Contractual and Fiduciary Duties in Business Relationships

1.In the context of corporate law, discuss the following statement and explain the fiduciary concept in detail:

“Since the decision of the High Court in Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64, it has been accepted in this country that a fiduciary duty arises out of an undertaking, express or implied, by the person incurring such duty.”

2.Discuss examples that demonstrate this fiduciary concept in each of the following areas, referring to case law and statute as necessary:
(a) The general law (as it relates to the formation of a company);
(b) A Partnership Act (in an Australian State or Territory); AND
(c) The Corporations Act 2001 (Cth).

In every form of business, two types of terms and relations exist between the parties. One is contractual and another one is a fiduciary. As soon as a person comes into a business relationship with another person or enters into a business transaction then in many of the cases, parties of the transaction built a contract.  In addition to this, some relations are of nature where parties thereof own a fiduciary duty with respect to the others. It is necessary to understand the meaning of both the terms. Contractual duty is the one that is mentioned in a contract; whereas fiduciary duties are not stated anywhere still parties are bound to perform them due to the nature of mutual relationships. The given discussion is focused on the fact that in a corporation, fiduciary duties exist due to some undertakings and posts and that can be implies or expressed one. Further, example of a lead case is also elaborated for a clear undertaking.  

As mentioned earlier that fiduciary duties exist in some of the business relations, this is significant to mention that in which transaction, such duties will exist; does depends on the nature of the office held by parties of the case. As the name implies, fiduciary duties exist in fiduciary relations i.e. where the nature of relation requires a certain level of trust between the parties[1]. Therefore, it would not be incorrect to mention that a fiduciary relationship is a relation of confidence. The lead feature of fiduciary relation is that one party undertakes to behave and act in favor of another party to whom the first person owns such duty[2]. Breach of a fiduciary duty has the same impacts as a breach of contractual duty. In order to look at that whether or not any legal duty was broken in an exceedingly case or not, one must grasp the scope of the undertaking. Every such duty arises out of an express or implied undertaking, taken by the parties to the case[3]. This is not obligatory the all the parties own such duties, in some the transactions or relations, only one party will be control at risk of perform the legal duty. It once more depends on the character of the relationship.

Nature and Scope of Fiduciary Duties in Corporations

In a corporation, so many offices are there that holds a fiduciary duty with respect to the corporation and to each other as well.  Every corporation of the country has to follow the provision stipulated under the corporate law.  While discussing the fiduciary duties, facts and decision of the case Hospital Products Ltd v United States Surgical Corporation[4], is highly essential to know. In the cited case, United States Surgical Corporation (USSC) has decided to appoint and authorize a person named Alan Richard Blackman as USSC’s exclusive and only Australian distributor for the distribution of USSC’s products in the country. Later on, Blackman has entered into an agreement with his corporation named Hospital Products International Pty. Ltd. (HPI), due to this agreement Blackman has substituted with HPI, and HPI becomes the new exclusive distributor of USSC[5]. Afterward, HPI started selling the products of USSC by it is own name. When USSC bring an action in against of here the high court has given the decision that in this case, there was no fiduciary relationship existed between USSC and HPI. High court further held that the duties, which HPI breached, were of a contractual nature. Court mentioned that in case of existence of a contract, the contract will be superimposed on the parties as the define legal rights and liabilities of the parties. The cases of contract cannot be lead by concept of fiduciary undertakings. The court has also provided reason of such practice and mentioned that allowing fiduciary concept over contractual one can defeat the whole purpose of contract.

What kind of undertaking a person holds with respect to a corporation decides his/her fiduciary duties. If a person has a relationship with a corporation that is fiduciary in nature then in such cases, that person will be liable to work in a confidential manner and to perform his/her fiduciary duties. In addition to this two kind of person deal with a corporate. One is insiders and another one is outsiders. Directors, officers, and employees are the insider person with respect to a corporate. Because of nature of their jobs and offices, these persons, owns a fiduciary duty towards his/her corporation.

