Confidential Relations and Fiduciary Duty
The concept of fiduciary is considered the highest standard of care. The fiduciary is an individual who has a fiduciary duty to accomplish certain tasks to another person. However, the person who is owed the duty of care is typically referred to as the principal or beneficiary. In fiduciary, when an individual breaches the fiduciary duties, such an individual is entitled to the ill-gotten profit and at times it may lead to the person being sued in a court of law. Further, the beneficiaries of the person will typically receive the damages even though they do not suffer any particular harm (Merkow et al., 2015). Often people are stimulated to enter into a fiduciary relationship, and this is attributed to the fact that such fiduciary duties generally results in specialization. The imposition of the fiduciary duties helps in the reduction of the risk of abuse to the beneficiaries of the fiduciary relationship. The reduction of the risk of abuse enables the potential beneficiaries to gain significant confidence in the relationship and hence most seek out for the fiduciary.
Before a fiduciary relationship is entered into by two parties, there must be the implied and expressed terms. In the case, the implied terms of the agreement were that the Hospital Product was to use best efforts in promoting the sale of the products of United States Surgical Corporation. Such a term meant that the Hospital Product could not destroy the products given to them for distribution. Further according to the case, it is clear that a fiduciary relationship existed since there was the Hospital Product which was to act on the interest of the United States Surgical Corporation and not on their own.
The fiduciary duties are often imposed on certain relationships. For instance, a doctor has a fiduciary duty to a patient. Other examples are attorneys to a client, guardian to his ward, principal to an agent and a priest to his parishioner. Confidence form the critical element in a fiduciary relationship since it enables all the parties to exert dominance and influence over the other. A fair transaction is often proved by the fiduciary relationship (Leib & Galoob, 2015). Further, the transactions between the beneficiary and fiduciary are treated differently in a variety of nations, however, in such transactions, the beneficiary is often favored. The transactions are therefore declared void and canceled at the end of a particular process.
Corporations and Fiduciary Duty
There are a variety of fiduciary duties given to the directors of corporations to help in the management of certain responsibilities in the corporation. Such duties entail the duty of loyalty and duty of care.
The decision of the High Court in Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64, was that the directors and the corporate officers should not their positions of confidence and trust to satisfy their private interest. The law demands all the corporate officers to not only protect the interests of the corporation but instead to work towards those interest which do not cause any injury to the corporation. Also, their work should be aimed at benefiting the corporation using their ability and skills and hence exercise their power lawfully.
Under this duty of care, all the directors should have prior knowledge and information out of any particular material information available, and this should be while making a business decision. The information used in making decisions by the directors should be of high quality and also there has to be a variety of advices available. Additionally, the directors must have adequate chance to obtain knowledge about a particular problem prior to making decisions in the corporation (Leib & Galoob, 2015). Further, the information made available to the directors should be verified, and so the director should evaluate the information with a critical eye. The critical assessment of the information is necessary to provide protection to the interests of the stockholders and corporations.
The High Court in Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64, also added the other fiduciary duties which have been imposed upon the directors and such include;
The duty of prudence compels the trustees to manage the various trusts with caution, a degree of care and skill in their duty.
The directors should express utmost good faith by placing the interests of the corporation at the center stage in the event of fulfilling their duties.
In the process of making certain decisions, the directors are required to disclose all, the relevant facts and circumstances to the stockholders who are considered to be critical in their decisions. Additionally, it is necessary that the directors’ act with a complete candor (Loewenstein, 2015).
All the information relating to the corporation must be kept confidential by the directors. Such information, however, should not be disclosed by the directors for their benefit (Nosworthy, 2016).In the judgment by the court, the decisions made by the directors were reviewed and ruled that while making business decisions, the directors had acted on an informed basis, in honest belief and good faith.
Duty of Loyalty
Generally, the board of directors during the formation of a company has certain fiduciary duties imposed on them. Under the common law, the board of directors has two main fiduciary duties such as;
According to Galoob & Leib (2014), under the duty of loyalty, the directors must place the interest of the company and the stockholders above their interests. They should, therefore, avoid creating any conflict of interest between their selfish interest and those of the company (Smith, 2014). The directors should act with honesty and not engage in activities that benefit them by taking advantage of their positions. There a variety of procedures which a company needs to follow when entering into a contract with another party. Such entail failure to vote for the lease especially when the company leases property from a director who has a conflict of interest.
In the process of fulfilling their obligations as directors, they are expected to act in good faith with the intent of promoting the interests of the company. Also, they have to act with reasonable diligence and care (Gold & Miller, 2014). For instance, they should avoid harm to a corporation and also attend all the board meetings regularly.
In the general law, the board of directors has the fiduciary duty to disclose relevant information to shareholders (Welch et al., 2016). For instance, they are required to disclose information when the company has completed a conflict of interest transaction and when shareholders are supposed to vote in a general meeting.
Partnership Act (in an Australian State or Territory) and Fiduciary Concept
According to the Partnership Act based on the Australian state,the partners generally act on behalf of a firm and hence they owe the firm certain fiduciary duties, and they are therefore given the power to carry out various tasks. Such powers include;
Every particular partner is an agent of a firm including the other partners in the business. Their actions should be aimed therefore at binding the firm and hence should not carry out any duty which is against the activities of the firm (Langford, 2016). Any action contrary to the objectives of the company by a particular partner may lead to a breach of fiduciary duty leading to certain damages. Such damages, however, may be covered by the other partners. In case, all the actions of the members of the hospital products should bind the hospital and hence the failure to perform the duties as expected result to a breach of fiduciary duty (Gitman, Juchau & Flanagan, 2015).
