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EQUITY WEEK 6/7, Trusts and Other legal relationship, what is a trust,…

- - - - Equity recognizes some relationships as giving rise to particular duties of loyalty. Term is from the latin “fiducia” = trust, confidence, loyalty. The fiduciary must avoid conflicts of interest.Example (studied in legal ethics) – a lawyer is in a fiduciary relationship with their clients. If a lawyer acting of a client learns of a business opportunity, they cannot exploit that opportunity themselves. Example #2 – a trustee owes a fiduciary duty to their beneficiary
      - A fiduciary may be someone who holds property for another, but this is not essential (ie a solicitor client relationship) But, fiduciary duties are usually imposed to protect property and economic interests. A finding that a relationship is fiduciary can open the door to property claims. If the fiduciary acquires property in breach of their fiduciary duties, that property may be held in constructive trust for the party the duty is owed to.
    - - The fiduciary is prohibited from acting other than in the interests of the beneficiary. A finding of breach does not: Depend on intent or Require loss . Irrelevant that consent to actions would have been given if requested if no request made and actual consent given. Duties may be: Vertical – one party owes fiduciary duties to the other. (Ie solicitor-client) or Horizontal – both parties owe fiduciary duties to each other. (Ie a partnership)
        
        DUTIES ARE NEGATIVE NOT POSITIVE
        
        Fiduciary duties are proscriptive not prescriptive. Means it is a duty to refrain from doing certain things rather than positive obligations to act. Fiduciary duties can supplement duties owed in statute, contract, tort, or under professional obligations.Example – A lawyer working under retainer has a duty to work diligently on the file – these duties are based in contract and professional obligations. They are not fiduciary. By contrast, the lawyer has a duty not to use information acquired from the client for his own benefit. Doing so breaches fiduciary duties owed. But a clear distinction between a negative and a positive duty can sometimes be difficult to draw. In other jurisdictions (ie Canada) fiduciaries can owe both positive and negative duties.
        
        CONFLICTS BETWEEN DUTY AND INTEREST
        
        Fiduciaries must avoid a situation where their duties come into conflict with their own personal interests. “Duty” here means the actions the fiduciary has undertaken to carry out for the other party. These are not specific legal duties, and will vary from case to case. “Interest” is a personal concern or pecuniary (financial) interest. This rule is strictly applied – conduct can still be a breach of fiduciary obligations even if the other party benefits. Profits must be disgorged. Fiduciaries are held to a high standard of conduct.
        
        SITUATION WHERE DUTY AND INTEREST CAN CONFLICT
        
        Unauthorized Remuneration: Fiduciaries can receive payment for services. Note – special rules for trustees, who as a general rule cannot require pay. BUT fiduciaries must not receive unauthorized payments for their actions. Examples: Secret commissions or bribes. Tips/gratuities (other than small sums received after performance). Fiduciary “assumes a double character” Example – fiduciary is an agent acquiring shares, and without disclosure, sells own shares to the principal.
        
        Breach of undertaking sub-rule
        
        Fiduciary cannot act to their own benefit in a transaction which attracts fiduciary duties. But remember, the nature of the duties owed depends on the circumstances of the case. Question of what is the scope of the undertaking must be addressed before one can look at whether there has been a breach. Clark Boyce v Mouat: solicitors who acted for both a woman and her son did not breach the fiduciary duties owed to her by failing to advise her of the wisdom of entering into the transaction as their retainer was only to provide legal advice.
        If the actions are within the undertaken duties and there is a conflict between interest and duty, informed consent must be acquired. Boardman v Phipps: the solicitor for a trust, who had information about a company as a result of his position, acted with another to take over the company. Two of the three trustees consented. Both the solicitor and the trust profited. The beneficiaries were able to claim the solitictor’s profits as not all trustees had consented.
        
        Misuse of position sub-rule
        
        Applies where the fiduciary uses their position to exploit an opportunity, and obtains benefits by reason of their position. Irrelevant whether the party duties were owed to could have exploited the opportunity. Applies not only to opportunities the party could have exploited, but also to things that they might reasonably be interested in, considering the party’s line of business.
        
        Conflicts between duty and duty
        
        Applies where a person owes fiduciary duties to more than one party, and their interests conflict. Can occur where: A lawyer acts for multiple clients. A director sits on the board of more than one company. An agent acts for multiple principals. Informed consent can be a defence.
    - - When do fiduciary duties arise
        
        Characteristics of a fiduciary relationship (no single one is determinative): Trust/confidence, Vulnerability (particularly when arising from the relationship). Acceptance of an obligation to act for another. Doing a job/exercising a power to make decisions for another. But these characterise relationships which are not fiduciary!The High Court has recognized that the cases provide “no comprehensive statement of the criteria by reference to which the existence of a fiduciary relationship may be established”: Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41.
        
        fiduciary relationships
        
        Some relationships are presumed to be fiduciary. Classic example -- trustee-beneficiary. Also lawyer-client:This should be familiar to you from legal ethics. Arises when a lawyer assumes the responsibility to act for a client. Based on the retainer, written or implied.On termination of relationship, obligations of confidentiality will continue. Divided authority on fiduciary duties. In other cases, fiduciary duties may be found based on the specific circumstances of the relationship.
        