Undertaking that defines the existence of a fiduciary relationship, can be expressed, or implied. When a well-defined relationship exists in between the parties, then such an undertaking is termed as “Expressed Undertaking.” Here the meaning of well defined relationship is a clearly stated relationship. Whereas on the other part, when a person holds such position where he is required to behave in a trustworthy manner with respect to another party but his/her relationship is not a titled one, then such undertaking is known as “Implied Undertaking”[6]. Both of the mentioned undertakings attract Fiduciary duties. This is significant to state that fiduciary duty is an aspect of the Law of Equity. According to this law, the court serves the decision the favor of a person who has clean hands.  In the case of Oliver Hume South East Queensland Pty Ltd v Investa Residential Group Pty Ltd[7] that if a person owns a fiduciary to duty to a holding company then he/she is need not to own such duty to a subsidiary company[8]. Further, the judge of the appellate court stated that if fiduciary duty arises out of an undertaking then there must be a point of time of such arrival in order to determine the existence of undertaking (in expressed as well as in implied undertaking). Fiduciary duty has it is a great impact as it is determined the liability of the parties.

Important Case Law on Fiduciary Duties in Corporations

Conclusion

By reviewing two of the cited cases in the above-mentioned discussion, it can be stated that for the obligation of fiduciary duty, there must be a fiduciary relationship. A fiduciary relationship comes out when a person undertakes to act in the interest of another party. In this situation, the first person owns a fiduciary duty with respect to the later one. Although, the study of fiduciary relationships and duties are important in the general context but becomes more significant when it comes to Corporate Law.

As soon as a person form a company/corporation, the concept of fiduciary duty becomes applicable. A person who works behind the formation of a company is known as the promoter. A company is an artificial person and cannot do an act itself, hence it becomes the responsibility of promoters to form a company with a level of caution. In addition to this as mentioned earlier, this is to mention here that fiduciary duty exists in formation of a company as promoters undertake to act in the interest of the company. In the process of formation of a company, promoters are the most significant person. In general, promoters are the person who determines the objects, scope and other terms and condition related to a company. Although Promoters are neither an agent nor a trustee of the company, yet holds an important position. Term promoter is nowhere defined in law, but this term has come out from the study of business. In order to define the legal position of a promoter, this can be stated that he/she stands in a fiduciary position towards the company about to be formed.

 According to Lord Cairns, there is no doubt in the statement that promoters own a fiduciary duty towards the company they are forming. Promoters of the company have great power and authorities, as they are the persons who create the company and define that in which manner the same would be working. After reviewing the correct position of a promoter of a company, the following statements can be made:-

A promoter undertakes to act in the interests of the company during the formation procedure and therefore he/she cannot earn any secret profit. If at any stages it comes into knowledge that a promoter alone or along with other promoters earned a secret profit or a profit in an unethical way on the name of the company then the company can claim for reversal of such profit, after formation[9].

Fiduciary Duties of Promoters in Company Formation

If a promoter sells his/her own property to the company then it is the duty of him/her to sell the same on reasonable value. It is the fiduciary duty of a promoter to not to sale his/her property to the proposed company at a higher amount than the fair price. If a promoter does so, then he/she will be responsible for the balance amount of such sale i.e. the unfair amount.

The fiduciary duty of promoter does not end up with the formation of the company, but the same goes on forever. It has held in the case of Tracy v Mandalay Pty Ltd[10] that the person who undertake to form a company for a given purpose and take required and necessary steps to fulfill that purpose, will also be treated as a promoter. In addition to the proposed company/ company, a promoter is also responsible to act in a fiduciary manner towards his/her co-promoters and investors of the company[11] (lawyers.com, 2018).

Similar to a company, an incorporated limited partnership is also an artificial person.  As in a company, directors and officers are the people who manage the business affairs, similarly in a partnership firm; partners are there to act on behalf of the firm. Partners own their contractual and fiduciary duties to the firm. In Australia, every state has it is own separate act that governs the partnerships over there. Although every state has a separate partnership act, yet this can be stated that provisions of all of them are slightly similar to each other. In New South Wales, Partnership Act 1892[12] (NSW) is the legislation that provides required provisions and rules related to the partnerships. Clause b of sub-section (1) of section 53C of Partnership Act 1892 says that a limited partner does not hold any fiduciary relationship with other limited partners as well as other general partners[13]. Under section 9 of the  Partnership Act[14], liabilities of partners are defined. According to this section, a partner of the partnership is obliged to perform the given duties towards firm and other partners as well.

