the partnership from a benefit or chance of benefit which arose out of the connection of the firm.'
· '… it may have been the case that Spreckley agreed to share profits with him [John Porter] in order to induce him to devote his energies and talents to the speedier or better subdivision of the land, sale of allotments or collection of the proceeds. But, if so, Porter simply diverted to himself remuneration he was bound to earn for the firm.'
· 'A supposition which seems extremely improbable, but which is perhaps possible, is that Spreckley made a gift to Porter of a share of the profits. But if this were the true character of the transaction, it can scarcely be differentiated from additional remuneration. Even if the actual object of such a gift was not to induce Porter to give to Spreckley's business energy, time and care which ought to have been more equally distributed over the various concerns of the firm, its tendency would manifestly be to do so. Indeed, the diaries disclose a preoccupation on Porter's part with the subdivision and sale of Whitethorn and Belgravia which goes far to justify the plaintiffs' complaint that he devoted himself almost exclusively to Spreckley's business. A partner, who is apparently performing the functions undertaken by the firm but is really advancing his separate interest, has a bias against the fair discharge of his duty to his partners. This alone might suffice to disable Porter from secretly taking the gift supposed, and keeping it for himself. But in fact it is only a part, one aspect, of the considerations from which this consequence ensues. The thing given, a right to participate in the client's profits, was an advantage the pursuit of which fell within the scope of the partnership business. The inducement which the firm could hold out to a client in order to obtain this advantage on the joint account consisted in the promise or expectation of an expenditure upon his affairs of greater energy, time, care and enthusiasm. This is the very thing that the acquisition of such a right would tend to promote in the individual partner whether he acquired it by gift, contract or otherwise. Finally the willingness of the client to divide the profits with one partner formed ground for thinking that he might be ready to make some profit-sharing agreement with the firm itself for their mutual advantage, and this was information which one partner could not suppress to forward his separate interest. These considerations combine to make it inconsistent with his fiduciary obligation to conceal the fact, and to take a separate interest without the partners' knowledge and consent.'
91 Birtchnell was, of course, a case concerning fiduciary duties owed by partners one to the other. Before going into the detail as he did, Dixon J said at 407-8:
'The relation between partners is, of course, fiduciary. Indeed, it has been said that a stronger case of fiduciary relationship cannot be conceived than that which exists between partners. … The relation is based, in some degree, upon a mutual confidence that the partners will engage in some particular kind of activity or transaction for the joint advantage only. In some degree it arises from the very fact that they are associated for such a common end and are agents for one another in its accomplishment. … The subject matter over which the fiduciary obligations extend is determined by the character of the venture or undertaking for which the partnership exists, and this is to be ascertained, not merely from the express agreement of the parties, whether embodied in written instruments or not, but also from the course of dealing actually pursued by the firm. Once the subject matter of the mutual confidence is so determined, it ought not to be difficult to apply the clear and inflexible doctrines which determine the accountability of fiduciaries for gains obtained in dealings with third parties. Of the duties imposed by these doctrines, one … is that which forbids a partner from withholding from the firm any opportunity of advantage which falls within the scope of its undertakings, and from using for his own exclusive benefit, information, knowledge or resources to which the firm is entitled. Another duty … is that which requires a fiduciary to refrain from engagements which conflict, or which may possibly conflict, with the interests of those whom he is bound to protect …'
92 As Dixon J observed in Birtchnell, none of the partners was precluded from investing and speculating in land for his own separate advantage. John Porter's failing was that, as a partner in a firm, he secretly shared profits from land speculation, with a client of the firm, where the client had employed the firm to carry out the land speculation on the client's behalf.
93 There is no correspondence between Birtchnell and the facts of the present case. Apart from other considerations, what is in issue in this case is an alleged breach of fiduciary duty said to be owed by the first respondent to the applicant. The case is not one brought by the third respondent's 33 fellow joint venturers in which breaches of fiduciary duties said to be owed by the third respondent to the other joint venture members were alleged.
94 It is also important to distinguish a joint venture from a partnership. In this case the parties were emphatic that they were not to be treated as partners. No joint venturer gained any authority to act as agent for or to bind any or all of the other joint venturers.
95 An enterprise described as a 'joint venture' may well bear the characteristics of a partnership and thus be properly described as a partnership, as was the case in United Dominions Corporation Limited v Brian Proprietary Limited (1985) 157 CLR 1 ('Brian'), but in many instances joint venturers will go to no ends of trouble to ensure that they are not seen to be partners. That was certainly the case in relation to the Horse Park 1 joint venture (see s 7 of the Partnership Act 1963 (ACT).
