Answer structure – Fiduciary duty Fiduciary Relationship The relationship between [X] and [Y] falls into an established category of fiduciary relationship between [fiduciary] and [principal] (case). OR Although they do not fall into a status-based fiduciary category, [X] and [Y] may be in a fiduciary relationship, based on their particular circumstances. Where one party has undertaken to act for another, and the other party reposes trust and confidence in the alleged fiduciary, they may be bound by fiduciary duties (HP v USSC). The vulnerability of the alleged principal in the circumstances will not be conclusive of a fiduciary relationship, but will be a powerful indication that one exists (Hodgkinson v Simms) Discussion Duties Fiduciaries owe two proscriptive duties: (Moss v Moss) - not to obtain a personal benefit or profit from their position as fiduciary (Chan v Zacharia) - not to place themselves in a position where their personal interests conflict with those of the principal (Aberdeen Railway v Blaikie) Discussion of breach Defences A fiduciary has a defence to a breach of duty if the principal has given their full and informed consent to the breach (QLD Mines v Hudson). In effect this imposes an obligation on a fiduciary to make full disclosure to the principal in order to proceed without liability. Discussion Remedies Where a fiduciary has breached their duty and has profited accordingly, the principal may seen an account of profit to give effect to their equitable rights (Warman v Dwyer) The obligation to account for a profit does not depend on the possibility of showing that the person entitled to complain of the breach of duty has suffered pecuniary damage to an equivalent extent (Furs v Tomkies) Discussion
It is not relevant to the liability of a defaulting fiduciary to account for profits that the profit was not available to the party to whom the duty was owed (Regal Hastings). A fiduciary who gains by reason of his/her position may be liable to account for that gain through the imposition of constructive trusteeship upon the fiduciary regarding the moneys or property the subject of the gain. (Hospital Products) Constructive trust can be imposed over property that has been purchased in breach of fiduciary duty even if the errant fiduciary has not profited from that transaction. (Soulos v Korkontzilas) Express Trusts Express declaration Property may be impressed with an express trust in one of two ways: declaration of trust which involves a change in equitable ownership transfer of property to be held in trust by the transferee which involves a change in legal title and usually too in equitable ownership Discussion…Discretionary or fixed? Certainties An express trust requires certainty of: - intention to create a trust - subject matter - objects of the trust Intention Creation of an express trust is based on the express or inferred intention of the settlor. The trust instrument, construed as a whole, must evince an intention to create a trust (Dean v Cole). Here, the intention to create a trust is expressed explicitly…discuss OR The failure to use the word 'trust' does not mean that it was not intended to create one. Intention may be inferred from language, nature of the transaction and the relevant circumstances attending the relationship between them (Re Australian Elizabethan Theatre Trust) For a trust to be intended the words so construed must bear an imperative or mandatory, not a permissive meaning. Disposition expressing the hope,
confidence, wish or belief (precatory words) is unlikely in the absence of contrary intention to bear an imperative meaning. (Hayes v National Heart Foundation) …discuss Subject matter The trustees must be able to identify clearly the trust property and, in the case of a fixed trust, must also be able to identify the precise entitlement of the beneficiaries. (Re Golay) Discuss Objects Under the beneficiary principle, express trusts must be in favour of human beneficiaries (or a recognised charitable purpose) (Morice v Bishop of Durham) For a fixed trust, a list of the beneficiaries must be compiled or be capable of compilation within a reasonable amount of time (West v Weston). OR For a discretionary trust, there must be criterion certainty. That is, it must be possible to state with certainty of any individual whether they fall within the class of beneficiaries. (McPhail v Doulton)…discuss Where the trustees are given a trust power of appointment, McPhail v Doulton suggests an additional requirement of administrative workability – that is, it must be practically possible for the trustees to administer the trust…discuss Charitable trust On its face the trust seems to be a trust for purposes. As such, it will only be valid where it is for a recognised charitable purpose. Charitable purposes are (Pemsel) - the advancement of education - the advancement of religion - the relief of poverty - general public benefit not fitting the preceding categories (Pemsel) Discussion… There is also a general requirement that charitable trusts be for the public benefit (Oppenheim) That is, the trust must benefit the community as a whole or an appreciably significant section of the community (Verge v Somerville) – a class which cannot be determined by family ties, contract, membership of an association or employment (Oppenheim v Tobacco Securities Trust)
Where a trust contains a mixture of charitable and non-charitable purposes, NSW has a legislative scheme for saving the charitable components of the trust, whereas the ACT does not. Where the purposes are so mixed that they cannot be separated by a court (a compendious gift) the trust will be invalid unless saved by a statutory scheme. Where the trustee has discretion to apportion trust property between a number of purposes, in the absence of any apportionment by the trustee a court will apply the gift between the potential objects with the share of the non-charitable objects passing to the testator's next of kin or the settlor in result (Re Clarke; Bracey v National Lifeboat Association) … discuss Formalities The creation or disposition of equitable interests in land must be evidenced and proved in writing (s 23C Conveyancing Act)…discuss Trustee's Powers Fiduciary relationship dictates that powers are to be exercised for the exclusive benefit of the trust, and subject to any restrictions imposed by the trust deed or statute. Exercise of powers A trustee is a fiduciary and therefore, whether holding a trust power (which must be exercised) or a bare power (which need not be exercised) will be subject to high standards. In relation to trust powers, which must be exercised, there is an additional right in the objects of the powers to call for their exercise. (McPhail v Doulton) In Lord Wilberforce's view any difference in the exercise of trust powers and mere powers is negligible; rather, the size of the class and the size of the fund will be influential in determining the extent of the trustees' responsibilities. In his view, the trustees given a mere power, like the trustees of a trust power, must assess: • the "permissible area of selection", • consider whether a potential object of the power was within the power and • consider whether a particular grant was appropriate. Discuss Exercise of discretion Trustees must exercise their discretion in good faith, upon real and genuine consideration and in accordance with the purpose for which the discretion was conferred. (Karger) Discuss