In the year 1991, the said act has amended and named as Partnership (Limited Partnership) Amendment Act[15]. A partnership is a business structure and general partners of the same acts as an agent or executive of the firm. A person who deals with the firm actually deals with it is partners. A general and regular partner holds a fiduciary relation with firm and other partners. This is the reason that a general partner owns a fiduciary relation towards the firm and another partner. Partners are the defined person in every partnership fir, yet in the case of Whywait Pty Ltd v Davison[16] it has discussed that when a relationship can be considered as a partnership. In the case of Chan v Zacharia[17] (1984) 53 ALR 417 a partner refused to do anything further that was required to wind up the partnership. In the decision of the case, it was held that obligation and fiduciary factor do exist until the dissolution of the firm and which means the same continuous even in the process of dissolution. This is also important to mention that despite the legislation, according to common partnership law, a partner is required to behave in an ethical manner and needs to ensure that he/she would not breach their fiduciary duties with respect to firm and to other partners as well.

Fiduciary Duties in Limited Partnerships

Every company in Australia is bound to act according to the provisions of the Corporations Act 2001[18]. The said act is the legislation that governs the provisions related to companies in Australia. As mentioned earlier that promoters are the person who establishes a company, this is necessary to state that some persons are also there who runs a company after formation. As per section 324CL of Corporations Act, 2001, such people are known as Officers of the company. Under the stipulated act, duties of directors and officers are mentioned. Division 1 of chapter 2D of the mentioned act define the civil obligations of directors. These sections prescribe the duties of directors and officers that they are obliged to perform in the course of their job. In addition to the civil obligations, the act imposes various fiduciary duties on directors and officers of corporations under the aforesaid section themselves. Section 181 requires a director and officer of the corporation to work in the best interest of the corporation and for the given purpose[19]. Section 182 of the act focuses on fiduciary duties. According to the provisions of this section, a director and employee of the company must not use their position improperly and must not take advantage for themselves or for others by using their position in a wrongful manner. 

In the case of ASIC v Adler[20] , the person named Adler being the non executive director of the company named Adler Corporation Limited has done some transactions with the other companies in which he was interest and earned the personal profit in an unethical manner. In the given case, the guilty person Adler has been declared as non-qualified being director of any other comoany for the next 20 years. This is also a case that attracts the fiduciary obligations of a director. Being the director of the company, it was the duty of Adler to perform in the best interest of the company rather than for personal profits. In Corporations Act 2001, so many cases have held in that directors or officers of the corporation have breached their fiduciary duties.  It was held in the case of Australian Securities and Investments Commission v Healey[21] that while preparing and furnishing financial statements of the corporation, directors must perform their fiduciary duty. In the cited case, Healey being CFO of a retail investment organization named “Centro Group” has failed to notice and investigate the omission of huge value in short term debts.

Further, in the case of  Diakyne Pty Limited v Ralph[22], the director of the corporation held liable as the same has not acted in the best interest of the corporation and misused his fiduciary position in the company[23]. In this case, the managing director of the company has breached his duty of care by allowing a payment of value $100,000 in form of bonus to another company in which he was interested. Such payment was not allowed under the law. In the decision the Judge has mentioned that I am giving order Mr. Ralph to repay a sum of $110,000 plus cost and interest.This is necessary to mention in the context that under the Corporations Act 2001, in addition to directors and officers, liquidators and solicitors of a corporation also holds a fiduciary position. It is the duty of liquidators of the corporation to act in the best interest of the company and to provide a fair price of assets in the process of liquidation. Section 579 of the act defines the duties of the liquidator. This section requires a liquidator to act with due care and in good faith of the company[24]. In conclusion, it is stated that under Corporations Act, 2001, many of the positions are defined that are of fiduciary nature and the same includes the position of a director, liquidator, and officers of a corporation.

Chan v Zacharia (1984) 53 ALR 417

Australian Securities and Investments Commission v Healey [2011] FCA 717

Diakyne Pty Limited v Ralph [2009] FCA 721; 72 ACSR 450

Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64

Oliver Hume South East Queensland Pty Ltd v Investa Residential Group Pty Ltd [2017] FCAFC 141

Tracy v Mandalay Pty Ltd (1953) 88 CLR 215

Whywait Pty Ltd v Davison [1996] QCA 178

ASIC v Adler (2002) 20 ACLC 576; 41 ACSR 72

Partnership Act 1892 (NSW)

Corporations Act 2001 (Cth)

Partnership (Limited Partnership) Amendment Act 1991 (NSW)

Partnership Act 1892 (NSW)

Tamar Frankel, Fiduciary Law (OUP USA, 2011) xvi

Austlii, Corporations Act 2001 – SECT 181 (2018) <https://classic.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s181.html>.