        DIRECTOR-COMPANY
        
        A company is a legal person. Broadly: The shareholders hold ownership stakes in the company. The shareholders elect the directors to manage and control the company. Executive officers (ie the CEO) are appointed by the board of directors to run the company on a day to day basis. They report to the board of directors. Both directors and executive officers owe fiduciary duties to the company. Duties are not owed to shareholders, except in special circumstances. May occur, for example, in a family company where the director is in a position of influence with other family members. Duties are not ordinarily owed to creditors, but may become fiduciary where company is insolvent.
        
        AGENT- PRINCIPAL
        
        An agency relationship exists where the agent has the power to create legal relationships between the principal and third parties. Example – if I am selling my house, I can retain a real estate agent. They have the power to conduct negotiations and potentially to accept offers to buy my house on my behalf. Fiduciary duties are owed by the agent to the principal. Agent must avoid conflicts of interest. Agent must communicate information to principal if non-disclosure would equate to self-interest.When the fiduciary duties will be owed will depend on the contract creating the agency relationship. My real estate agent’s power to create legal relations that bind me is limited to the sale of my house.
        
        PARTENRSHIPS
        
        A partnership is a legal structure where two or more persons carry on business together. Partnership Act 1982 (NSW), s. 1: “Partnership is the relation which exists between persons carrying on a business in common with a view of profit and includes an incorporated limited partnership.” You will study partnerships in more detail in the Law of Business Organizations (LOBO). Fiduciary duties can arise in relationships resembling partnerships but where the formal partnership relationship is not established. Situation of mutual fiduciary duties. The nature and extent of the duties will depend on the contract creating the partnership.
        
        GUARDIAN-WARD
        
        Guardians may be responsible for minor children or for adults who are unable to manage their own affairs. A guardian is not necessarily a trustee of the ward’s property. This means that actions of a guardian will not be held to the same standard as those of a trustee. The relationship is fiduciary, but not all of the guardian’s conduct will attract fiduciary duties. May require the guardian to advise ward re existence of legal claims. Does not include an obligation to ensure the ward’s physical safety.
        
        relationships where fiduciary duties are not presumed
        
        commercial relationships
        
        Ordinary commercial relationships are not usually fiduciary. In negotiations and other dealings, parties free to pursue their own self-interest. Parties are presumed to be sophisticated, acting at arm’s length, with access to legal counsel and advisors.
        
        Employer-employee
        
        Employees may be fiduciaries to their employers if they are in a position of “trust confidence and vulnerability”. Senior employees at the management level (ie a CEO) will usually be a fiduciary. Other employees may be fiduciary. A finding that an employee is a fiduciary means that the employee owes undivided loyalty to the employer – goes beyond contractual duties. Employee is required to put employer’s interest above own. Non-management employees approached by a competitor did not breach fiduciary obligations in not informing employer: Lonmar Global Risks v West.
        
        Financial advisor-client
        
        Financial advisors may be fiduciaries. Will depend on the relationship. May arise where there is an undertaking to advise and reliance on that advice. But requires more than just reliance on skills without any guidance of influence: see Pilmer v Duke Group (in liq) (2014) 207 CLR 165. Banks are usually not fiduciaries in relation to customers. However they may become fiduciaries if they take on an advisor role.
        
        crown-indigenous persons
        
        In Canada, the idea that the Crown owes a fiduciary duty to indigenous persons is clearly established. Based on fact that native lands not alienable except by surrender to the Crown. Source – both caselaw and the Constitution Act 1982, s. 35(1) Legislation which interferes with indigenous land rights reviewable by the courts in accordance with fiduciary duties imposed in equity. New Zealand also recognizes that Crown owes fiduciary duties. In Australia, position unclear: Toohey J in Mabo suggested there was a fiduciary relationship. Subsequent caselaw contradictory. If indigenous rights receive constitutional recognition, this may change.
    - - When information is provided in confidence, equity may prevent the unauthorized use of that information. “If a defendant is proven to have used confidential information, directly or indirectly obtained from a plaintiff, without the consent, express or implied, of the plaintiff, he will be guilty of an infringement of the plaintiff’s rights.” Saltman Engineering Co Ltd v Campbell Engineering Co Ltd. (1948) 65 RPC 203 Confidential information can be disclosed: In personal relationships. To the government, In business dealings.
        