96 In Brian, Mason, Brennan and Deane JJ said at 10:
'The term "joint venture" is not a technical one with a settled common law meaning. As a matter of ordinary language, it connotes an association of persons for the purposes of a particular trading, commercial, mining or other financial undertaking or endeavour with a view to mutual profit, with each participant usually (but not necessarily) contributing money, property or skill. Such a joint venture (or, under Scots' law, "adventure") will often be a partnership. The term is, however, apposite to refer to a joint undertaking or activity carried out through a medium other than a partnership: such as … joint ownership. …'
97 I pause to observe that it is commonplace for joint ventures to exist where the parties are not associated with one another in a financial 'undertaking or endeavour with a view to mutual profit'. Clearly, the joint venture in this case had no interest in 'mutual' profit. It was formed so as to allow a capital asset in the form of broadacre land to be acquired and developed so as to permit its subdivision into numerous residential leasehold estates which could then be allocated to the several joint venture members according to their respective financial contributions. In some respects it could be compared with a collective of independent grocery stores acquiring product in bulk and then dividing it amongst themselves to enable stock in trade to be acquired at a cheaper price than would otherwise be the case.
98 In Consul, Gibbs J found, at 399, that a manager/director of the respondent, which conducted a business of acquiring dilapidated properties, renovating them and reselling them at a profit, would not be in breach of his fiduciary duty to the respondent or any of the other companies in the group which were, together, controlled by Mr J W Walton, solicitor, were he to buy a property which Mr Walton had, uninfluenced by him, decided not to buy.
99 Where a director of a company has been excluded from all decision-making and all participation in the company's affairs, with the consequence that his influence is such that he might as well have resigned, his duty to the company is diminished. Provided that he does not use the company's property, his duty may be reduced to vanishing point (per Sedley LJ in In Plus Group Ltd v Pyke [2002] 2 BCLC 201 at [89]-[90]).
100 In the circumstances of this case it is necessary to identify the scope and character of the applicant's undertaking, and thereby ascertain the subject matter over which the fiduciary obligations of the directors of the applicant extended. In so doing, it is appropriate to have regard to the nature of the applicant and the purposes for which it was formed, the terms of the Joint Venture Deed constituting the Horse Park 1 joint venture and the limitations imposed thereby upon the undertakings of the applicant and also to the course of dealing actually pursued by the applicant as opposed to matters which some of the joint venture members may have had in contemplation and which may in certain limited circumstances have led to an expansion of the applicant's activities.
101 The scope and character of the applicant's undertaking is not to be determined, for present purposes, by reference to its statutory powers. In another era one would have addressed corporate capacity by reference to the true meaning of a company's memorandum of association. But that is not the issue in the context of a claimed breach of fiduciary duty by a director of a company registered in 2001.
102 The scope and character of a company's undertaking should be ascertained for present purposes by seeking to ascertain the general intention and common understanding of the members (see generally per Dixon J, as his Honour then was in H.A. Stephenson & Son Limited (in liquidation) v Gillanders, Arbuthnot and Company (1931) 45 CLR 476 at 487. See also per Menhennitt J in Re Tivoli Freeholds Ltd [1972] V.R. 445 at 470-472).
103 In the context of clauses 2.5 and 3.2 of the Joint Venture Deed it is difficult to see how the scope and character of the undertaking of the applicant could be expanded beyond its role as trustee and manager of Horse Park 1, in the absence of an amendment to the Joint Venture Deed or a unanimous resolution of the joint venture members. There was no such amendment or unanimous resolution proposed or passed at any time. As will be apparent later, this is really the beginning and the end of the matter.
104 The raison d'etre for the incorporation of the applicant was to serve as the trustee for and manager of the Canberra Residential Developments (No. 1) Joint Venture. One only has to turn to Recital F, the definition of 'Directors' in clause 1.1 and to the provision for the remuneration of 'Directors' in clause 24.3 of the Joint Venture Deed to see that the undertaking of the applicant was inextricably intertwined with and limited by the undertaking of the joint venture itself.
105 It is clear that the function of the Joint Venture Deed was to regulate the relationship between the members of the joint venture and also to provide for the management of it by the applicant. It is equally clear that as the 'sole and exclusive manager' of the Horse Park 1 joint venture, the applicant's role was, as the Joint Venture Deed indicated, that of a 'bare trustee agent and representative of the Joint Venture Members in accordance with [the] Deed' (see clauses 4.2, 4.3, 22.2 and 39.1).
106 Notwithstanding the registration of the applicant on 19 October 2001, almost four months before the execution of the Joint Venture Deed on 12 February 2002, the joint venture was expressed to commence on 13 December 2001, being the date upon which the applicant acquired Horse Park 1 as trustee for the 34 parties whose contributions funded the relevant deposit and who later became joint venture members under the joint venture deed. It will be recalled that Mr Bradley, as solicitor for the emerging group, had proposed the joint venture structure and the need for a company to serve the joint venture members as the applicant did.