Fiduciary Obligations

Trustees are subject to prescriptive and proscriptive duties.

A prescriptive duty requires action by the person owing it; a proscriptive duty requires restraint.

The fundamental duty of all fiduciaries (which includes trustees) is that of undivided loyalty.

The duty of undivided loyalty imposes upon all fiduciaries the following proscriptive duties:

  • (a) not to allow a conflict of interest and duty;
  • (b) not to obtain an unauthorised benefit from the relationship; and
  • (c) not to allow a conflict of duty and duty.
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    In the case of persons who have undertaken the duties of trustees of an express trust, the duty of loyalty imposes the following prescriptive duties namely:

  • (a) the duty to perform and adhere to the terms of the trust;
  • (b) the duty to keep and render accounts; and
  • (c) the duty to act personally and not act under the dictation of others.
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    The trustee undertakes them by accepting the trust.

    In his often cited work “Fiduciary Obligations” P.D. Finn set out two groups of obligations owed by fiduciaries to their principals.

    The first group serves to bind the fiduciary to the discretions of his office. They are designed to ensure that there will be no failure on his part to exercise those discretions.

    The duties in this group comprise:

  • (1) a duty not to delegate discretions;
  • (2) a duty not to acts under another’s dictation;
  • (3) a duty not to place “fetters” on discretions; and
  • (4) a duty to consider whether a discretion should be exercised.
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    The second group binds the fiduciary in the actual exercise of his discretions. The general obligation points to the end to which he must aim – the service of his beneficiaries’ interests. These duties in theory ensure that the fiduciary does not stray from that mark. This group consists of:

  • (1) a duty not to act for his own benefit, or for the benefit of any third person;
  • (2) a duty to treat beneficiaries equally where they have similar rights;
  • (3) a duty not treat beneficiaries fairly where they have dissimilar rights; and
  • (4) a duty not to act capriciously or totally unreasonably.
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    Equity’s concern is to ensure that if and when choices are to be made, they will be made by the fiduciary, and will be made for an in the beneficiaries’ interests.

    As a general rule, it is the province of the fiduciary to determine what actions are in the interest of his beneficiaries. The courts are not entrusted with this decision. On the other hand, it is the province of the courts to determine what actions are not in the beneficiaries’ interest, and an action will not be in the beneficiaries’ interest if it constitutes a breach of any of the specific duties.

    Conflicts of Interest

    It is a strict rule of equity that a fiduciary must not enter into engagements which give rise, or which might give rise, to a conflict between the fiduciary’s personal interest and his or her duty to the principal {Chan v Zacharia. (1984) 154 CLR 178 at 198; 53 ALR 417 per Deane J. {Link}. }

    It is not necessary to show that the fiduciary has put personal interest ahead of duty. The breach occurs when he or she places himself or herself in a position in which there is the possibility of a conflict between the two.

    Lord Cranworth in Aberdeen Railway Co v Blaike Bros (1854) 1 Macq 461; [1843-60] All ER Rep 249 said:

    “It is a rule of universal application, that no one having such duties to discharge, shall be allowed to enter into engagements in which he has, or can have a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound to protect. So strictly is this principle adhered to that no question is allowed is allowed to be raised as to the fairness or unfairness of the contract so entered into.”

    A fiduciary cannot profit from his or her position without the informed consent of his or her principal {Williams v Barton [1927]; All ER Rep 751}.

    Duty to Inform

    A fiduciary cannot profit from his or her position without the informed consent of his or her principal {Williams v Barton [1927] 2 Ch 9; [1927] All ER Rep 751}.

    Deane J in Chan v Zacharia. (1984) 154 CLR 178 at 198; 53 ALR 417 stated at [30]:

    The liability to account as a constructive trustee will not arise where the person under the fiduciary duty has been duly authorized, either by the instrument or agreement creating the fiduciary duty or by the circumstances of his appointment or by the informed and effective assent of the person to whom the obligation is owed, to act in the manner in which he has acted.