        Elements of the action
        
        Element of an action for breach of confidence (from Optus Networks Pty Ltd v Telstra Corp Ltd. (2010) 265 ALR 281):
        Information must be identified with specificity
        Information must have the necessary quality of confidence. \
        Information must have been received in circumstances importing an obligation of confidence owed to the claimant
        There must be a misuse of the information (actual or threatened) without the authority of the provider.
        Information does not need to meet the requirements of being intellectual property to be protected.
        
        Quality of confidence
        
        First two elements are related – information must be identified in order for the quality of confidence to be established. Information must not be in the public domain. Can enter the public domain by publication, ie in newspapers, or via open court proceedings. Transitory publication may not destroy confidentiality. Publication to a limited group of persons may not destroy confidentiality.
        
        Information that may be confidential: Personal information (address, financial info)
        Details of sexual relationships/preferences/activities Photographs Diaries/journals/memoir
        s Medical information (ie treatment for drug addiction)
        Identity of criminals/witnesses, etc. (if not in the public interest to disclose)
        Cultural information (ie secret aboriginal cultural practices)
        Commercial information (trade secrets)Distinction between trade secrets and employee “know-how” or general stock of knowledge in profession.
        Trival information is not protected. Government secrets (but subject to public interest).
        
        Obligation of confidence
        
        :Coco v A N Clark (Engineers) Ltd, [1969] RPC 41 Facts: Negotiations to manufacture mopeds in a joint venture. Plaintiff disclosed designs to defendant. Negotiations failed, and defendants manufactured mopeds integrating elements of the design. Test is objective. “Any reasonable man in the shoes of the recipient … would have realized the upon reasonable grounds the information” was confidential.
        
        Obligation can be expressly stated, or inferred from the conduct of the parties, or inferred from the nature of the relationship. Obligation is implied when there is a fiduciary relationship. Prince Jefri Bolkiah v KPMG (a firm) [1999] 2 AC 222 KPMG, an accountancy firm, had acted for the chairman of a Brunei company. The chairman objected to KPMG being retained by the Brunei government to investigate that company. An injunction was ordered unless KPMG could show effective measures had been taken and there was no risk of information being disclosed to investigators.
        
        Accidental communication, misappropriation and eavesdropping
        
        Whether an obligation of confidentiality arises will depend on the circumstances. Fractionated Cane Technology v Ruiz-Aliva, defendants invited to a demonstration which produced unexpected results. No obligation of confidence arose. Misappropriated – ie where info is gained by industrial espionage. Will be protected as it would be unconscionable to allow, even if technically not communicated in circumstances where obligation of confidentiality understood. Phone tapping/eavesdropping. May depend on whether conduct legal and/or it would be unconscionable to allow use of the information.
        
        ESTABLISHING THE BREACH
        
        Question is what use of the information will be a misuse/breach the duty of confidentiality. Smith Kline & French Laboratories (Australia) Ltd v Secretary, Department of Community Services and Health (1991) 28 FCR 291. Facts: drug company disclosed information to the government for the purposes of an application to extend a patent. The government used the information to evaluate an application for a generic drug. The first company argued this was misuse, but was unsuccessful. Question is whether unfair use has been made of the information. The court rejected a test of whether the use was within the purpose of disclosure. Divided authority on whether detriment must be shown. If it is a required element, it will be a low level of detriment that must be shown.
        
        DEFENCCES
        
        Use of the information is in the public interest. Includes where there is a danger to persons or to the public as a whole. Includes in the interest of the administration of justice. Ie information disclosed questioning the accuracy of breath test devices: Lion Laboratories v Evans, [1985] QB 526. In the past, disclosure of sexual conduct considered “grossly immoral” might have been in the public interest, although this has been questioned more recently. Woodward v Hutchins [1977] 2 All ER 751 Pop stars tried to prevent publication of their agent’s “tell all” stories about them. Found they did not have grounds to object to publication of their information when they had courted public attention
        
        REMEDIES: An injunction against disclosure. Equitable compensation. Accounting for profits. A constructive trust
- - - - TYPES OF EXPRESS TRUSTS
        
        created by
        
        TRANSFER
        
        trust must be compeletley constituted by transfer of the property
        
        DIRECTION
        
        REQUIRES
        
        3 CERTAINTIES
        
        Certainty of intetnion
        
        The settlor must have intention to create a trust. Must be an imperative that the property is held on trust, not just a wish or hope that it be used in a certain way. Settlor need not understand trusts law to create a trust: Re Armstrong (dec’d) [1960] VR 202 Intention must be clear.
        
