The Fiduciary Concept
The word fiduciary has been derived from the Latin word Fiducia which signifies trust. In general course a fiduciary relationship can be seen between a person who has taken the responsibility of acting in the best interest of the company or has the obligation to do so and the other person bestows his on her confidence in such person to do the same. In the case of Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64 it had been provided by the court that the a fiduciary duty may come out of an undertaking which may be implied or expressed, by any person who is incurring such duty. This case was in relation to the issues that in what circumstances would a person owe fiduciary duties to another. It is important to determine whether a relationship has a fiduciary character or not as it results in certain obligations if such duty has been identified. The obligations which are imposed on a fiduciary are have more importance than any other obligation which is present in contract or tort law (Sollars and Tuluca 2018).
The purpose of this paper is analyze the decision provided in the above discussed case in context of corporate law. The paper provides an explanation on relation to a fiduciary in details. The paper also discusses examples which depicts the concept of fiduciary relationship in areas of general law, partnership law and the provisions of Corporation Act 2001 (Cth) .
The concept of fiduciary in equality is used in a minimum of four senses. These include describing the position of a person who has fiduciary obligations in equity, provide special features to the relationship of the principal and the fiduciary, provide the nature of breach in case a person does not comply with the obligations and explains the specific situations which lead to the identification of a fiduciary relationship (Davis and Kusiak 2015). In general course a fiduciary relationship can be seen between a person who has taken the responsibility of acting in the best interest of the company or has the obligation to do so and the other person bestows his on her confidence in such person to do the same. As provided by the case of Whitehouse v Carlton Hotel Pty Ltd, the trust and confidence in context can be deemed and as per Chan v Zacharia, the reposition of the term should not necessarily result in a confidential relationship.
Implications of the Case on Corporate Law
For instance, in Hospital Products Ltd v United States Surgical Corporation, it was stated by the court that a duty of loyalty owed by the solicitor to the client along with the duty to respect the confidence of the client, result out of fiduciary nature of the relationship between the client and the solicitor. However the duties have to be informed and moulded through the terms of the contract between them. It had been stated by Mason J in this case that there may be contractual and fiduciary duties between the same parties. Where there is a basic contractual relationship present between the parties it provides the foundation for the creation of a fiduciary relationship. With respect to such situation importance is provided to contractual foundation as its terms regulate the relationship between the parties. It is the duty of the fiduciary to adjust itself with respect to the obligations which have been created under the terms of the contract to ensure consistency and conformity with the terms (Welch et al. 2016). The fiduciary relationship cannot be imposed on the terms of the contract in a way which changes the way in which the contract was intended to be operated. It was further explained by the judge in this case that the right to act in personal interest cannot be considered as an answer to the presence of a fiduciary relationship, where there is an obligation to act for the interest of the other party. It is the responsibility which is the basic of a fiduciary relationship, even where it is subjected to qualifications including the term that the fiduciary is at times provided with the right to act in favour of personal interest. It is the duty of the fiduciary to adjust with respect to the relationship with the principal created through the formation of a contract. The right to act in a particular way with respect to a contractual term by only referring to personal interest will lead to the breach of a fiduciary duty. The issue of identifying with respect to a contract when the fiduciary has the right to pursue personal interest cannot be in itself be considered as a reason for not abiding by fiduciary duties, however it may be an element in deciding that a person claiming that there is no relationship being created, that there is no obligation to act for the interest of the other party. Thus, the case implies that a fiduciary duty may come out of an undertaking which may be implied or expressed, by any person who is incurring such duty. It also clarifies that the obligations which are imposed on a fiduciary are have more importance than any other obligation which is present in contract or tort law.