    Where a fiduciary (including a trustee) enters into a transaction with persons to whom he owes the fiduciary duty (the latter including a beneficiary under a trust) and the fiduciary is unable to prove the transaction has been entered into with the “fully informed consent” of the beneficiary of the fiduciary duty, the transaction is voidable at the instance of the beneficiary, notwithstanding that the beneficiary would have consented even if the fiduciary had made a full disclosure to him of the relevant facts {Maguire v Makaronis (1997) CLR 449 at 467-468 and at 472 (per Brennan CJ, Gaurdron, McHugh and Gummow JJ.}

    If there has been operative misrepresentation made to the beneficiary by his fiduciary, then the transaction is also voidable at the instance of the beneficiary.

    It is no defence to a claim on these principles for the fiduciary to say that he or she acted honestly or in good faith. {Refer to Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134n at 144, 145 per Lord Russell, at 137 per Viscount Sankey; [1942] 1 All ER 378 (‘the rule of equity which insists on those who by use a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud, or absence of bona fides; or upon such a question or consideration as to whether the profit would or should otherwise have gone to the plaintiff, or whether the profiteer was under a duty to obtain the source of the profit for the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or ether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or benefited by his action. The liability arises from the mere fact of a profit having in the stated circumstances, been made. The profiteer, however honest and well intentioned, cannot escape the risk of being called upon to account).{Also refer to Boardman v Phipps [1967] 2 AC 46; [1966] 3 All ER 721; [1966] 3 WLR 1009}.

    Fiduciary Obligations of the Directors of Corporate Trustees

    The Victorian Court of Appeal in Australasian Annuities Pty Ltd v Rowley Super Fund Pty Ltd [2015] VSCA 9; 318 ALR 302; 104 ACSR 312 held at [59]:

    The fiduciary duty owed by a director to a company is somewhat expanded when the company is a trustee company. This was explained by Robson J in Re S & D International Pty Ltd (No 4),(2010) ACSR 595 where his Honour stated:

    The basic common law duty of a director is that he or she must act bona fide in what he or she believes is in the best interests of the company as a whole. This duty is encompassed in s 181[of the Corporations Act 2001 (Cth)]. In this instance, S&D acted as a trustee of the unit trust and the best interests of the company were clearly to act properly in accordance with the trust deed and in the interests of the unit trust. In other words to ensure that the trustee exercised its powers honestly and in the best interests of the beneficiaries of the trust.[Ibid 657]

    At [228-229] the Court of Appeal continued:

    I agree with the statement by Robson J of the duties of a director of a company that acts as a corporate trustee. In circumstances where a company is a corporate trustee, a director acting in the best interests of the company as a whole must act in good faith to ensure that the company administers the trust in accordance with the trust deed having regard to the rights and interests of the beneficiaries of the trust. The best interests of the company as a corporate trustee are to act properly in accordance with the trust deed in managing the business of the trust and in dealing with the assets and liabilities of the trust. A director of a corporate trustee must act in good faith to ensure that the company complies with its obligations as a trustee, and properly discharges the duties imposed on it by the trust deed and by trust law generally. It is not in the best interests of the company for it to act in breach of its duties of a trustee, for the company has assumed the responsibilities of that office and must see to it that they are fulfilled.{See Hurley v BGH Nominees Pty Ltd (No 2) (1984) 37 SASR 499, 510 (Walters J); Re S & D International Pty Ltd (2010) ACSR 595, 657 [283] (Robson J); Bell Group v Westpac (2008) 39 WAR 1, 1194 [4619] (Owen J).}

    The obligation of a director of a corporate trustee is the same whether the trust is a unit trust or a discretionary trust viz. to act in good faith to ensure that the company acts properly in accordance with the trust deed in administering the business, assets and liabilities of the trust. Although in the case of a discretionary trust, a member does not have any present entitlement to the trust assets, the member does have standing to compel the proper administration by the corporate trustee of the trust.{Kennon v Spry (2008) 238 CLR 366 [74]; Gartside v Inland Revenue Commissioners [1968] AC 553}. This is not disputed. The director should act in good faith to ensure that there is no cause for legitimate complaint by a beneficiary about the administration of a trust for which the company is responsible.

    A transcript of this case can be found here.


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    This tab updated on 4 June 2015