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Module 2 · Fiduciary relationships and duties

What this module covers and why it matters. This module covers when one person owes another a fiduciary obligation and what that obligation contains. A fiduciary is a person who must act loyally in relation to another's interests, and equity enforces that loyalty by forbidding conflict and profit. The module matters because fiduciary issues run in nearly every year and they rarely stand alone. The relationship finding is the gate that opens the conflict and profit breaches in the investment question, the constructive trust over an incentive and the third party and tracing questions later in the subject. Get the relationship right and the rest of the answer has somewhere to stand.

How to use this guide. The numbered scaffold below is the analytical order for a problem. Work it in sequence because each step depends on the one before, and do not reach for a remedy before you have found a relationship, a content and a breach. The comparison table fixes the one distinction the module turns on, which is established category against ad hoc. Read the guide once for the map and then revise from the scaffold and the table.

Cases at a glance

The analytical scaffold

Use this fixed order when a problem asks whether someone has breached a fiduciary duty. It is a student framework rather than an exam script, so understand why each step comes where it does.

1. Is there a fiduciary relationship? Take the recognised categories first. If none fits, run the ad hoc analysis. This is the gate. Nothing downstream runs without it.
2. Is the relationship vertical or horizontal? A vertical relationship has one party acting for another. A horizontal relationship binds joint venturers to each other, and the duty can arise before the venture is formally constituted.
3. What is the content of the obligation? In Australia the duties are proscriptive. There is no unauthorised conflict and no unauthorised profit, and no positive duty to act in the other's best interests.
4. Was there a breach? Test it act by act. A single course of conduct can contain several distinct breaches.
5. Was it authorised? Only the fully informed consent of all beneficiaries or principals excuses a breach. One person's acquiescence is not enough.
6. What remedy flows? Account of profits, equitable compensation, or a constructive trust over the unauthorised gain.
7. Who else has a claim? Note the third party and tracing questions that follow, and ask who competes for the asset if anyone is bankrupt.

Having set out the order we take the load bearing steps in turn.

Is there a fiduciary relationship

This is the gate of the whole module. The status question is answered in two ways and you try them in order. First ask whether the relationship is one the law already recognises. Only if it is not do you run the harder ad hoc test.

The categories are a set of keys. If the facts fit one of them then status is settled without argument and you move straight to content and breach. This is why the trustee, the solicitor with a trust account and the company director are the typical exam figures. Their status is not in issue and the marks lie in what they then did.

Mason J's critical feature test has clean elements and you run each one. There must be an undertaking to act for or on behalf of another. It must be in the exercise of a power or discretion. That power must affect the other's interests. The other must be correspondingly vulnerable. The house term for this is ad hoc fiduciary and not factual fiduciary, so use it.

There is an alternative route into a fiduciary position. A person who holds themselves out as acting in another's interests, such as an adviser giving investment advice, may thereby assume the position (Daly v Sydney Stock Exchange, Gibbs CJ and Brennan J). A stockbroker who presents as advising a client takes on the obligation by the holding out itself.

The second scaffold step lives here too. A vertical relationship has one party acting for another. A horizontal relationship binds parties to a common venture inter se, and the duty can arise before the venture is formally on foot (United Dominions Corporation v Brian). The informal joint venture opener is a recycled exam figure and it feeds the conflict machinery of the investment module, so watch for parties who are cooperating in a venture that has not yet been documented.

The content of the obligation

Having found a relationship you turn to what it requires. The Australian answer is narrow and deliberate, and stating it precisely is where marks are won and lost.

Proscriptive means the duties tell the fiduciary what not to do. There are two prohibitions and no more. Do not have an unauthorised conflict. Do not make an unauthorised profit. Equity does not add a positive command to serve the beneficiary well, so a claim framed as a failure to act in the beneficiary's interests is not a fiduciary claim in Australia. This limit does real work in the traps below.

The strictness is the twist. Honesty is no defence and neither is the fact that the principal suffered no loss and could never have taken the opportunity. In Regal (Hastings) v Gulliver the directors acted in good faith and the company could not itself have taken up the shares, yet they still had to account for the profit. The rule reaches the gain because it was made through the position, and the fiduciary's motive and the principal's inability are beside the point.