Review Trustees are not required to give reasons for their decision; however, "if trustees of their own volition disclose their reasons they are treated as waiving their immunity and inviting examination and review of the reasons." The issues which are examinable by the Court are limited to whether there has been a failure to exercise the discretion in good faith, upon real and genuine consideration and in accordance with the purposes for which the discretion was conferred. In short, the Court examines whether the discretion was exercised but does not examine how it was exercised. (McGarvie J, Karger) The exception is that the validity of the trustees' reasons will be examined and reviewed if the trustees choose to state their reasons for their exercise of discretion. The test of acting honestly is the same as the test of acting in good faith... (Karger) …discussDuties of trustees Standard of care A trustee ought to conduct the business of the trust in the same manner that an ordinary prudent man of business would conduct his own, and beyond that there is no liability or obligation on the trustee. (Re Speight) The standard of care for trustees in exercise of their duties is objective and does not depend on the skill and care which the trustee would exercise in his own business. There is a higher standard expected of professional trustees than lay trustees especially when the former hold themselves out as having special skills and charge remuneration: (Bartlett v Barclays Bank Trust Co Ltd (No 1). Discuss Duty to account and provide information As the trustee must hold and deal with the trust property for the benefit of the beneficiaries, the trustee must account for her or his stewardship. (Re Simersall) Therefore the trustee must keep proper accounts and allow the beneficiaries to inspect these. The trustee's duty extends to providing full information concerning the management of the trust. The duty to give information applies to potential objects of the exercise of a mere power (Spellson v George). Beneficiaries have a proprietary interest in trust documents (Re Londonderry) The beneficiary's right to information concerning the trust may be qualified or excluded by a specific provision in the trust instrument. (Re Londonderry's Settlement) Trust documents are (Re Londonderry) a) documents in the possession of the trustees as trustees b) contain information about the trust which the beneficiaries are entitled to know
c) the beneficiaries have a proprietary interest in the documents and are entitled to see them. Discuss Duty to Invest Trustees are obliged to invest trust moneys even absent a declaration in the trust instrument to this effect (Adamson v Reid) Absent any specification in the trust document, there a general statutory power of investment (s 14 Trustee Act) S 14C specifies the matters that a trustee shall have regard to in exercising the power. Generally, they must not be swayed by their own personal or ideological preferences as to suitable investments (Scargill) Discuss Duty to act impartially Trustee must not act in a manner that favours the entitlements of one class to the detriment of those of another. Trustee must manage the fund in a manner productive in the interests of income beneficiaries, but must not risk or reduce the capital to the detriment of the beneficiaries in remainder. Unanimity
If the trustees cannot agree, the status quo prevails. One practical consequence of the unanimity rule is that trust business cannot be transacted except at a meeting at which all the trustees are present. (Luke v South Kensington Hotel Company)..discuss
Appointment of an agent
As a general rule, trustees must exercise their powers personally. Delegation of the trust's execution may be permitted by the trust instrument or legislation (s 64 Trustee Act) …discuss
A trustee may not employ an agent where he should do the work himself, but he may employ an agent where it is in the ordinary course of business to use others and he runs no needless risk in doing so. (Re Speight) …discuss Resulting Trusts Failure of express trust Where an express trust fails, a trustee will hold the trust property on resulting trust back to the settlor…discuss Failure to dispose of the whole beneficial interest If the trust distributions do not exhaust the resources of the trust, the property will be held on resulting trust for the contributor(s)/transferor(s) (Re Gillingham Bus Disaster Trust)
Purchase of property in the name of another Where one person contributes to the purchase price of property, and places it in the name of another, equity will presume that they did not intent to make a gift, rather that the property is subject to a resulting trust to the extent of their contribution (Calverley v Green). This presumption is rebuttable, either by evidence of contrary intention or via the contrary presumption of advancement. Presumption of advancement Where [a husband buys property in the name of his wife]/[a parent buys property in the name of their child] they are presumed to have made a gift. (Calverley v Green/Nelson v Nelson) Evidence of by evidence of the actual intentions, at the time of purchase, of the parent or other person who provided the purchase money, can rebut the presumption of advancement (Nelson v Nelson)…discuss Illegality Party to a transfer of property for an illegal purpose can recover that property if he or she can establish a legal or equitable title therein without relying on her or his own illegality. If that party is unable to establish her or his cause of action without disclosing the illegal purpose of the trust he or she is not entitled to the relief sought (Scott v Brown) Where the illegality flows from statute, it is a question of the impact of the statute itself upon the institution of the resulting trust. (Nelson v Nelson) If it is possible to recognise the resulting trust such that the court does not assist in an illegal venture, or enrich a claimant unjustly, they may be able to claim a resulting trust.
