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Fiduciary Duties

In: Business and Management

Submitted By teresa7b
Words 2685
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Title: Fiduciary obligations may spring up by reason of relationships of trust and confidence or confidential relations.

Fiduciary is an important issue arises in business relationships, in partnerships, it helps create a fair business environment for all the parties when working together, in agency, it protects the principles' benefits, in corporations, it may lead the business operates properly and legally. Therefore, fiduciary obligations are closely related to co-operations Trust and confidence are the most important elements in these fiduciary relations, in this essay, the relationship of a fiduciary obligation and above relations will be demonstrated and explained.

Table of Content

Introduction P.1
Table of Content P.2
The Basic Concept of Fiduciary P.3
Fiduciary Concepts and Obligation vs Partnership Relations P.6
Fiduciary Concepts and Obligation vs Corporate Relations 1. Directors P.8 2. Promoters P.11
Conclusions P.13
Bibliography P.14

The Basic Concept of Fiduciary
Fiduciary, under oxford’s dictionaries’ definition, is trustee who is given control or powers of administration of property in trust with a legal obligation to administer the beneficiary’s interest, and the Cambridge dictionary defines “relating to the responsibility to look after someone else's money in a correct way”. It is obvious that the fiduciary concept involves the element of mutual trust and confidence: the property or interest of the beneficiary which relied on the protection of the trustee, a correct way arise an obligation that the behavior is monitored by avoiding any equitable breaches. Besides, it also presumes that not only the beneficiary but the trustee’s benefit is also protected, the beneficiary have to keep his promise of the trustees’ interest when the duty is completed and the promise of confidential information between the parties.

According to Paul Finn (1989, P.83)’s definitions, “A fiduciary is obliged to act in beneficiary’s interest, not only that it possess certain characteristics, but also being wish to exact particular standard of conduct”, In a case Hospital Products Ltd v United States Surgical Corp (1990) relating fiduciary duty, “a fiduciary is a person who undertakes or agree to act for, or on behalf of, or inter interests of, another person, in the exercise of power of discretion which will affect the interests of that other person in a legal or practical sense.’ Mason J said. "a position of disadvantage or vulnerability on the part of one of the parties which causes him to place reliance upon the other and requires the protection of equity acting upon the conscience of that other" given by Dawson J in the same case. Hepburn, S (2009, P.118) divide the types of fiduciary in to two level, Vertical level and Horizontal Level, Horizontal level are the relationship of the partners to be equally, e.g partnership and joint ventures. Their capacity and interest in this fiduciary relationship is similar. Vertical level is the relationship between the partners who is one side stronger while the other side is weak. (e.g. Solicitors and their clients). The Stronger side (i.e. the solicitors) has a capacity to control the issues, while the weaker side has to rely on the stronger side to complete an issue.

From the above comments, fiduciary obligations relies on a relationship of loyalty, trust and confidence, and the parties in the relationship requires to act on bona fides to each other and the trustee is required to place his knowledge and skills to act on beneficiaries’ interests, business behavior is restricted so that they are protected by avoiding any violations of each others' interest and to provide a fair environment for those relationship. Fiduciary duties may also help and stop damaging the relationship. There are different fiduciary requirements between different relationships and will discuss in details of these relationship with fiduciary obligations. Moreover, Duke Group Ltd (In Liq.) v Pilmer & Ors (1999), suggested that, trustee and beneficiary, agent and principal, solicitor and client, director and company, partner and partner, generally accepted fiduciary relationships, to realize the infinite variety of circumstances in which the duty has been held to arise within those relationships, and will be owed by one person to another.

