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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
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
Fianc and fiance- not settled law. Best practice would be to argue both a presumed and actual undue influence claim. Same in not presumed below. NOT PRESUMED- husband and wife; Europen Asian Bank of Aus v Kurland (1985)- although see wifes 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).
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If undue influence (presumed or actual) is not rebutted, the plaintiff is entitled to have the transaction/contract rescinded, i.e. treating the contract as if it never existed.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
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]
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 trustees 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.