Fiduciary obligations 

A fiduciary undertakes to act in the interests of another in a way that gives rise to a relationship of trust and confidence, and to a vulnerability to abuse of the position. The obligation is one of loyalty — not of care, and not of good performance.

Who is a fiduciary

Some relationships are accepted as fiduciary without argument: trustee and beneficiary, solicitor and client, agent and principal, company director and company, partners between themselves.

Outside those categories the question is answered on the facts. The critical indicia are an undertaking to act in another's interests, a resulting power or discretion capable of affecting the other's interests, and a corresponding vulnerability or inability to protect oneself. A commercial relationship between parties dealing at arm's length is not fiduciary merely because one trusts the other or because the bargain proves poor, and Australian courts are cautious about superimposing fiduciary duties on a contract that allocates risk between parties who negotiated it.

Where the relationship is fiduciary, the next question is its scope: a person may be a fiduciary for some purposes and not others, and the duties extend only to the subject matter of the undertaking.

Proscriptive only: the Australian position

This is the point on which Australian law diverges most clearly, and it is examinable. Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41¹ is the leading High Court authority confining Australian fiduciary duties to this proscriptive core, cautioning against treating every relationship of commercial trust as fiduciary.

Australian fiduciary duties are proscriptive. They forbid; they do not require. There are two of them:

• the conflict rule — a fiduciary must not, without informed consent, place themselves in a position where their duty and their own interest, or two duties, conflict or may conflict;
• the profit rule — a fiduciary must not, without informed consent, obtain any unauthorised benefit by reason of their fiduciary position or of an opportunity or knowledge resulting from it.

Australian law declines to recognise prescriptive fiduciary duties — positive duties to act in the beneficiary's interests, to disclose, or to take care. Canadian law has gone further in that direction; English law occupies a middle position. The consequence is practical: a complaint that a fiduciary acted carelessly, or failed to volunteer information, is a claim in contract, tort or under statute, not a fiduciary claim, unless it can be expressed as a conflict or an unauthorised profit.

Informed consent

Consent is the answer to both rules, and it must be fully informed: the beneficiary must know the material facts, including the nature and extent of the fiduciary's interest, and consent freely. The onus of proving it lies on the fiduciary. Consent may also be given in advance by the terms of a trust deed, a partnership agreement or a company constitution.

The strictness of the rules is deliberate. Liability does not depend on dishonesty, on the beneficiary suffering loss, or on the transaction being a good one — a fiduciary who makes a profit in breach must account for it even though the beneficiary could not have obtained it and has lost nothing.

Remedies

• Account of profits — the standard response to the profit rule. The fiduciary disgorges the gain, with an allowance sometimes made for skill and effort, which is discretionary and is refused where the conduct was dishonest.
• Equitable compensation — for loss caused by the breach. Its causation rules are equity's own; common law remoteness and contributory negligence are not simply imported, and reasoning that assumes otherwise is the fusion fallacy in action.
• Constructive trust — a proprietary response, giving priority in insolvency and access to the traceable proceeds. Australian law treats it as available where a fiduciary holds property or profits obtained in breach, and treats a remedial constructive trust as a last resort where other remedies are inadequate.
• Rescission of a transaction entered in breach, and third party liability where a stranger knowingly receives trust property or knowingly assists in a dishonest breach.

Directors and statute

For company directors the equitable duties sit alongside statutory duties under Commonwealth corporations legislation, which cover the same ground and more, and which are enforceable by the regulator with civil penalty consequences. The two sets of duties coexist; the statutory ones are not a code replacing equity.

Applying this in a problem question

1. Establish the fiduciary relationship — category or facts — and define its scope.
2. Identify which rule is engaged: conflict, profit, or both.
3. Ask whether there was fully informed consent, remembering the onus is on the fiduciary.
4. Do not convert a want of care or a failure to disclose into a fiduciary breach.
5. Choose the remedy deliberately, and say why a proprietary remedy is or is not warranted.

Where the authority sits

Case law, with a strong and distinctive Australian line on the proscriptive limits of the obligation, read alongside the statutory directors' duties in Commonwealth corporations legislation.