Plaintiffs v Defendants

Supreme Court of Victoria|2006-04-07|Before: Hollingworth J

Equity - fiduciary duties - nature of fiduciary duties - whether proscriptive or prescriptive - held that fiduciary owes no positive duty of disclosure of past wrongdoing

Practice and procedure - pleading struck out with no right to re-plead - appropriate principles to be applied

"31 Further, by letters dated 23 September 1999 and 12 October 1999 the plaintiffs, as they were entitled to do, required Anthony Porto to advise of property development dealings other than for the plaintiffs in which he had been involved and where the dealings occurred while he was an employee and or director of P & V Industries or after that time but where the dealing was initiated during that period.

A copy of each of the letters may be inspected by arrangement at the office of the plaintiffs' solicitors.

32 Anthony Porto has failed, neglected and refused to advise the plaintiffs of the details sought and continues to fail, neglect and refuse to do so.

33 By the further conduct referred to in paragraph 32 Anthony Porto has breached and [is] continuing to breach his employment agreement.

34 Further and alternatively to paragraph 33, by the conduct referred to in paragraph 32 Anthony Porto has breached and continues to breach each and every one of the fiduciary duties.

35 Further and alternatively to paragraphs 33 and 34, by the conduct referred to in paragraph 32 Anthony Porto has breached and continues to breach each and every one of the statutory duties."

5 By a notice of appeal dated 3 November 2005, the plaintiffs seek to appeal against the Master's orders in relation to paragraphs 31, 32 and 34.

Applicable pleading principles

6 In the claim, the duties pleaded in paragraph 13 as implied terms of the employment contract are also pleaded in paragraph 14 as fiduciary duties[1]. Those duties include the traditional fiduciary duties encompassed by the "no profit" and "no conflict" rules, which I will discuss shortly. There is no pleading in paragraph 13 or 14 of a positive duty of disclosure of wrongdoing. There is only the allegation in paragraph 31 that the plaintiffs requested Anthony Porto to provide the relevant information "as they were entitled to do."

7 If successful in this appeal, the plaintiffs wish to re-plead paragraphs 31, 32 and 34 in substantially their current form, and also to include as paragraph 13(p) an express allegation that Anthony Porto owed a duty to "disclose to the plaintiffs any conduct by him which constituted a breach of any of those [earlier pleaded] duties."

8 Whether treated as an application to strike out the current paragraphs, or to amend the claim to add paragraph 13(p), there is no real dispute that the relevant test is essentially the same for the purposes of this case. The oft-quoted passage from Dixon J, as he then was, in Dey v Victorian Railways Commissioners[2] reminds us that a case must be very clear indeed to justify the summary intervention of the court to prevent a plaintiff from submitting its case for determination.

9 Barwick CJ in General Steel Industries set out the test as follows:

"The test to be applied has been variously expressed; 'so obviously untenable that it cannot possibly succeed'; 'manifestly groundless'; 'so manifestly faulty that it does not admit of argument'; 'discloses a case which the court is satisfied cannot succeed'; 'under no possibility can there be a good cause of action'; 'be manifest that to allow them' (the pleadings) 'to stand would involve useless expense'."[3]

10 The plaintiffs rightly point out that nowhere is the need for caution more important than in a case where the ultimate outcome turns upon the resolution of a disputed issue of fact.[4] But that is not a significant consideration here. The current dispute is over whether the law recognises a positive duty of disclosure in a fiduciary relationship; that issue can be determined as a matter of law without first needing to resolve any underlying factual dispute. In considering this appeal, I proceed on the assumption that the plaintiffs would be able to establish all of the factual matters pleaded in the claim.

11 I accept that, on a pleading summons, courts should not be too quick to stifle the development of the law in an area in which the outcome is likely to turn on developing doctrine.[5] But in my opinion, for the reasons which follow, there is no indication that the law in Australia is developing or likely to develop to include a positive fiduciary duty of disclosure.

12 A person in a fiduciary position is not, unless otherwise expressly permitted, entitled to make a profit from his position of trust ("the no profit rule") or to put himself in a position where his duty and personal interest conflict ("the no conflict rule"). These general rules are both cast in proscriptive terms, being things which a fiduciary cannot do. Here, the claim alleges breaches by Anthony Porto of both the no profit and no conflict rules.

13 The plaintiffs also argue that, as a director, Anthony Porto owed a fiduciary duty to disclose his past wrongdoing. They rely on the recent decision of the English Court of Appeal in Item Software (UK) Limited v Fassihi [6], as referred to at first instance in Trevorrow v State of South Australia (No 2)[7], as authority for that proposition. The defendants deny that any such duty is recognised by Australian law.