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        No particular form of words required: equity looks to intent rather than to form. if there are no words creating the trust, courts may infer intention from the settlor, looking at the language of documents, oral dealings, and the circumstances surrounding the relationship between the parties: Korda v Australian Executor Trustees (SA) Ltd (2015) 317 ALR 225.
        
        Paul v Constance [1977] 1 All ER 195, a de facto couple went to the bank together to deposit money, put it in his name but with her having authority to withdraw – he told her “this money is as much mine as it is yours”. Found to be a declaration of trust
        
        can be infferred by conduct whihc may be more revealing then words
        
        Certainty of subject matter
        
        There must be trust property.No trust is created if the trust property can not be identified. The nature of the property and the amount of the property must be specified. Words creating a trust for “the bulk of my estate” are not sufficiently certain: Palmer v Simmunds (1854) 2 Drew 221. Will be sufficient if it is possible to put together enough information to identify the property. Maxim: that which is not certain is capable of being rendered certain. Estate of Chau (dec’d), a trust over “bank accounts” included a wealth management account because the testator had always called it a bank account. The property must be in existence (future property cannot be trust property). Note Norman and Shepherd from week five and the issues in distinguishing between present and future property.
        
        PROBLEMS WITH FUNGIBLE PROPERTY
        
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        Certainty of Object
        
        The beneficiaries (objects of the trust) must be identified at the time the trust is created. A trust (other than a charitable trust) must have beneficiaries so that there is someone to enforce the trust: Morice v Bishop of Durham (1805) 10 Ves 522. The courts will not supervise trusts.
        . The requirement for this is that a list could have been produced, not that it actually was and it must be capable of being determined at the time of the trust (Re Leverhulme)
        Fixed trusts: General rule – it should be possible to draw up a list of the beneficiaries at the time their interests come into effect. Called “list certainty”. A trust regarding “my old friends” is too uncertain: Re Gulbenkian’s Settlements [1970] AC 508. It is only required that a list could have been produced, not that it actually was. West v Weston (1998) 44 NSWLR 657: a trust for family members of a class with over 1600 people. Found sufficient if court can be satisfied on the balance of probabilities that a substantial majority of beneficiaries identified and no further reasonable inquiries could be made. Has been criticized.
        
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        DECLARATION
        
        Charitable trusts – the trust property is held by the trustee for a charitable purpose, not for a beneficiary.
        
        CHARITABLE TRUSTS
        
        Attorney-General (NSW) v Perpetual Trustee Co Ltd (1940) 63 CLR 209 at 222: “A charitable trust is a trust for a purpose, not for a person. The objects of ordinary trusts are individuals, either named or answering a description, whether presently or at some future time. To dispose of property for the fulfilment of ends considered beneficial to the community is an entirely different thing from creating equitable estates and interests and limiting them to beneficiaries.”
        A trust being charitable has significant tax implications.
        A charitable trust does not violate the rule against perpetuities if the trustee takes the interest within the period, even if the purpose is carried out after.
        
        ENFORCEMENT
        
        A charitable trust does not fail under certainty of object because the AG will enforce. This is because enforcement is in the public interest. The courts may also enforce/vary charitable trusts. Non-charitable purpose trusts have nobody to enforce and therefore are invalid. Possible exception – trusts for the maintenance of tombs and animals, but cases not followed in Australia.
        
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        A charitable trust has no beneficiaries. It is enforceable by the Attorney General: Strickland v Weldon (1885) 28 Ch D 426. The Attorney General is a law officer of the Crown. Originally was the King’s Attorney. The office evolved – today the Attorney General is the guardian of the public interest and advises the government in that regard.Nature of the office varies between jurisdictions. In some the AG heads a ministry and sits in cabinet, in others the AG is not a cabinet member although they may attend cabinet meetings.
        
        ADMINISTRATION OF CHARTIABLE TRUSTS AND TRUSTS FOR UNINCORPORATED ASSOCIATIONS
        
        VARIATION OF CHARITABLE TRUSTS
        
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        UNINCORPORATED ASSOCIATIONS
        
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        Fixed, the beneficiaries and their entitlements are known
        
        Discretionary, trustees have discretion re how to distribute trust income/capital. The “beneficiaries” may have only an expectancy of being considered, may have no right to disbursements from the trust.
      - Express trusts can be very formal and carefully created with legal counsel drafting trust documents. However, can also be created by unsophisticated persons demonstrating an intention to hold property for another.“Bare” trust – the trustee has no obligations other than holding legal title. May convey title to the beneficiary on demand. May occur where obligations exhausted, ie a trust for a minor child who has reached adulthood.