Constructive Trust A constructive trust can be imposed on the basis of parties' common intention, or to remedy an unconscionable outcome under the common law. Common intention A court may impose a constructive trust to give effect to the common intention of the parties as to ownership of property. The common intention to which the Court gives effect may be expressed in such an oral agreement or it may be ineferred from the conduct of the parties (Gissing v Gissing) What is enforced is an actual intention, inferred as a matter of fact not an imputed intention which they never had but would have had if they applied their minds to it (Allen v Snyder) …discuss
Unconsionability A constructive trust may be found where the substratum of a joint relationship or endeavour is removed without attributable blame and where the benefit of money or other property contributed by one party on the basis and for the purposes of the relationship or endeavour would otherwise be enjoyed by the other party in circumstances in which it was not specifically intended or specially provided that that other party should so enjoy it…. in such a case, equity will not permit that other party to assert or retain the benefit of the relevant property to the extent that it would be unconscionable for him so to do… (Deane J, Muschinski v Dodds). Unconscionable conduct is assessed against notions of what is fair and just, but only in the confined context of determining whether conduct should, by reference to legitimate processes of legal reasoning, be characterised as unconscionable for the purpose of a specific principle of equity whose rationale and operation is to prevent wrongful and undue advantage being taken by one party of a benefit derived at the expense of the other party in the special circumstances of the unforeseen and premature collapse of a joint relationship or endeavour. Equity requires that the rights and obligations of the parties be adjusted to compensate for the disproportion between their contributions to the purchase and improvement of the property. That adjustment requires, at the least, that the parties be proportionately repaid their respective contributions to the extent allowed by the proceeds of any sale. (Deane J, Muschinski v Dodds) Equity favours equality – where parties have lived together for some time and 'pooled their resources and efforts to create a joint home', a court will start from the premise that they should share beneficial ownership equally as tenants in common. (Baumgartner v Baumgartner) Adjustments will be made to avoid any injustice that would result from not taking account of any disparity between individual contributions (Baumgartner)…discuss
Timing Parson v McBain rejected the idea that a constructive trust only comes into existence when ordered by a court. Absent 'something tangible and distinct having grave and strong effect to accomplish the purpose' (Abigail v Lapin) equitable interests under a constructive trust may not be defeated by transfer of the legal interest (to a trustee in bankruptcy, creditors etc)
Recipient Liability [X] may be liable to [Y] for having received property in breach of a trust (or other fiduciary obligation (Consul)). Recipient liability requires: - 'chargeable' receipt, in own capacity and not as agent (Citadel) - of trust property - subject to an express trust, or company assets transferred by directors (not clear whether applies to constructive trust) (Citadel) - with knowledge on the part of the recipient. In Australia, the knowledge requirements for recipient and accessory liability are not settled definitively. Consul Developments and Citadel Assurance (Canadian) accept the classification of types of knowledge adopted in Re Baden, and suggest that all 5 classes of knowledge on the Baden scale will be sufficient to ground recipient liability. Given that the recipient has obtained a personal benefit, a lower threshold of knowledge is required than for assistance in a breach of trust. (Citadel) Discuss Remedies [Y} may seek a constructive trust or a charge over the property received by {X], assuming that it can be traced. Accessory Liability To show that [X] is liable as an accessory, it must be shown that: - there was a breach of a fiduciary duty (Consul) - [X] assisted in the breach, in that but for their conduct the breach would not have occurred (Twinsectra) - [X] had knowledge of the breach or was dishonest (Consul; Royal Brunei) Breach of duty: Discuss Assistance Discuss – but for test Knowledge Knowledge, for accessory liability, requires a higher threshold than in the case of a recipient (Citadel Assurance). Generally, knowledge that fall into the first three categories on the Baden scale will be sufficient to ground liability, but the latter
