Week 2: Equitable Fraud Wider Scope
Equitable fraud has a wider scope than common law fraud. It includes not only unconscionable transactions, but also any behaviour which in unjust, unfair or which breaches equitable principles
Intention/Mens Rea (a guilty mind):
Common law fraud requires proof that a false representation was made with an intention or reckless indifference to the underlying truth; Derry v Peek (1889). In equitable fraud, ‘no actual intention to cheat need be proven. It was sufficient if a person misconceived the extent of an obligation imposed on him or her by a court of equity’’; Nocton v Ashburton [1914] per Lord Haldane.
‘Acted in good faith’ (bona fide) is no defence
“The fault being that the person violated, however innocently, an obligation which he or she must be taken by the court to have known”; Nocton v Ashburton [1914] per Lord Haldane. Boardman v Phipps [1967] emphasises this application by finding that even where the party acts in good faith, equitable fraud may arise.
Nocton v Ashburton [1914] FACTS: Nocton, a solicitor, advised Lord Ashburton to release a parcel of land subject to a mortgage in Lord A’s favour to assist a building development on site. The release of the mortgage had the effect of promoting a second mortgage in favour of Nocton on the same property. This, however, had not been the intention on Nocton when he gave Lord A the advice. Upon default, Lord A’s remaining security proved insufficient and he sued Nocton. On APPEAL it was HELD: -
Nocton had breached his fiduciary duty to Lord A and was liable to indemnify Lord A for the loss. It was immaterial that Nocton’s intentions in giving the advice were bona fide. The breach of fiduciary duty constituted equitable fraud.
Equitable fraud remains the catch-all for cases that do not satisfy the elements of unconscionability or undue influence for lack of characterisation rather than lack of unfairness.
Week 2: Unconscionability The Concept of Unconscionability
Unconscionability is a general concept which means “against good conscience”, “wrongful” and unjust”. Undue influence and unconscientious conduct are causes of action based on this concept.
UNDUE INFLUENCE
Relationship between the parties at the time the contract was entered. The will of the subordinate party is “not independent and voluntary because it overborne” by the dominant party; Commercial Bank of Australia v Amadio (1983) per Mason J
PRESUMED Undue Influence
The operation of a presumption at law is such that the elements required for one party are presumed, shifting the onus of proof to the other party. In the case of undue influence, the court will presume undue influence in particular relationships of: - trust and confidence - in which the dominant party has abused that relationship to enter into the impugned transaction. The specific relationships that give rise to the presumption have been expanded since Johnson v Buttess (1936) to include: - Parent and child- the transaction will be set aside if the child was denied the ability to make their own judgement through the exertion of influence by the parent or parent figure; Bullock v Lloyds Bank Ltd [1955] (cannot reverse roles) - Guardian and ward (Bank of NSW v Rogers (1941)- relied on uncle after death of her parents- no independent advice) - Trustee and beneficiary- personal connection between T and B so as to constitute an interference with the B’s independence in decision making; Whereat v Duff [1972] - Doctor and patient- subordinate party is excessively ill and relying on the advice of their medical advisors; Breen v Williams (1996) - Solicitor and client- a solicitor must take additional steps to ensure the independent and informed decision-making capacity of their client; Bester v Perpetual Trustee Co Ltd [1970]. - Religious advisor and devotee- McCulloch v Fern [2001] made $93,000 payment to religious movement which was subsequently used to pay a sum over a mortgage. There is no requirement that the religion constitute a mainstream religion.
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Fiancé and fiancée- not settled law. Best practice would be to argue both a presumed and actual undue influence claim. Same in not presumed below.
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NOT PRESUMED- husband and wife; Europen Asian Bank of Aus v Kurland (1985)- although see ‘wife’s special equity’ (Yerkey and Garcia), nor grandparent and grandchild; Beanland v Bradley (1854), nor siblings; Armstrong v Armstrong (1873)
The list of presumptuous relationships are neither finite nor exhaustive; Brusewitz v Brown [1923] per Sir John Salmond ONUS OF PROOF: The onus is on the dominant party to satisfy the court that the subordinate party made the decision independently and in light of available information (rebutting the presumption).