Only fully informed consent authorises a conflict or a profit, and it must be the consent of everyone entitled. One beneficiary saying that a course is fine does not excuse the breach. State the rule and then show whose consent is missing, because the missing consent is usually the answer. Two limits are commonly planted and each is disposed of by naming it.

The first is harm dressed as a fiduciary wrong. A planted physical or psychological injury is not a fiduciary breach, because it is not relevant subject matter over which fiduciary duties attach. The duties are proscriptive and protect against conflict and profit only. Name the limit and move on rather than analysing the harm as a loyalty question.

The second is the incentive or secret commission, which is the classic profit breach and the bridge forward to the constructive trust module. A reward paid to a fiduciary for steering a transaction is a straightforward unauthorised profit. In Australia it can be held on constructive trust, subject to remedial discretion (Grimaldi v Chameleon Mining (No 2)).

Remedies in outline

Every breach closes with a remedy and its character, so finish the analysis rather than stopping at the breach. The choice of remedy shapes what the plaintiff actually recovers and whether the claim survives the defendant's bankruptcy.

Three remedies sit here and each answers a different need. An account of profits strips the gain and the court may allow something for the fiduciary's skill in producing it. Equitable compensation repairs a loss. A constructive trust attaches to a specific unauthorised asset and gives the plaintiff a proprietary claim, which is what matters in an insolvency because it reaches the asset ahead of the general creditors. The choice of remedy is the plaintiff's, subject to the bar on double recovery. The bribe or secret commission case is where the constructive trust earns its keep, because a personal right to account is worth little against a bankrupt defendant while a proprietary claim reaches the specific asset.

Established category or ad hoc

The one distinction the module turns on is how status is shown. The table sets the two routes side by side and simplifies them to their working parts.

The lesson of the table is procedural. Run the categories first because they settle status without argument, and reach for the ad hoc test only when no category fits. A common error is to argue the ad hoc features for a defendant who is plainly a director or a solicitor, which wastes the effort the marks are not paid for.

How the examiners test this

This section reads soberly from where the marks fall and from the recycled traps.

Fiduciary issues run in most years and they rarely stand alone. The relationship finding sets up the conflict and profit breaches in the investment question and the constructive trust over an incentive, then the third party and tracing questions after that. Treat the finding as the foundation for a larger answer rather than as a self contained topic.

Two traps are planted repeatedly and each is worth stating in the examiner's own terms. The first is acquiescence by one beneficiary. One person's approval ratifies nothing, because you need the fully informed consent of all beneficiaries to excuse the breach. State the rule and then identify whose consent is missing. The second is harm dressed as a fiduciary wrong. A planted assault is not a fiduciary breach, because such harm is not relevant subject matter over which fiduciary duties attach, since Australian fiduciary duties are proscriptive and protect against conflict and profit only. Name the limit and move on.

Close every breach with the remedy and its character. Use an account or equitable compensation for a personal claim, and reach for a constructive trust where a specific unauthorised asset must be captured in a bankruptcy. The remedy is not an afterthought. It is where the constructive trust and the insolvency contest are won.

One further point is essay content and not hypothetical fodder. Whether the Crown owes Indigenous Australians a fiduciary obligation is argued in the essays through O'Connell, Gover and the Bulun Bulun material. It is a genuine debate about the reach of fiduciary doctrine and it belongs in prose argument. It is never planted as invented hypothetical facts.

Consolidation

Fiduciary analysis runs in a fixed order. Find the relationship, by category first and by the ad hoc test only if no category fits. Fix the content, which in Australia is the proscriptive pair of no unauthorised conflict and no unauthorised profit. Test the breach act by act and remember that honesty and the absence of loss are no defence to the strict no profit rule. Ask whether every principal or beneficiary gave fully informed consent. Then close with the remedy and its character, because the account, the compensation and the constructive trust do different jobs and the proprietary claim is the one that survives insolvency.

Take it to the practice bank

This module is drilled in the Equity and Trusts practice bank. Every problem there carries a realistic Pass answer, an H1 model answer, and an examiner's comment explaining the decisive fact and where the marks are lost.