The Fiduciary Concept in General Law (Formation of a Company)
The case is very important in relation to the identification of fiduciary relationship between parties who already have a contractual relationship. Contracts are profound in the corporate sector and relationships between the companies and between company and the shareholders are all managed through the provisions of a contract. In this context, a fiduciary relationship will come to the context when a person has the responsibility of ensuring the best interest of the other party a fiduciary relationship is created (Huebner and Klein 2015). However the relationship has to be altered in relation to the terms of the contract, in case such alteration is necessary for the purpose of ensuring that proper function of the contract. For example in the case of Henderson v Merrett Syndicates Ltd [1995] 2 A.C. 145 the court stated that a fiduciary has the right to incorporate an exclusion clause into a contract to exclude fiduciary obligations. However, not in all circumstances can such clauses be considered as valid. Firstly the clause has to be clearly explained to the principal like any other exclusion clause and secondly as stated by the case of Chan v Zacharia [1984] HCA 36, (1984) 154 CLR 178, the other party has to have understanding in relation to clause. Any person who would be depending on another person to take care of assets would be owed a fiduciary relationship by the person who has promised to take care of the assets.
A fiduciary in general law can also be defined as a person who legally acts on behalf of and in the best interest of another person. A company is considered as a separate person at law. Thus all those who are working on behalf of company are its fiduciaries. The people who work on behalf of the company include promoters, directors and officers. All such persons are provided by fiduciary duties by law (Mantese, Radice and Mantese 2016). The formation of a company is carried out by a promoter. He is the person who takes an active role in bringing the corporation to existence and thereby bringing in investors for the company. Under the general law, there is a fiduciary relationship between a promoter with the investors, co-promoters and the organization itself. They have the duty to act with utmost honesty and good faith, putting the interest of the principals always above other personal or third party interest. A person, who has come to know about a business opportunity by utilizing his position as a promoter, does not have the right to take advantage of the business opportunity in favour of personal interest at the cost of the interest of the principals. They have the duty of using reasonable care with respect to their performance as a promoter. When the promoter has breached a duty it would be considered as a fraud and thus they can be made liable for the loss suffered by the principals. For example, if the promoter of company A gets into a contract with company B and takes personal advantage of the contract by imposing the liability on company A, he has committed breach of his fiduciary duties (Eckstein and Parchomovsky 2018).
Each state has been provided with its own legislation to govern the law of partnership. In addition to the state legislations, the Partnership Act 1963 also governs partnership at a federal level. There are various ways in which the concept of fiduciary is created by the partnership legislations. The legislation sets out the duties of a partner in relation to a partnership business. These duties have been set out under section 33-35 of the PA. It has been stated by section 33 of the legislation that a partner has he duty of giving accounts to the business. They have to provide true account in relation to all things which may have an effect on the business to the other partners or their legal representatives. In section 34 of the PA it has been provided that partners have to account for any private profits made by them in relation to the business. The section states that it is the duty of the partner to be bound to account to the business any benefit which has been attained without the consent of the other partner in the firm. When any property of the business is used by the partner in personal capacity it has to be ensured that they account for such use. The section is also applicable where the partnership has been dissolved because of death of a partner and the affairs of the firm has not been wound up completely by the legal representative of the deceased partner or the surviving partner of the business. However the section is not applicable in relation to an incorporated partnership. Section 35 of the PA provides that the partner has the duty of not competing with the firm. Under this duty it can be stated that the partner does not have the right to from any business which may directly or indirectly compete with the form. Any profit which has been made by such business can be held to be on constrictive trust for the first partnership. The section specifically provides that in case a partner in a firm continues, without the permission of the other partners in the form, a business of similar nature as to compete with the firm, the partner who is carrying out the business has to account for and pay the firm all profits made by such partner in the new business.
Thus, from the above discussion it is clear that the Partnership Act 1963 incorporates the fiduciary duties in relation to the partnership business. This is because the partners rely on the trust and confidence bestowed on each other to carry out the business. They are also provided access to the resources of each other which they have the power to use in any manner they want. Thus it is essential for the proper functioning of the partnership business that fiduciary obligations are present in legislation.