ACTUAL Undue Influence
Arises where the aggrieved party cannot satisfy the court that the relationship with the alleged dominant party falls within the presumed categories. ONUS OF PROOF: - First lies with the alleged subordinate party to establish that the influence of the dominant part existed and distorted their ability to make an independent decision. - If established, the onus then returns to the dominant party to prove the independent decision-making of the sub-ordinate party on the balance of probabilities (rebut the presumption). In Bank of Credit and Commerce International SA v Aboody (1989) it was held that for the subordinate party to establish that a relationship of influence existed they are required to prove: - The alleged dominant party’s capacity to influence the subordinate party - Such an influence was exercised on the facts - The exercise of influence was undue; and - This undue influence gave rise to the relevant transaction Johnson v Buttress (1936) (Leading Case on Actual Undue Influence) FACTS: Gift from donor to donee. Donor (P) was 67, widowed, illiterate, unintelligent and close to the daughter of a stepsister of his late wife (D). P relied on the D for both company and advice. P transferred almost whole estate to P without consideration. HELD: Plaintiff was unduly influenced. This applies whenever one party assumes a position naturally involving an ascendancy or influence over that other, or dependence or trust on his part. One occupying such a position falls under a duty in which fiduciary characteristics may be seen.
DEFENCE- REBUTTING THE PRESUMPTION (Both Presumed and Actual) Dominant party may be able to REBUT THE PRESUMPTION based on:
Independent advice being given: - Bester v Perpetual Trustee Co Ltd [1970]- although she was asked if she had any questions by an independent solicitor, she was not given any advice. - Bank of NSW v Rogers (1941) - Bank manager knew she was emotionally dependent upon uncle, but did not suggest that she receive independent advice. Laches: unreasonable delay by plaintiff. Time begins when plaintiff becomes aware of equitable rights; Bester v Perpetual Trustee Co Ltd [1970] - in this case, plaintiff was not aware of equitable rights until twenty years after undue influence by two uncles to settle her estate on them and receive a small income in return. Influence of third party Other considerations: - The size of the estate or transaction in question - The consideration, or lack thereof, provided from the alleged dominant party - Availability or transparency of information relevant to the transaction - The quality of the assent
REMEDY If undue influence (presumed or actual) is not rebutted, the plaintiff is entitled to have the transaction/contract rescinded, i.e. treating the contract as if it never existed.
UNCONSCIENTIOUS CONDUCT Commercial Bank of Australia v Amadio (1983) established the elements required to prove unconscientious conduct. The ONUS is on the plaintiff to prove: 1. That they were under a ‘special disadvantage’ 2. The defendant knew or is likely to have known about the disadvantage and proceeded to unconscionably exploit the disadvantage in order to obtain consent to the transaction (knowledge requirement). SPECIAL DISADVANTAGE Fullager J in Blomley v Ryan (1956) acknowledged that there is a wide variety of circumstances that may lead to a special disadvantage and among them are: 1. 2. 3. 4.
Poverty or any need of any kind Sickness Age Infirmity (illness) of body or mind
5. Drunkenness 6. Illiteracy or lack of education 7. Lack of assistance or explanation where assistance or explanation is necessary
The common characteristic is that they have the effect of placing one party at a disadvantage in relation to the other- Ryan Some characteristic which “seriously affects the ability of the innocent party to make a judgement as to his own best interests”; Amadio (1983) per Mason J. KNOWLEDGE REQUIREMENT The knowledge requirement is established where the defendant has (Amadio): -
actual knowledge of the situation, or is aware of the possibility that that situation may exist, or a reasonable person who is aware of facts would raise that possibility
DEFENCES If the elements are proven, the ONUS is then cast upon the dominant party to prove the transaction was fair, just and reasonable; Commercial Bank of Australia v Amadio (1983). Adequacy of consideration – In Blomley v Ryan (1956), inadequacy of consideration played a central role in showing that unfair use was made of the occasion (intoxicated alcoholic P sells land to P at 60% of recognised value) Independent legal advice- Amadio (1983)- should equalise both parties bargaining power. REMEDIES: Rescission or refusal of specific performance