Duty of Care
Since the partners act on behalf of a firm they have the fiduciary duty not to use the credits of the firm for their private use and any other purpose related to the firm’s ordinary course of business (Munro, 2017). Any particular partner found to have used his powers to gain advantage for himself or herself breaches the fiduciary duty, and thus he or she will carry the liability for the damages.
According to Finn (2016), a partner, who commits any wrongdoing in as director of a body corporate and in the context of the Corporation Act 2001, should be penalized for having breached the fiduciary duty. However, there are certain circumstances under which such a partner is not penalized, and they include;
- When a co-partner is a director of the corporation
- If the partner had the authority of the other co-partners
- When the income of the firm arises out of the remuneration given to the partner for acting as director of a corporation
Just like in the case, the partners in the hospital product owed the United States Surgical Corporation the fiduciary duty not to use the medicine they were to supply improperly (Gover, 2016). There are certain circumstances in which the partners may misapply a firm’s property, and they include;
- If money is received from a third party in the course of its business and it happens that it is misused by one of the partners of the firm while it is in the custody of the firm.
- When one of the partners misapplies the property, he or she has received from a third party.
Feaver (2016) argues that all the partners have a fiduciary duty to notify the firm of their actions and failure to which a breach of fiduciary duty is considered. However, the only exception occurs when such a partner has committed a fraudulent act against the corporation. In the case of the Hospital Products v. United States Surgical Corporation, the partners of the hospital should have alerted the company of their actions which were relating to the affairs of the company, and hence they breached the fiduciary duty.
Based on the Corporation Act 2001 there are certain fiduciary duties to the directors of corporations under the legislation. It is expected of the appointed directors to abide by the Corporations Act to fulfil their fiduciary duties. The Corporation Act 2001 spells out the following fiduciary duties of the directors;
According to section 191 of the Act, the directors of a company are expected to provide notice of interest to the other directors when such a director has a material personal interest. Such a personal interest has to be associated with the affairs of the company (Nosworthy, 2016). The key information in the notice should contain the extent and nature of the interest. Further, the interest should be presented during the directors’ meeting.
A civil obligation is imposed on the secretaries and directors of a corporation to fulfill their fiduciary duties in good faith and for proper purpose for the best interest of the corporation. Such an obligation is stipulated in section 181 of the Corporation Act (Ghahramani, 2015). The directors who exercise their power and act in the interest of the third parties for selfish gain are considered to have breached their duty. Such a breach of duty is regarded as a criminal offence especially if the director was intentionally dishonest or was reckless in the performance of his or her duty. This is contained in section 184 of the act.
Duty of Prudence
All the directors of a corporation have refrained from the inappropriate use of their position to benefit themselves and others with the intent of gaining an advantage. Such an obligation is contained in section 183 of the corporation act 2001 (Silberglied, 2015). As a director, had to avoid using her position to gain an advantage for herself since this was considered as a breach of the fiduciary duty.
Any information relating to a corporation and is held by a particular director should not be used improperly to gain an advantage over themselves and for others. Such a duty is important especially when the director has certain interests associated with the industry in which the government board relates (Stephens, 2017). Under circumstances in which a corporation’s information is used improperly and dishonestly, it is considered as a criminal offence, and this is stipulated in a section of 184 of the Corporation Act 2001.
According to Smith & Lee, 2014), during the discharge of duties and exercise of power, the directors are expected to act with a reasonable degree of diligence and care as stated in section 180 of the Act. The section expects that a reasonable person in a position of a corporation should act with due care and diligence. The circumstances in which a director should act with due care and diligence when making decisions are as follows;
- When the decision is in the best interest of a corporation
- The decision should be made for proper use and in good faith
- The directors should also be well informed on the subject matter before making any decision
- The directors should not possess any material personal interest in the subject matter when making decisions.
All the directors should take an active interest in the affairs of a corporation and hence have a comprehensive understanding of the activities of the company. The duty to act with care and diligence is typically contained in section 180 of the Corporation Act.
In the case of Hospital Products v. United States Surgical Corporation, Surgeons Choice, a contract was signed leading to the creation of a fiduciary relationship between the two parties. One party was obliged to become the critical distributor of medical products in Australia. The obligations were to last for the whole period of distributorship (Degeling & Legg, 2014). Based on the case, it is clear that the agent committed a serious breach of fiduciary duties and hence the United States Surgical Corporation had to recover for the damages caused as a result of breaches. According to the Corporation Act, a person is not allowed to use his powers to gain profit by entering into a relationship which is contrary to his fiduciary duty (Fullarton, 2017). However, this was breached since the Hospital product had used their position to benefit themselves. During the judgment, there are certain issues which were considered to determine whether there was a breach of fiduciary relationship. Such matters related to the interest of the agent and the obligations imposed on the hospital product. However, it was concluded by the judge that there was no breach of fiduciary duty leading to non-consideration of the different questions which were discussed in the court.
References
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