Fiduciary Concepts and Obligation vs Partnership relations
Before imposing the fiduciary obligations in to a partnership relationship, the court may look into details whether a partnership exists. According to Partnership Act ss.1” Partnership is the relation which exists between persons carrying on a business in common with a view of profit. From Partnership Act ss..5 said, every partner in a partnership is an agent of the firm and of the other partners for the purpose of the business of the partnership; no matter an agent or a partner, they all owe a fiduciary obligation. The fiduciary duties in partnership, is described as horizontal. When a partnership exists, a fiduciary obligation arise in a contract or a business relationship, that expect the partners have mutual rights and duties and are bound to exercise the utmost good faith in the best interest of the partnership, according to ss28 of Partnership Act, they have to disclose full information or opportunities relevant to the firm’s business, which means that they have to avoid any conflict of interest and taking any personal advantage from it, from ss29, partners have to explain for the private profit derived from the partnership and refer to ss30 of partnership Act said they cannot form a similar business compete with the partnership which is also arising a conflict of interest in fiduciary, On the other side, it also means that the principle should give the trustees exercising the power on behalf of the principle but should not misuse the power and information to gain any private interest for their own. All partners are expected to respect to the rules and obligation with accordance of the contract or the legislations. In the case of Birtchnell v Equity Trustee (1929), the defendant has sold and repurchased a land of the partnership and earned a profit without notice to other partners, the court held that the defendant had to account the profit to other partners. In the case of Chan V Zacharia (1984) relating the use of partnership’s position for personal benefit, the court held that Chan has breached of fiduciary obligations as he has violate the conflict of interest of the partnership. The obligation is valid from the start of the business which the partnership agreement is formed and end until the business finally wound up, but in this case, the partnership haven’t been wound up, and at the same time, the partner cannot use partnership’s asset in the gain of personal interest.

Fiduciary Concepts and Obligation vs Corporate Relations
When discussing this topic with corporations, the managing staffs owe duties to the other stake holders, the main example of the managing staffs are promoters and directors.

Corporation vs Directors
Directors, under Corporation Act s.9,, defines who are appointed at this position or acting in that capacity, are important agents, trustees and fiduciaries between a company and share holders and they are part of controllers of the company and possess a power of decision making and access company books etc, therefore, they owe a fiduciary duty to them. It is a fiduciary relationship described as a vertical relationship. In accordance with the corporation Act, the duties of directors owe to the shareholder include acting in good faith in the best interest of the company, loyalty to the company and always disclose full and complete information to the principle of the company which is provided in Corporation Act s.181, it is because they are appointed by the shareholders to act on behalf the company and act for the benefits for them.. Secondly, they have a duty to use the information, power and position in a proper way, it means they must avoid any conflict of interest with their position that means the directors have to require the approval for the company’s transactions, so that the company benefits can be protected, told by s182 and s183 of the Corporation Act. In the case of Regal Hasting v Gulliver (1942), which is related conflict of interest between directors and the company, which the court held that the directors had to account the profit to the company, Lord Wright concluded that “In the absence of any dishonest intention, or negligence, or breach of a specific duty to acquire the shares for the appellant company, the respondents as directors were entitled to buy the shares themselves. Once, it was said, they came to a bona fide decision that the appellant company could not provide the money to take up the shares, their obligation to refrain from acquiring those shares for themselves came to an end.” Therefore the directors is obliged to avoid from the conflict of interest at any time even the principle hasn’t got any ability to gain the interest in the same issue. Under s184, it was told that if they are reckless and intentionally dishonest, will come to a criminal offence. One thing should be noted that, not only directors, the officers and employee are also applied in the above statutory.

S. 185 states that s.180 – s.184 may also extent to the duties they operate in the common law or principle of equity, Therefore, according to the general law, as directors can exercise their power under the Constitution or replaceable rules in Corporation Act, they also owe a duty to retain discretion of exercising their powers. In General Law, directors have to exercise their powers in active discretions and retain the discretions. There is no specific rule in statutory talking about but according to s190, and s198, there are criteria for the directors to delegate or exercise their powers, and there are required to be responsible for their delegation (see s.190). in the case of ASIC v Adler (2001) regarding to the directors’ duties, s190 and s198 is explained by the General Law, directors may delegate any of their powers to a committee of directors, a single director, an employee of the company or any other person, and he have to be responsible for the delegate’s exercise of power if he or she did not believe on reasonable grounds and in good faith, after making proper inquiries if the circumstances indicate the need for it, that the delegate was reliable and competent in relation to the power delegated and would exercise the power in conformity with the duties imposed on the directors of the company by the Corporations Act: s190(2).

Furthermore on the issue of conflict of interest, in the ss 191 and 195 of the corporation act, directors are require to disclose all of their material actual or potential interest, and refer Chp 2E of Corporation act, directors have disclose all interests of related parties such as controlling power, financial benefits to the company for a further approval of the personal interest and avoid any unauthorized benefits incur in the positions.

Corporations vs Promoters
Promoters, according to Tracy V Mandalay (1953), are the parties actively participate in the formation of corporations but before appointed as directors, A more detailed of definition provide in Aequitas V AEFC Leasing Pry Ltd (2001) is that ” actively participate in the work of raising equity capital for the new company after it has been incorporated but before an independent board has been appointed”, besides, professional bodies and companies may act on behalf of a principle as a promoter.