Week 4: Fiduciary Relationships DEFINITION Fiduciary relationships are relationships of confidence between parties in which the fiduciary is held to be in a position of trust and confidence to the principal (confiding party). DUTY-Generally The essence of fiduciary relationships is a paramount duty imposed on the fiduciary to act in the interests of the principal. As noted in Maguire v Makaronis (1997), “equity intervenes…not so much as to recoup a loss suffered by the plaintiff as to hold the fiduciary to, and vindicate, the high duty owed to the plaintiff” ESTABLISHED CATEGORIES OF RELATIONSHIPS The courts have identified a number of presumed categories of fiduciary relationships:
Trustee and beneficiary- Keech v Sandford (1726) Boardman v Phipps [1967] Solicitor and client- Boardman v Phipps [1967] Employee and employer- Consul Developments v DPC Estates (1975) –prop. develop Directors and company- Regal (Hastings) Ltd v Gulliver [1967] Partner and partner- Chan v Zacharia (1984) Agent/Principal & Accountant/Client
The categories are not closed. And the court may find relationship evidenced by the required degree of trust and confidence being placed in one party by another. COMMERCIAL AGREEMENTS
Commercial agreement between a manufacturer and distributor. Held: not to be fiduciary relationship as they are to protect their own interests, for both to make a profit. NO DUTY; Hospital Products Ltd v United States Surgical Corporation (1984) Collateralisation clause in JOINT VENTURE of three parties which allowed for obtainment of collateral advantage (own interests) in relation to the proposed project without the knowledge and informed consent of one of the parties to the joint venture. Therefore, held to owe a fiduciary duty to other partners in joint venture; United Dominions Corporation Ltd v Brian (1985)
INTENTION IRRELEVANT It is irrelevant whether there was any intent by the fiduciary to defraud or act contrary to his duty; Nocton v Lord Ashburton [1919].
FIDUCIARY DUTIES/OBLIGATIONS In Australia, fiduciary duties only set out what the fiduciary MUST NOT DO; Breen v Williams (1996). In Chan v Zacharia (1984), Deane J distinguished two aspects of the fiduciary duty: 1. The fiduciary is not to get into a situation where his personal interests conflict with the fiduciary obligation, i.e. principal receiving a benefit or gain from personal conflict. (NO CONFLICT RULE)- possibility of conflict must be a “real sensible possibility” for the fiduciary to breach duty. EXCEPTION: fully informed consent given by principal; Boardman v Phipps [1967] 2. The fiduciary must account for any profit obtained by use of his fiduciary position or knowledge (NO PROFIT RULE) e.g. directors made a profit for themselves by utilising the position and knowledge they possessed by virtue of being directors of the company; Regal (Hastings) Ltd v Gulliver [1967]. RENEWAL OF LEASE (Conflict of duty) Rule in Keech v Sanford (1726):
Trustee cannot renew the lease for his/her own benefit which was held on trust for a beneficiary. A trustee, who personally obtains a right to renew the tenancy, holds that renewal on CONSTRUCTIVE TRUST for the beneficiaries. Upon renewal, IRREBUTTABLE PRESUMPTION arises that renewal is held on trust
This rule applies to other fiduciary relationships, however, in the case of non-trustee fiduciaries (e.g. partners) it is a rebuttable presumption of fact; Chan v Zacharia (1984) – On the facts of the case, the lease was found to be an asset of the partnership and therefore it was held on constructive trust for the partners. DEFENCE- Informed consent The only way a fiduciary may escape liability is by obtaining fully informed consent from the principal; Boardman v Phipps [1967] TRUSTEE- in Boardman, the unanimous consent of the trustees and beneficiaries is necessary where a solicitor was planning to perform an act which placed him in a situation of conflict of interest DIRECTOR- in Regal, necessary to obtain consent of the company through a resolution of shareholder at a general meeting of the company. REMEDIES Where a fiduciary profits by improper use of his position or through conflict of interest, account of profits and constructive trust; Boardman v Phipps [1967]
Week 7: Trustees Powers and Duties DUTY & POWER DISTINGUISHED A DUTY is a course of action which the trustee must:
Perform- a positive duty Refrain from doing- negative duty
If a trustee act contrary to duty, there will be a breach of trust. A POWER is a discretion which the trustee may perform only if they believe it is appropriate. Failure to act honestly in the exercise of discretion is a breach of trust and of the trustee’s fiduciary duty: Cowan v Skargill [1985]
