Fiduciary relationships are arguably the cause of fiduciary duties. This article examines the undertaking theory and the trust and confidence theory of fiduciary relationships, as well as the conflict rule and the profit rule.
Tests of Fiduciary Relationships
There are two theories or tests as to when a fiduciary relationship comes into existence and how it can be identified.
- The first theory may be called the "undertaking" theory. According to the "undertaking" theory, a fiduciary is someone who has undertaken to act in a beneficiary's interest.
- The second theory can be called the "trust and confidence" theory. According to this theory, a fiduciary is someone in whom a beneficiary has full trust and confidence that the person is acting and will act in the beneficiary's interests rather than the fiduciary's own interests. It is the abuse of that trust and confidence which is said to justify the intervention of equity. One theorist has argued that "trust is the essential feature of a fiduciary relationship".
The two major obligations owed by fiduciaries are a duty of loyalty and a duty to account for benefits gained. These obligations are commonly known as the "conflict rule" and the "profit rule". However, these are not the only obligations a fiduciary may owe.
The conflict and profit rules are overlapping rules, in the sense that in most cases where there is a profit gained from a fiduciary position there has also been a conflict of duty and interest. The conflict and profit rules are nonetheless distinct themes of fiduciary obligation.
In Australia, the fiduciary obligations are negative only and are not positive, as the High Court made clear in Breen v Williams (1996) 186 CLR 71. So, in Australia, being a fiduciary only entails prohibitions.
Loyalty
A fiduciary owes a duty of loyalty to the principal. A fiduciary is thereby bound to act in the interests of the principal, and not to pursue his or her own interests.
Lord Cranworth LC discussed fiduciary duties in Aberdeen Railway Co v Blaikie Bros. (1854) 1 Macq 461, as follows.
- [I]t 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. So strictly is this principle adhered to that no question may be raised as to the fairness or unfairness of a contract so entered into.
This principle was illustrated by the High Court of Australia in Chan v Zacharia (1984) 154 CLR 178, as follows.
- Per Gibbs CJ and Deane J — Where a partner obtains, without the consent of his co-partner, a renewal in his own name of a lease of partnership premises, there is a rebuttable presumption of fact that the renewed lease was obtained by use of his fiduciary position, and that he holds it as constructive trustee for the partnership. This presumption extends to the case where a partnership has been dissolved and the assets are in the course of realization. In the present case there was nothing to rebut the presumption.
Remedies in Equity
Equity will appropriate for a principal any benefit or gain obtained or received by a fiduciary in circumstances where there existed a conflict of personal interest and fiduciary duty, or a significant possibility of such conflict. The purpose of the law is to ensure that the fiduciary is motivated only by a duty of loyalty, which is not compromised by the possibility of gaining a personal advantage.
Operation of Fiduciary Duties in Business
Fiduciary duties underlie many agency, partnership and company directors' duties. The employee-employer, parent-child and lawyer-client relationships are some of the many nominate categories of fiduciary relationships.
Sources:
Aberdeen Railway Co v Blaikie Bros. (1854) 1 Macq 461.
Breen v Williams (1996) 186 CLR 71.
Chan v Zacharia (1984) 154 CLR 178.
Join the Conversation