Table of Contents
A fiduciary relationship is the relationship between the fiduciary and the beneficiary or the principal and the duty owed between the two parties to ensure decisions are made in the best interest of one another. The existence of fiduciary relationships can be presumptive and/or status based or non-presumptive and determined on facts and/or conduct.
Each relationship is based on either a horizontal duty which consists of a mutually owed duty and equal parties or a vertical owed duty which consists of a one-way duty to a more vulnerable party.
The test for whether a fiduciary relationship arises is if, in actual circumstances of the relationship, the principal can reasonably expect the fiduciary to act in the principal’s best interests.
A joint venture has a non-presumptive fiduciary duty which is determined based on facts and conduct . In order to determine if a fiduciary duty exists between two parties involved in a joint venture, the indicia of fiduciary relationships is used.
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As seen in Breen v Williams, Australian courts have consciously refrained from adopting a general test for the existence of a fiduciary relationship, and pointed to matters that may suggest the existence of a fiduciary relationship, including a relation of confidence, inequality of bargaining power, an undertaking by one party to perform a task or fulfil a duty in the interests of the other party, the unilateral exercise of a discretion of power by one party which may affect the interests of the other or dependency or vulnerability which causes reliance on the other.
It has also been noted in Hospital Products Ltd v United States Surgical Corp “The critical feature of these relationships is that the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense.
The relationship between the parties is therefore one which gives the fiduciary a special opportunity to exercise the power or discretion to the detriment of that other person who is accordingly vulnerable to abuse by the fiduciary of his position. The expressions ‘for’, ‘on behalf of’, and ‘in the interests of’ signify that the fiduciary acts in a ‘representative’ character in the exercise of his responsibility, to adopt an expression used by the Court of Appeal.”
The “critical feature” of the traditional fiduciary relationship was the undertaking or agreement by the fiduciary to “act for or on behalf of or in the interests of another person in the exercise of power or discretion which will affect the interests of that other person in a legal or practical sense.”
In this instance, Ronaldo did make the unilateral decision to add to the overall cost of the project without consulting and providing Tim with full disclosure of his plans. Tim and Ronaldo entered into the joint venture on the basis that Tim provided the land and Ronaldo landscaped the land and developed the commercial shops. The venture was started on the presumption both parties would fulfil the agreement, in turn showing a dependency that caused a reliance on each party to fulfil their obligations to the detriment of the other party.
The agreement was started upon the reliance Tim would provide something to his detriment (which in this case was the land) on the preemies that Ronaldo would provide something to his detriment (which in this case was the time and expertise in the development and landscaping of the project), this shows a clear relation of confidence in each party and the undertaking of both parties to fulfil the duties in the interests of the other.
The agreement allowed Ronaldo to make decisions on behalf of the venture with relation to his obligations and in turn, allowing him to hire David to carry out the landscaping as Ronaldo had the unilateral exercise of power and the discretion in this instance which was proven by the fact he was not required by the agreement to consult with Tim prior to making decisions around the landscaping and development of the project.
With the elements of the indicia of fiduciary relationships satisfied, it can be established there was a fiduciary relationship between Tim and Ronaldo in this agreement and TPL and RPL respectively. The duty was of a horizontal nature as the parties were equal partners in the venture.
Issues
Where there is a fiduciary duty in a joint venture, both parties must make decisions that are in the best interests of the venture and the parties and not profit personally from their dealings. Nothing with equitable value can be used for personal gain and the scope of the fiduciary duties will decide the scope of the breach.
There is two ways a fiduciary can be in breach of their duties; firstly, by being in a conflict of interest position or secondly, by making an improper gain from their position. A fiduciary has the duty to not place oneself in a position of conflict of their duties relating to the principal and their duties as a fiduciary or trustee, the duty not to make profit from the principal’s trust and the duty not to act for one’s own benefit or the benefit of third parties without the consent of the principal. A fiduciary must not profit from their position except with the principal’s fully informed consent.
In Aberdeen Railway Co v Blaikie Bros Lord Cranworth explains that no one with a fiduciary duty “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 whom he is bound to protect.” The phrase “possibly may conflict” was then interpreted in Boardman v Phipps to mean “that the reasonable man looking at the relevant facts and circumstances of the particular case would think that there was a real sensible possibility of conflict.” It is shown in Regal (Hastings) Ltd v Gulliver that a fiduciary can only profit from his or her position as the fiduciary if they have the principal’s fully informed consent. This consent must be full and frank and will not be so if it is misleading or inadequate and must be of all material facts to the principal . Disclosure must be made to the principal and if there us more than one principal it must be made to all as per Australian Securities Commission v AS Nominees Ltd. A fiduciary must also not be in a position where their duties to two or more parties conflict for example if a solicitor acts for two parties with conflicting interests as per Stewart v Layton (t/as BM Salmon Layton & Co).
In relation to Tim and Ronaldo, it is clear Ronaldo allowed his personal interest to prevail over the duty he owed to Tim therefore violating the duty not to profit from the position of a fiduciary by receiving an improper gain. In this instance, equity will intervene to prevent profit from the abuse of duty of the fiduciary. The scope of the duty or responsibility will determine the scope of the breach however, equity will not override existing legal obligations in contract, equity will only supplement with the relevant fiduciary duties as applicable.