Australian Government, Federal Register of Legislation (2018) <https://www.legislation.gov.au/Details/C2018C00275/Html/Volume_2>.

David H Denton, Fiduciary Duty – Principles (2018) <https://www.davidhdenton.com/uploads/2/3/1/2/23125402/fiduciary_duties_-_principles.pdf>.

Duhaime, Implied Undertaking Rule Definition (2018) <https://www.duhaime.org/LegalDictionary/I/ImpliedUndertakingRule.aspx>.

Jade, High Court of Australia (2018)  <https://jade.io/article/67147>.

James Edelman, The Importance Of The Fiduciary Undertaking (22 March 2013) < https://www.supremecourt.wa.gov.au/_files/UNSW%20Conference%20of%20Fiduciary%20Law%2022%20Mar%202013%20Edelman%20J.pdf>.

Jeremy Whelen, Fiduciary relationships in corporate groups – Full Federal Court extends equity’s reach (2 November 2017) <https://www.commbarmatters.com.au/2017/11/02/fiduciary-relationships-in-corporate-groups-full-federal-court-extends-equitys-reach/>.

lawyers.com,  Fiduciary Responsibilities: Corporations (2018)  <https://www.lawyers.com/legal-info/business-law/small-business-law/fiduciary-responsibilities-corporations.html>.

Moores, The Directors Series: Part 2 – Fiduciary Duties (2014) < https://www.moores.com.au/news/the-directors-series-part-2-fiduciary-duties>.

NSW Legislation,  Partnership Act 1892 No 12 (2018) <https://www.legislation.nsw.gov.au/#/view/act/1892/12/historical2004-04-05/full>.

Sindhuja, S,  Promoter of a Company: Functions, Duties and Liabilities (2018) < https://www.businessmanagementideas.com/company-management/promoter-of-a-company-functions-duties-and-liabilities/8952>

Tamar Frankel, Fiduciary Law (OUP USA, 2011) xvi.

David H Denton, Fiduciary Duty – Principles (2018) <https://www.davidhdenton.com/uploads/2/3/1/2/23125402/fiduciary_duties_-_principles.pdf>.

ames Edelman, The Importance Of The Fiduciary Undertaking (22 March 2013) < https://www.supremecourt.wa.gov.au/_files/UNSW%20Conference%20of%20Fiduciary%20Law%2022%20Mar%202013%20Edelman%20J.pdf>.

[1984] HCA 64

Jade, High Court of Australia (2018)  <https://jade.io/article/67147>.

Duhaime, Implied Undertaking Rule Definition (2018) <https://www.duhaime.org/LegalDictionary/I/ImpliedUndertakingRule.aspx>

2017] FCAFC 141

Jeremy Whelen, Fiduciary relationships in corporate groups – Full Federal Court extends equity’s reach (2 November 2017) <https://www.commbarmatters.com.au/2017/11/02/fiduciary-relationships-in-corporate-groups-full-federal-court-extends-equitys-reach/>

Sindhuja, S,  Promoter of a Company: Functions, Duties and Liabilities (2018) < https://www.businessmanagementideas.com/company-management/promoter-of-a-company-functions-duties-and-liabilities/8952>.

(1953) 88 CLR 215

lawyers.com,     Fiduciary Responsibilities: Corporations (2018)  <https://www.lawyers.com/legal-info/business-law/small-business-law/fiduciary-responsibilities-corporations.html>.

Partnership Act 1892 (NSW)

NSW Legislation,  Partnership Act 1892 No 12 (2018) <https://www.legislation.nsw.gov.au/#/view/act/1892/12/historical2004-04-05/full>.

Partnership Act 1892 (NSW)

Partnership (Limited Partnership) Amendment Act 1991 (NSW).

[1996] QCA 178

Chan v Zacharia (1984) 53 ALR 417

Corporations Act 2001 (Cth).

Austlii, Corporations Act 2001 – SECT 181 (2018) <https://classic.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s181.html>.

ASIC v Adler (2002) 20 ACLC 576; 41 ACSR 72

[2011] FCA 717

[2009] FCA 721; 72 ACSR 450

 Moores, The Directors Series: Part 2 – Fiduciary Duties (2014) < https://www.moores.com.au/news/the-directors-series-part-2-fiduciary-duties>.

Australian Government, Federal Register of Legislation (2018) <https://www.legislation.gov.au/Details/C2018C00275/Html/Volume_2>