The courts have promoter-company relationships as within "accepted" or "ordinarily recognized" categories of fiduciary relationship: Hospital Products Ltd. v United States Surgical Corporation (1984), therefore promoters normally owes a fiduciary duty. The fiduciary relationship here describe as a vertical relationship. Fiduciary relationship arise when promoter enter in to the contract with the principle, actively participate in the formation of corporations, promoters owe duty of loyalty to the company and the board of directors, they have to put the company’s interest as the highest interest and avoid any conflict of interest or personal advantages occurs in their positions, especially making secret profit. The most important they have to act on is to avoid and potential for personal gain and they have to keep the principle fully informed by disclose as much as issues relating to his positions (See Aequitas V AEFC Leasing Pry Ltd (2001). In the case of Fairview Schools Sdn. Bhd v Indrani a/p Rajaratnam [1998], Mahadev Shanker JCA said," Promoters have a legal duty not to make a secret profit out of the promotion of the Company without the Company's consent and also to disclose to the Company any interests the promoters have in any transaction proposed to be entered into by the Company" In the case of Erlanger v New Sombrero Phosphate Co (1878) which is about insufficient disclosure given by the promoter, the court held that the company was entitle to rescind the contracts as promoters didn’t make full disclosures to board of directors.

Michael J WHincop (1998) in the law reform agrees that early disclosure more important than all material information disclosure about the business. It was because loss caused to beneficiary’s interest or conflict of duty may also be arisen when there is a delay of disclosure of information. The fiduciary duties owed by the promoters are almost the same as directors, but the requirement of the disclosures and awareness of conflict of interest are stricter that may easily lead the promoters fall into the breaches of such duties.

The factors of loyalty and truth are the important elements of the personality in different relationship in our human life, not only the above relations, but also in friendship or in families, however, to make a fair co-operative environment, fiduciaries in business relationship is essential, to be easily achieve the goal of fiduciary obligations, all parties have owe a duty care on the conflict of interest, we should try our best to avoid any personal interest that affecting interest of cooperation, and by full disclosure of information may lead us a way to avoid the conflict of interest and duties. Moreover, all parties in a business owes fiduciary obligations to all the others, a trustworthy relationship is build in the trust between each others , not an one-way duties owe from one to another, but it is an interactive duties that they are owe to each others. A pleasant co-operation relationship then will be build up.

Bibliography A. Aritcles / Books / Reports 1. Paul Finn, 1989. Contract and The Fiduciary Principle. UNSW Law Journal, 12, 2. Hepburn, S, Principles of Equity and Trusts (The Federation Press, 4th ed, 2009), Chapter 8, Fiduciary Obligations 3. Ciro, T and Symes, C, Corporations Law in Principle (Thomson Reuters, 8th ed, 2009) 4. Whincop, Michael, "Promoters, Prospectuses and Pragmatism : Updating Fiduciary Duties in a Time of Economic Reform" [1998] MonashULawRw 17;

B. Cases 5. Pilmer v The Duke Group Ltd (in liq) [2001] HCA 31; (2001) 207 CLR 165, 6. Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; 156 CLR 41 7. Birtchnell v Equity Trustees Executors & Agency Co Ltd [1929] HCA 24; (1929) 42 CLR 384 8. Kak Loui Chan v Zacharia [1984] HCA 36; (1984) 154 CLR 178 (7 June 1984) 9. Regal (Hastings ) Ltd. v. Gulliver [1942] UKHL 1; (1942) 1 All ER 378 10. Asic v Adler and 4 Ors [2001] NSWSC 644 11. Aequitas v Aefc [2001] NSWSC 14 12. Tracy v Mandalay Pty Ltd [1953] HCA 9 13. Erlanger v New Sombrero Phosphate Co(1878) 3 AC 1218 14. Fairview Schools Sdn. Bhd v Indrani a/p Rajaratnam (No1)[1998] 1 MLJ 110

C. Legislations 15. Partnership Act 1892 (NSW) 16. Corporation Act 2001(CTH)

D. Others 17. Australasian Legal Information Institute, online available at
<> assessed in 12/2011 18. Jim Jackson, LAW00004 Company Law Study Guide (3rd ed, 2011) 19. Harvard System of Referencing Guide at <> assessed in 12/2011

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