14 The defendants' position certainly represents the traditional Australian view on the subject. For example, Glover states the position as being that:

"Fiduciary duties do not impose positive obligations on fiduciaries who are not trustees. This is sufficiently important to repeat. No obligatory course of action is mandated by the fiduciary rules. Instead, fiduciary law is cast in terms of what fiduciaries must abstain from rather than consider or perform."[8]

15 The defendants particularly rely upon the High Court cases of Breen v Williams[9] and Pilmer v Duke Group[10], as authority for the proposition that fiduciary duties are limited to proscriptive duties.

16 Breen was a case in which a patient sought access to her medical records from her doctor. The court held that no right of access existed, whether as an implied contractual right or proprietary right, or as an incidence of the duty of care, a fiduciary duty or a general "right to know".

17 The court held that if a doctor was in a fiduciary relationship[11], his duties and obligations were limited to the no profit and no conflict rules; all members of the court agreed that there was no fiduciary duty to allow access to the patient's medical records.

18 The defendants rely in particular upon the following statements in the joint reasons of Gaudron and McHugh JJ:

"In this country, fiduciary obligations arise because a person has come under an obligation to act in another's interests. As a result, equity imposes on the fiduciary proscriptive obligations - not to obtain any unauthorised benefit from the relationship and not to be in a position of conflict. If these obligations are breached, the fiduciary must account for any profits and make good any losses arising from the breach. But the law of this country does not otherwise impose positive legal duties on the fiduciary to act in the interests of the person to whom the duty is owed. If there was a general fiduciary duty to act in the best interests of the patient, it would necessarily follow that a doctor has a duty to inform the patient that he or she has breached their contract or has been guilty of negligence in dealings with the patient. That is not the law of this country."[12]

19 Gummow J agreed, observing that to hold that a fiduciary has a positive obligation to act in the interests of the beneficiary would be to turn established principle on its head.[13]

20 Dawson and Toohey JJ noted that there was a tendency in the United States of America, and to a lesser extent Canada, to view a fiduciary relationship as "imposing obligations which go beyond the exaction of loyalty and as displacing the role hitherto played by the law of contract and tort by becoming an independent source of positive obligations and creating new forms of civil wrong."[14] Brennan CJ confirmed that that notion does not accord with the law of fiduciary duty as understood in this country.[15]

21 The plaintiffs argue that the principles in Breen should be confined to a doctor-patient relationship. They say that a distinction should be drawn between a director, who is the mind of a company, and a doctor, who is not the mind of his patient. Such a distinction may well be relevant to the question of whether there is a fiduciary relationship at all. But the statements of fiduciary principle in Breen, referred to above, were cast in very general terms, and not limited to the doctor-patient relationship.

22 When Breen had been before the New South Wales Court of Appeal,[16] Kirby P, as he then was, had agreed with the Supreme Court of Canada in McInerney v MacDonald[17] that a fiduciary relationship between doctor and patient could involve a positive obligation of disclosure. However, when later sitting on the High Court in Pilmer, a case involving an accountant and client, Kirby J accepted that his earlier opinion had not found favour with the High Court. His Honour noted that the High Court in Breen had upheld "the principle stated in the aphorism that fiduciary obligations are 'proscriptive' and not 'prescriptive'."

"This, in my view, is the fundamental reason why all members of this court in Breen rejected [the patient's] claim of a fiduciary obligation. Whatever the differing views which the justices held concerning the character of the relationship in question there and whether it was, or was not, a fiduciary one for some or all purposes, there was agreement that [the patient's] claim failed because it would have involved imposing on the suggested fiduciary positive obligations to act. It would have burdened him with an affirmative obligation to grant access to his notes to a patient ('prescriptive' duties). It would thus have gone further than the conventional ('proscriptive') duties of loyalty, of avoiding conflicts of interest or of misusing one's power, such as fiduciary duties have traditionally upheld.

Whilst, for my own part, I question the viability of this supposed dichotomy (because omissions quite frequently shade into commissions) I must accept that Breen embraces the distinction. Moreover, it is one that has been approved in commentaries. Until further elucidated by this court, it should therefore be followed by Australian courts and by me."[18]

23 The decisions in Breen and Pilmer clearly confirm that, in Australia, fiduciary duties are limited to proscriptive duties of loyalty. Breen was decided only 10 years ago and Pilmer as recently as 2001. The comments made by Kirby J in Pilmer, even if made somewhat reluctantly, to the effect that the proscriptive-prescriptive dichotomy is one which should be followed by Australian courts, are entirely apposite here. This means that the no conflict and no profit rules encompass the whole content of fiduciary obligations and the duty of loyalty imposed on a fiduciary is promoted by prohibiting disloyalty rather than by prescribing some positive duty.[19]