IMPLIED DUTIES Where the trust instrument does not specify duties, the duties will be implied by equitable principles and statute: Byrnes v Kendle (2011) - Mr K as trustee did not collect rent owing on a leased property held on trust. Although the trust deed was silent as to his duties, the High Court held that both the statutory duties and those implied in equity must be carried out by the trustee (subjective intention irrelevant-new principle). 1. Become acquainted with the terms of the trust instrument Including the documents, deeds relating/affecting trust property, nature/circumstances of trust property and relevant obligations. If unfamiliar trustee may possibly vomit a breach of trust 2. Act honestly Fundamental duty to act honestly and in good faith for the benefit of the beneficiaries: Armitage v Nurse [1997] However, even if acted bona fide, trustee may still breach fiduciary duties if in a position of conflict of interest: Boardman v Phipps [1967] 3. Exercise reasonable care Investment or management of business on behalf of others: standard of care required is ‘the same care and skill as an ordinary, prudent man of business would exercise in conducting that business as if it were his own’: Permanent Building Society (in liq.) v Wheeler (1994) 4. Act gratuitously Trustee must not profit from the position as placed in position of conflict of interest However, trustee may receive remuneration if it is expressly/impliedly provided for in the trust instrument, or special agreement between T & B or payment been allowed by the court pursuant to s 81 Trustee Act 1925 (NSW)- if court considers expedient/appropriate.
5. Adhere to and carry out the terms of the trust ‘Perhaps the most important duty’: Davey v Pein (1884) Trustee must carry out the wishes and objectives of the settlor. Trustee may only deviate from the terms of the trusts pursuant to s 81 Trustee Act 1925 (NSW) if the court thinks it is expedient and in the interests of the beneficiaries. Expedience depends upon the circumstances of the case. However, deviation cannot substantially alter the nature of the trust or result in its termination: Re Trusts of Kean Memorial Trust Fund (2003) 6. Not to delegate duties or powers Co-trustees: must act UNANIMOUSLY, unless trust instrument provides for majority decision making: Luke v South Kensington Hotel Company (1879) Failure to obtain CONSENT of other trustees will render the trustee in breach of trust: Boardman v Phipps [1967] Delegation may be permitted by s 53 Trustee Act 1925 (NSW) to employ an agent to conduct business on behalf of the trustee in the interests of the proper administration of the estate, e.g. lawyer, accountant or real estate agent. 7. Treat all beneficiaries impartially ‘Giving proper consideration to relevant matters and excluding irrelevant matters’: Knox v Mackinnon (1888) 8. Keep and render proper accounts & provide full information when requested Keep complete and proper accounts for the trust property and dealings with the trust property: Kemp v Burn (1863) May have accountant examine or audit accounts to keep proper accounts pursuant to s 51 Trustee Act 1925 (NSW) 9. Not to deal with trust for own benefit Particularly relevant where conflict of personal interest and duty as a trustee or by reason/use/knowledge resulting from his fiduciary position of trust and confidence: Regal (Hastings) v Gulliver [1967] (company directors) Boardman v Phipps [1967] (trustee/beneficiary) 10. Not allowed to purchase trust property Trustee may not purchase property from the trust without the CONSENT of the Court or the consent of all beneficiaries or express power in the trust instrument.
Week 9: Rights of Beneficiaries POSSESSION OF TRUST PROPERTY Fixed trust with trustee having NO ACTIVE DUTIES to perform and merely holds the property. The beneficiary is ENTITLED TO POSSESSION AND TITLE of the property if: 1. B is sui juris (legally entitled to hold property, i.e. over 18 and of sound mind) 2. Originally sui generis (one of a kind-sole beneficiary) o Today, rule has changed: no longer needs to be sole beneficiary provided beneficiaries agree unanimously 3. B is absolutely entitled, i.e. has an equitable interest in regard to whole trust estate Therefore, B has right to demand that the legal interest in the trust property be conveyed to him or to a third person: Saunders v Vautier (1841) Trustee has ACTIVE DUTIES to perform (e.g. to manage land held on trust for the benefit of persons in succession), the beneficiaries life tenant has no right of possession. However, upon giving security, the B may be given possession of property (no legal title), provided they maintain the property in good order: Jenkins v Milford (1820)