Remedies
When considering which remedies are appropriate for this type of breach of a fiduciary duty, the facts, jurisdiction and category of remedies are considered. The court prefers to award personal remedies, however proprietary relief is possible in exceptional cases namely where the gain is readily identifiable. Subject to discretion, in the inherent jurisdiction, the remedy of equitable compensation may be awarded to a plaintiff. Explained in Re Dawson (dec’d) the objective of equitable compensation is to restore the assets of which the trust has been deprived as a result of misappropriation by the trustee or fiduciary “the trustee is liable to place the trust estate in the same position as it would have been in if no breach had been committed….
The principals embodied in this approach do not appear to involve any inquiry as to whether the loss was caused by or flowed from the breach, rather the inquiry in each instance would appear to be whether the loss would have happened if there had been no breach.” When the plaintiff shows the breach by non-disclosure of material facts and/or other fraudulent conduct the court will infer the breach caused the plaintiff’s loss without the need for any further evidence as demonstrated in Brickenden v London Loan & Saving. It can be established the causation of the loss was the breach from the fiduciary, if Ronaldo had not added the extra to the bill of the venture, Tim would not have paid the extra money and the loss would not have occurred.
The object of equitable compensation is to restore persons who have suffered loss to the position in which they would have had there been no breach of the equitable obligation in question. The considerations for the court in awarding equitable compensation as a remedy were outlined in Pilmer v Duke Group Ltd, it was noted that causation, remoteness, contributory conduct and mitigation are not factors that affect the assessment of compensation and that the amount awarded should not be exemplary. It is distinct from common law damages because there is no remoteness test and the damages are assessed at the time of the judgment . The necessary casual connection is determined by asking whether the profit was obtained “by reason of fiduciary position or by reason of his taking advantage of opportunity or knowledge derived from his fiduciary position”. Ronaldo using the contractor to finish the addition to his personal home and charging that to the costs of the business venture without providing disclosure to Tim shows the misuse of the opportunity and advantage of his position as fiduciary, namely from the power to make decisions unilaterally in relation to the landscaping and development.
As seen in Gemstone Corporation of Australia v Grasso the remedy used in this instance will be equitable compensation, since the principal has suffered a loss whilst the fiduciary has hardly made a monetary profit which makes account for profits an inappropriate remedy. In this instance, the loss suffered by the principal was in the overall bill of the venture which included the building and concreting works at Ronaldo’s personal home and therefore the loss would be to the value of what share Tim paid as extra for the works.
TPL may also have a claim for third party liability against David. In limited circumstances, where there is a breach of trust or fiduciary obligation and a third party was involved, there may be a claim for third party liability. As per Farah Constructions Pty Ltd v Say-Dee Pty Ltd, the liability of a third party may arise if the third party in questions has; knowingly received property in breach of trust or fiduciary duty or knowingly assisted a trustee or fiduciary to breach fiduciary duty or commit a breach of trust. In relation to the level of knowledge that is required by the third party, Justice Peter Gibson in Baden v Societe Generale pour Favoriser le Developpement du Commerce et de l’Industrie en France SA determined five separate levels of knowledge. Actual knowledge, wilfully shutting one’s eyes to the obvious, wilfully and recklessly failing to make inquiries that an honest and reasonably person would make knowledge of circumstances which would indicate the facts to an honest and reasonably person and knowledge of circumstances which would put an honest and reasonable person on inquiry. Further cases have indicated that liability must be established based on the first four of the above criteria, not solely on the fifth level of knowledge.
For a third party to be held accountable, it must be established that a trust or fiduciary relationship exists, dishonesty or fraudulent design on part of the trustee exists, the third party has assisted the trustee in that dishonesty or fraudulent design and the third party has the requisite knowledge.
In this instance, David is the third party as he has received the benefit from the fiduciaries’ failure of duty and dishonest decision. It has been established a fiduciary relationship existed between TPL and RPL and Tim and Ronaldo respectively and there was dishonest design on part of Ronaldo towards the joint venture. In relation to David assisting the fiduciary in the dishonesty, the level of knowledge needs to be established.
In order to establish the requisite knowledge level, we refer to Baden and the five levels considered by Justice Gibson. David did not have actual knowledge as it was not disclosed that he was given actual confirmation that Ronaldo was not to use the funds to pay for the extra works he engaged David’s services for. It may be inferred that David may have wilfully shut his eyes to the obvious or wilfully and recklessly failed to make inquiries that an honest and reasonable person would make as he was informed the payment would be coming from the joint venture between RPL and TPL without receiving the consent by the other party of the venture. A reasonable person may have made enquiries with both parties of the venture to ensure disclosure was given with regards to the funds for the project. If it is established that there is liability of a third party, the third party can be personally liable to account and a constructive trust can be imposed upon the assets of the third party. Once the requisite knowledge level has been established, the third party liability can be established and a claim made.
Conclusion
In conclusion, it is apparent that the joint venture did raise a fiduciary relationship and duty between Tim and Ronaldo and their companies, TPL and RPL respectively. The scope of the duty was not to enter into a conflict of interest or profit for personal gain as fiduciaries of the venture. It is established that Ronaldo has failed in his duty as a fiduciary and therefore is accountable for his failure. Tim has a claim in equitable compensation against Ronaldo and RPL respectively for the portion of the money that was misappropriated as the venture costs and used for Ronaldo’s personal gain.
David failed to make the reasonable enquiries in relation to the acceptance and disclosure of all principals of the venture for the extra costs associated with the works at Ronaldo’s personal home. Due to the lack permission given from all principals to David and his lack of reasonable questioning, he may now be liable as a third party to the breach. As stated previously, if third party liability is established, David may be responsible to account for his profits and/or a constructive trust may be imposed upon the assets of the third party to account for the amount caused in accordance with the breach.