24 It is true that there are cases which refer to a fiduciary as having an "obligation" to make disclosure. However, in each instance, advance disclosure functions only as the means of obtaining the consent of the beneficiary, thereby avoiding a breach of the two fundamental rules governing proscriptive fiduciary relationships. As Lindgren J observed in National Mutual Property Services (Australia) Pty Ltd v Citibank Savings Ltd:

"there are countless statements in the authorities that fiduciaries as such (I exclude contractual undertakings) have an obligation to make voluntary disclosure, but always, so far as my researches reveal, as the means of avoiding a breach of the related duties not to have a secret interest conflicting with their duty as a fiduciary and not to make a secret profit from their fiduciary position."[20]

His Honour then approved the following observation by Glover:

"[t]here is as yet in Australia no positive rule that a fiduciary must disclose personal interests to a beneficiary, or disclose anything else. Adequate disclosure is a defence to each of the conflict and profits rules, as we will see. Any positive disclosure rule would have to have a content. It could not be a mere prohibition. This would be contrary to the scheme of fiduciary duties."[21]

25 The function of disclosure in these contexts is quite different from the disclosure proposed by the plaintiffs, which is a positive duty to disclose past wrongdoing.

The English position

26 The plaintiffs say that it is at least arguable that the law in Australia is that stated by the English Court of Appeal in 2004 in Item Software, rather than the High Court in Breen and Pilmer. I disagree, for several reasons.

27 In Item Software, the relevant question before the court was whether a director and employee of a company could be in breach of any duty by failing to disclose his own misconduct at the time it occurred. In deciding the matter, Arden LJ, with whom the other members[22] agreed, focused on the person's duties as a director. That is because the duties imposed on a director are generally higher than those imposed on a mere employee; a director is in a fiduciary relationship, with a responsibility for the success of the company's business.

28 The court held that a fiduciary owes no separate and independent duty to disclose his own misconduct; "so to hold would lead to a proliferation of duties and arguments about their breadth."[23] However, it went on to hold that a director's fundamental fiduciary duty of loyalty was a dynamic and flexible concept, which may, nonetheless, require disclosure to be made.

"I prefer to base my conclusion in this case on the fundamental duty to which a director is subject, that is the duty to act in what he in good faith considers to be in the best interest of his company."[24]

29 The duty of loyalty was described as the "time-honoured rule", a phrase used in an American case to which the court referred without any analysis[25]. Her Ladyship then quoted at some length from an American academic text, which spoke in very general terms about the fiduciary's duty of loyalty, before stating that the "observations seem to me to express qualities of the duty of loyalty applying equally to the law of England and Wales."[26] The passage from which she quoted had said nothing about any obligation to disclose, merely that the general fiduciary duty of loyalty is a residual concept that can include factual situations that no one has foreseen and categorized. She went on to conclude that:

"The only reason that I can see that it could be said that the duty of loyalty does not require a fiduciary to disclose his own misconduct is that it has never been applied to this situation before. As I have explained, that is not a good objection to the application of the fiduciary principle."[27]

30 She said that her conclusion, which she based on "policy reasons" was not inconsistent with the House of Lords decisions in Bell v Lever Brothers Ltd[28] or Horcal Ltd v Gatland[29], which she felt had not addressed this issue directly. Her Ladyship distinguished Horcal on grounds that it applied only "in the context of disclosure before an agreement for payment of compensation or an increase in remuneration was made".[30] However, it is difficult to imagine how Robert Goff LJ would not have regarded a duty to disclose personal misconduct to be part of a director's basic duties of loyalty if such a duty was not to exist at the time a director was negotiating a compensation package.

31 On the facts of the case, Arden LJ said that there was no basis on which the director "could reasonably have come to the conclusion that it was not in the interests of [the company] to know of his breach of duty. In my judgment, he could not fulfil his duty of loyalty in this case except by telling [the company] about [his misconduct]."

32 With the greatest respect, I do not find this line of reasoning satisfactory. Whilst acknowledging that there is no separate duty of disclosure, the court effectively went on and imposed one, and did so on what does not seem to be a sound theoretical footing. It did so without adequately describing the true scope of the obligation, other than by vague reference to "the interests of the company".

33 The court did so largely for policy reasons, which included the economic inefficiency of a company having to expend resources investigating a director's wrongdoing. However, fiduciary duties are not traditionally analysed in terms of economic efficiency; an economic analysis belongs more traditionally in areas of tort or contract law.