The corporation Act 2001 (Cth) is the primary legislation which has been entrusted with the power of governing the activities of corporations operating in Australia. A corporation is a separate legal entity which provides for a separate ownership and management. The principle of separate entity distinguishes owners’ and corporation identity. The managers or director are entrusted with the role of ensure that they work in a way as to provide adequate returns for the owners of the corporation. A director having the responsibility of managing the corporation’s affairs have been provide through the Act supreme powers of managing the company. All aspects of the organization is under the control of the directors. This means that the investment which have been made by the shareholders are subjected to the discretion of the directors. If the directors do not act in a proper way they may cause loss to the shareholders. These directors are paid to ensure that the company is managed by them in an effective manner. They should not pursue personal interest at the cost of the interest of the company. In order to ensues that the directors’ act in an appropriate manner the Corporation Act imposes certain obligations on the directors which are known as general duties.
These general duties both incorporate and substitute the fiduciary duties which the directors and managers owe to the organization and its shareholders. Under section 180(1) the Act compels the directors to function carefully and diligently like a reasonable person, section 181 of the CA obliges directors to act in good faith in the best interest of the company. The court clarified in the case of Australian Securities and Investments Commission v Australian Property Custodian Holdings Limited [2013] FCA 1342, as to what is considered to be the best interest of a company. According to the case, during the period of solvency, the directors have to act for the best interest of the shareholders and during the period of insolvency the best interest would be shifted towards the creditors. In addition to these duties section 182 and 183 of the legislation respectively ensures that the directors do not misuse their position and information obtained from the company. Where the directors have been found to have acted in violation of the statutory duties which substitute the fiduciary duties they are subjected to fines and penalties. They may be asked to pay personally (notwithstanding the corporate veil) a penalty of up to $200000 or any amount which they have caused to be a loss by the shareholders or creditors of the company. Thus the application of the CA with respect to creation of a fiduciary relationship signify that the directors have are the fiduciaries in relation to the company, its shareholders and sometimes to its creditors.
Conclusion
In conclusion, it can be stated that the case of Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64 implies that a fiduciary duty may come out of an undertaking which may be implied or expressed, by any person who is incurring such duty. It also clarifies that the obligations which are imposed on a fiduciary are have more importance than any other obligation which is present in contract or tort law. The Partnership Act 1963 incorporates the fiduciary duties in relation to the partnership business. This is because the partners rely on the trust and confidence bestowed on each other to carry out the business. They are also provided access to the resources of each other which they have the power to use in any manner they want. Thus it is essential for the proper functioning of the partnership business that fiduciary obligations are present in legislation. The application of the CA with respect to creation of a fiduciary relationship signify that the directors have are the fiduciaries in relation to the company, its shareholders and sometimes to its creditors. Under the general law, there is a fiduciary relationship between a promoter with the investors, co-promoters and the organization itself. They have the duty to act with utmost honesty and good faith, putting the interest of the principals always above other personal or third party interest.
References
Australian Securities Investments Commission v Australian Property Custodian Holdings Limited [2013] FCA 1342
Chan v Zacharia [1984] HCA 36, (1984) 154 CLR 178
Davis, E.Z. and Kusiak, K.S., 2015. Gaining the Advantage in Close-Corporation Disputes: Examining Key Differences between Massachusetts and Delaware Fiduciary Duty Law. Mass. L. Rev., 97, p.23.
Eckstein, A. and Parchomovsky, G., 2018. Toward a Horizontal Fiduciary Duty in Corporate Law.
Henderson v Merrett Syndicates Ltd [1995] 2 A.C. 145
Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64
Huebner, M.S. and Klein, D.S., 2015. The Fiduciary Duties of Directors of Troubled Companies. American Bankruptcy Institute Journal, 34(2), p.18.
Mantese, G., Radice, R. and Mantese, T., 2016. Navigating the World of Fiduciary Duty within the Corporate Context. J. Mo. B., 72, p.246.
Partnership Act 1963 (Cth)
Sollars, G.G. and Tuluca, S.A., 2018. Fiduciary Duty, Risk, and Shareholder Desert. Business Ethics Quarterly, 28(2), pp.203-218.
The corporation Act 2001 (Cth)
Welch, E.P., Saunders, R.S., Land, A.L., Turezyn, A.J. and Voss, J.C., 2016. Folk on the Delaware General Corporation Law: Fundamentals. Wolters Kluwer Law & Business.
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