two constructive forms of knowledge will not suffice – the conscience of the individual has to be affected by their knowledge (per Stephen J in Twinsectra). Discuss Alternatively, the English decision in Royal Brunei suggests that dishonesty is the touchstone of liability. That is, the conduct in question would be regarded by honest persons as dishonest (Twinsectra) Discuss Breach of Trust A breach of trust consists in nothing more nor less than an act by the trustee in contravention of the duties imposed on him by the trust or in excess of his powers. (Re Spedding) Not all breaches of trust and not all breaches of duty by a fiduciary, amount to a breach of fiduciary duty: Bristol and West Building Society v Mothew Remedies Where the trust estate has suffered losses, the trustee may be liable for equitable compensation plus interest. Equitable compensation aims to restore the trust estate to the position it would have been in but for the breach (Re Dawson) The causal connection is established by satisfying a 'but for' test (Target Holdings). Even if the immediate cause of the loss is the dishonesty or failure of a third party, the trustee is liable to make good that loss to the trust estate if, but for the breach, such loss would not have occurred. (Target Holdings) Interest is awarded on equitable compensation in order to properly compensate for a breach of trust or fiduciary duty where there is an interim between the loss occurring and the remedy being granted: Re Dawson OR Where a trustee has profited in breach of trust, the trustees may seek an account of profits (a personal remedy) (Warman v Dwyer) or a charge or constructive trust over the profits and property purchased with them (a proprietary remedy). OR Where a third party is liable as recipient or as an accessory, they can be subject to personal claims, and to proprietary claims in relation to trust property (if it can be traced).
Equitable compensation for non-fiduciary breaches of trust The remedy of equitable compensation is still evolving (Beach Petroleum v Kennedy). There is some question as to whether equitable compensation for non-fiduciary breach of trust should be restorative, or compensatory – that is, should compensation be awarded for breaches of non-fiduciary duty subject to the same rules as common law damages. Bristol & West Building Society held that 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. The High Court has questioned this approach in Youyang, arguing that equity is a separate body of law, which developed distinct from the common law and should not automatically be subject to the same restrictions. Tracing Property needs to be identifiable before tracing is available. Once the property or its proceeds have been dissipated, the right to trace ends. Tracing into mixed funds – mixed trusts Equity developed rules for tracing into mixed funds, whereas the common law did not. Where monies are misappropriated and paid into more than one account it is inappropriate to apply Clayton's case (first in first out) - investors can be repaid pari passu. (Re Registered Securities) Where a trustee mixes the money of two or more trusts, and there is insufficient money to meet all claims, the beneficiaries may be able to claim only a part of the moneys to which they are entitled. Their claims on the fund may have to abate because of the trustee's fraud (Stephens Travel v Qantas) The general rule is that the beneficiaries have an interest in the mixed fund in proportion to their contribution to it (Lord Provost of Edinburgh v Lord Advocate). OR Tracing into mixed funds – trustee's own account When funds from a trust fund are mixed in the trustee's own bank account, equity presumes that any transactions involved only the trustee's personal funds, so that any amount remaining is trust money (Rule in Re Hallett's Estate) Where property is purchased with trust funds and the trustees own money the beneficiary will be entitled to a charge over the property to secure restitution of the trust moneys, including a proportionate share of any increase in value (Scott v Scott) Lowest Intermediate Balance Rule
Equity limits the beneficiaries' proprietary claim to the lowest balance in the account between the date of the wrongful deposit and the date the claim was made unless it can be inferred that the trustee intended to restore funds to the depleted trust (lowest intermediate balance rule) (James Roscoe v Winder) Beneficiaries may be able to recover greater than the minimum intermediate balance if they can trace the withdrawn funds. (Re Oatway) Tracing to a Third Party Bona fide purchaser for value of the legal estate without notice of a trust will take free from the claims of beneficiaries. Where third parties know of the trust they may be liable as constructive trustees. The beneficiary proprietary claim to the trust property or its traceable proceeds can be maintained against all except a bona fide purchaser for value without notice. Same rules apply where there have been numerous successive transactions, so long as the tracing exercise is successful. (Foskett v McKeown) Tracing into increase in value Where a trustee wrongfully misappropriates trust property and uses it exclusively to acquire other property for his own benefit, the beneficiary is entitled at his option either to assert his beneficial ownership of the proceeds or to bring a personal claim against the trustee for breach of trust and enforce an equitable lien or charge on the proceeds to secure restoration of the trust fund. (Foskett v McKeown) If the traceable proceeds have increased in value, he will assert his beneficial ownership and obtain a profit. (Foskett v McKeown)