34 The court did not consider Breen or Pilmer and noted that it had been referred to no Commonwealth authority at all. Even if, which may be doubted, the decision in Item Software represents the current law in England, it does not represent the law in Australia.

35 Item Software was considered in Australia in the decision of Gray J in Trevorrow[31]. The case considered whether legal professional privilege could be claimed by the State in respect of documentary records relating to a child who had been a ward of the State. The State conceded that it had been in a fiduciary relationship vis-à-vis the child[32].

36 Gray J said that among the duties owed by a fiduciary to a beneficiary was a duty to disclose. He then noted that the classical formulation of that duty involved the obligation to disclose all interests that may conflict with the interests of the other person. This is the prior voluntary disclosure that I discussed earlier in these reasons. However, his Honour then quoted with apparent approval from Item Software, which dealt with disclosure of past wrongdoing, not prior voluntary disclosure. He did so without any discussion of the fact that these are completely different situations. He also did not discuss Breen or Pilmer.

37 He concluded that to determine whether the Board should have disclosed its misconduct, one must examine whether the best interests of the plaintiff child required the disclosure of any breach of duty. As the interests of the welfare of a child are paramount, legal professional privilege cannot be used as a shield to prevent the child from having access to and fully exploring all information relevant to the child's welfare[33].

38 In fact, it is not clear to me that the matter was actually decided on fiduciary grounds at all. I say that because his Honour may have based his reasoning on statutory duties, not fiduciary duties:[34]

"it would be wholly inconsistent with the rationale for the privilege that it should protect a deliberate abuse of statutory power. It is arguable on the plaintiff's case on the material presently before the court that privilege has been sought to be used to protect the government or its instrumentalities from the consequences of a deliberate abuse of statutory power."

39 On appeal, the Full Court of South Australia upehld the decision that the information was not priviliged, but for different reasons. Doyle CJ found that the matter of privilege was resolved by the finding that "there was nothing in the circumstances to suggest to the solicitors... that the use of the advice was subject to obligations of confidentiality or restrictions."[35] Consequently, his Honour stated that "while I do not agree with all aspects of the judge's reasons, I agree with his ultimate conclusion" which is that "the information was not received by the solicitors in circumstances that imported an obligation of confidence."[36]

40 Furthermore, his Honour preferred "not to express any view on the other grounds on which the judge found that legal professional privilege could not be claimed. It is not necessary to do so, in light of the decision I have reached."[37] White J also did not consider whether fiduciary duties could be thus expanded and found that "the decision of the judge rejecting the claim for legal professional privilege was correct either because the documents lacked the necessary quality of confidentiality, or because the privilege which was otherwise applicable had been waived."[38]

41 As Trevorrow was decided upon the law of privilege, the Full Court did not comment on the correctness of Item Software or the contradictory High Court authority.

42 While Canadian and American courts view fiduciary obligations as both proscriptive and prescriptive, Australia has clearly not followed the trend in North American decisions to find fiduciaries have positive obligations to act to protect the interest of the principal, disclose information or give advice.

43 The law in Australia, as outlined in Breen, is that fiduciary duties are limited to imposing constraints on conduct which the fiduciary has in fact embarked upon and not by imposing a positive obligation of disclosure of the kind assumed by a duty to disclose. Indeed, the ruling in Item Software does not make any reference to Breen despite the fact that Breen has been adopted elsewhere in England.[39] Item Software, to the extent that it advances a different view, is therefore not a decision that is consistent with Australian law.

44 Regardless of the status of Item Software in England, the High Court in Cook v Cook[40] observed that previous judicial statements of the English Court of Appeal should no longer be seen as binding upon Australian courts. The precedents of other legal systems are not binding and are useful only to the degree of the persuasiveness of their reasoning.[41] Even if I were not bound by Breen and Pilmer, I do not find the reasoning in Item Software to be satisfactory.

45 Senior counsel for the plaintiff argued that Item Software is showing an evolving further responsibility on directors of companies as manifested in the one issue that has permeated both jurisprudence and community interest in North America, Australia and England: the calling of directors to account for their wrongful behaviour. However lauded such endeavours to increase corporate transparency may be, these changes have largely taken the form of increased statutory duties. It is not the place for courts to usurp the role of the legislature and, in the process, tinker with established equitable rules such as those that govern the duties of fiduciaries.

46 The High Court in Breen cautioned against excessive judicial activism in law reform:[42]

"Advances in the common law must begin from a baseline of accepted principle and proceed by conventional methods of legal reasoning. Judges have no authority to invent legal doctrine that distorts or does not extend or modify accepted legal rules and principles. Any changes in legal doctrine, brought about by judicial creativity, must "fit" within the body of accepted rules and principles. The judges of Australia cannot, so to speak, "make it up" as they go along. It is a serious constitutional mistake to think that the common law courts have authority to "provide a solvent" for every social, political or economic problem. The role of the common law courts is a far more modest one.

In a democratic society, changes in the law that cannot logically or analogically be related to existing common law rules and principles are the province of the legislature. From time to time it is necessary for the common law courts to re-formulate existing legal rules and principles to take account of changing social conditions. Less frequently, the courts may even reject the continuing operation of an established rule or principle. But such steps can be taken only when it can be seen that the "new" rule or principle that has been created has been derived logically or analogically from other legal principles, rules and institutions."

47 Whether such a duty forms part of the law of Australia is a decision which should be made by an appellate court not by a judge at first instance on an interlocutory application. Therefore, the correct course of action is for me to dismiss the appeal against the Master's orders. This path is well trodden. Esanda Finance Corporation Ltd v Peat Marwick Hungerfords[43] is an example of a matter that began as a strike out application for want of a discernable cause of action that eventually found itself before the High Court, with the High Court being in a position to make definitive pronouncements on the point of law in question.

48 As I have found that no obligation of disclosure exists, it is not necessary for me to consider whether such a duty would survive the termination of the fiduciary relationship; suffice to say that I find no logical reason why the duty ought to terminate on the end of a relationship, given that this duty specifically relates to past conduct.

49 For the reasons given above, the appeal must be dismissed.

[1] I query whether all of the duties pleaded in paragraph 13 are in fact capable of being fiduciary duties, but that is not a matter I need to determine for the purposes of this application.

[2] [1949] HCA 1; (1948) 78 CLR 62 at 92.

[3] General Steel Industries Inc v Commissioner for Railways (NSW) [1964] HCA 69; (1964) 112 CLR 125 at 129.

[4] Webster v Lampard [1993] HCA 57; (1993) 177 CLR 598 at 602 per Mason CJ, Deane and Dawson JJ.

[5] Heptonstall v Gaskin (No 2) [2005] NSWSC 30 at [14] per Hoeben J.

[6] [2004] EWHC 948; [2004] IRLR 928.

[7] Unreported, 26 September 2005, Supreme Court of South Australia per Gray J, BC200507294.

[8] John Glover, Equity, Restitution & Fraud (2004) at [4.2].

[9] [1995-6] 186 CLR 71.

[10] [2001] HCA 31; (2001) 207 CLR 165.

[11] About which there was disagreement.

[12] At 113.

[13] At 137-8.

[14] At 95.

[15] At 83.

[16] Breen v Williams (1994) 35 NSWLR 522.

[17] (1992) 93 DLR (4th) 415.

[18] [2001] HCA 31; (2001) 207 CLR 165 at 214.

[19] Richard Nolan, A Fiduciary Duty to Disclose? (1997) 113 LQR, 222.

[20] Unreported, Federal Court, 28 May 1998 at 23.

[21] From Commercial Equity: Fiduciary Relationships (1995) at [5.10].

[22] Mummery LJ at [124] and Holman J at [84].

[23] At [41].

[24] At [41].

[25] Mutual Life Insurance Co of New York v Rank Organisation Ltd [1985] BCLC 11 at 21.

[26] At [43].

[27] At [44].

[28] [1931] UKHL 2; [1932] AC 161. Bell v Lever Brothers is the classic authority for the proposition that an employee who had committed a fraudulent breach of the terms of his employment is not under a duty to disclose that breach to his employer: "The servant owes a duty not to steal, but, having stolen, is there superadded a duty to confess that he has stolen? I am satisfied that to imply such a duty would be a departure from the well established usage of mankind and would be to create obligations entirely outside the normal contemplation of the parties concerned."

[30] Item Software, above n 1, [58].

[31] Unreported, 26 September 2005, Supreme Court of South Australia per Gray J, BC200507294.

[32] At [81].

[33] At [88].

[34] Ibid, [89].

[35] Trevorrow v South Australia (No 4) [2006] SASC 42, [52] .

[36] At [54-55].

[37] At [69].

[38] At [176].

[39] See: Attorney-General v Blake [1998] Ch 439.

[40] Cook v Cook [1986] HCA 73; (1986) 162 CLR 376, ('Cook v Cook').

[41] Ibid, 390 (Mason, Wilson, Deane And Dawson JJ).

[42] Breen at 115 per Gaudron and McHugh JJ.

[43] Esanda Finance Corporation Ltd v Peat Marwick Hungerfords [1997] HCA 8; (1997) 188 CLR 241.

At a glance

Court

Decision date

Before

Source

Judgment (32 paragraphs)

Cases Cited (7)