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Equity and Trusts Flowcharts 1
Equity and Trusts (LAW317)
Macquarie University
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Questions: Is there Fiduciary Obligations a fid relationship? In which category? What is the scope of that relationsuip? Was there a breach within that scope? Is the breach excluded by contract or by informed consent/ratification by the b’ee? What is the property? Has it been assigned validly? Can it be traced? What are the possible remedies available? Are there any bars? (hardship, unclean hands, laches, third party rights) The essence of a fiduciary relationship is that the fiduciary must act exclusively in the interests of the beneficiary in matters coming within the scope of that relationship Existence of a duty Is the relationship fiduciary in nature? Established Category? (Breen v Williams) Factual fiduciary rels Trustee-B’ee Solicitor-Client Director-Company Employer-Employee Agent-Principle Partner-Co-partner Executor-Beneficiary of Deceased estate Vertical relationships Investment advisor-client (Daly v Sydney stock exch) Doctor-patient (depends on scope— Breen v Williams) Distorted fid relationships: Chase manhatten Bank) - No fid rel on the basis of est cat nor undertaking, but found in order to grant remedy of constructive trust of $2 mill mistakenly deposited Factors considered: vulnerability, ascendency, representation, power of one of the parties (Hospital Products) Undertaking test as per Hospital Products Whether the fid has undertake to act in the best interests of the b’ee in a legal or practical sense In Cth Bank v Smith, undertaking test applied between the bank and a customer—bank made an undertaking to act exclusively in the interests of the P. Horizontal Relationships All partners act in the interests of the partnership—all horizontal relationships that mimic a partnership can be treated as fiduciary in nature. Question is not undertaking, but whether the parties have placed a high degree of mutual trust and confidence in each other in the pursuit of their common goal. UDC v Brian is the authority Core fiduciary duties: No Conflict Rule and No Profit Rule (Keech v Sandford) Non Core fiduciary duties: Duty to act in good faith (Armitage), equitable duty of care, duty of confidence Scope of Fid relationship There should be an examination as to whether the undertaking was related to the breach. If not related, may be beyond the scope of the fid duty (Birtchnell) Conduct of all parties is relevant (Birtchnell) In Mauat, the house of Lords rejected P’s claims of breach of fid duty that solicitors did not advise her properly of the financial situation of her son because the scope of their duty was limited to legal advice NOTE: In Aust fid duties are proscriptive, not prescriptive (Pilmer v Duke, Breen) i. duty not to conflict, not to profit rather than a positive duty to do something Was there a breach? Of the No Conflict and/or no profit rule? (Keech) Breach of duties as a trustee? Boardman and Phipps—was there a ‘real sensible possibility’ of a conflict? Chan v Zacharia applied this real sensible possibility of conflict rule. Defences Has the fiduciary duty been excluded by contract? (ASIC v Citigroup). Has the breach been authorised or ratified via informed consent? (Queensland Mines Ltd v Hudson) Remedies (see remedies page) Can property be traced? Has property been validly assigned/ transferred? (ie where is the property?) Bars Laches (Lindsay Petroleum) Acquiesence (Gafford) Unclean hands (Black Uhlans—needs to be immediately related to the equity sued for) Hardship (Patel v Ali) Third party rights (Giumelli) Trusts EXPRESS CONSTRUCTIVE RESULTING (SEE NEXT PAGE FOR EXPANSION ON EXPRESS TRUSTS) AUTOMATIC A trust construed by the court (Guimelli) which is used as a remedy to correct unconscionable behaviour and or unjust enrichment Creation Enforcement Trustee Powers Trustee Duties Trustee Rights Breach of trust and Defences Diff to express trust because… Imposed by law (court order) and not the intention of parties Diff to Resulting trust because… Based more on the fact that it would be unconscionable to keep ppty rather than lack of intention Category basis of constructive trusts: 1. Unjust enrichment (Chase manhattan, Wambo) - knowledge key in Wambo. 2. Breach of fiduciary duty (Attoney Gen of HK v Reid) 3. Unconscionable conduct (Baumgartner) 4. Wrongdoing 5. Remedy for estoppel (Guimelli) 6. Stolen property by non fiduciary (Black v Freedman) Common Intention constructive trusts Allen v Snyder 1. A common intention or understanding that claimant will acquire an interest 2. The claimant must have acted to their detriment in reliance on that understanding Both demonstrated in Green v Green (Thai mistress case). Takes effect from the date that detriment begins (Parsons v McBain) Baumgartner Constructive Trust Muschinski v Dodds and Baumgartner lays a new test based on unconscionable conduct. The parties intentions, while important, the overall conduct and the relationship will also be relevant when considering whether the claimant has an equitable interest. Mostly ruled now by family law provisions but still applies to: 1. Couples not living together as de facto 2. Family disputes not involving couples 3. Commercial ppty disputes PRESUMED Gives effect to the lack of intention to benefit another at the time of transfer and not later. On failure of an express trust Consent vitiated by fraud, misrepresentation, or other vitiating factor (Reid v Reid) Basis of charitable trust breaks down Mr Calverley only put Green’s name down because he needed it to secure the mortgage not to benefit her. In any case was a de-facto rel so presumption of advancement would not apply. Purchase money Napier Voluntary transfer Calverley v Green The presumption of resulting trust can be rebutted by evidence which shows that the intention was that the beneficiary would be entitled to the use and enjoyment of their legal title for their own benefit (Calverley, Anderson v Mcpherson) Presumption of Advancement: Rebuts presumption of resulting trust. Dixon J in Wirth v Wirth—beneficial interest being intended in the situation where the presumption is applied Discussed in Calverley and Anderson v McPherson Presumption arises only in these situations: Husband à Wife but not de facto couples (Calverly v Green) Parent and Child (Brown v Brown ; Nelson v Nelson) Transferor in the ‘position of a parent’ (loco parentis) v Recipient (Anderson v McPherson) The presumption of advancement, like the presumption of result-ing trust, can be rebutted by evidence of the intention of the parties at the time of the transfer. If it is shown that there was no actual intention to confer a beneficial interest on the legal title holder the presumption will not be effective and the normal presumption of resulting trust will apply Accessorial liability Barnes v Addy rule: Strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions, perhaps of which a court of equity my disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees. Knowing Assistance Knowing Receipt Breach of fiduciary obligation Need not be breach of trust, but can be breach of another fid obligation Breach need not be dishonest Receipt of property (beneficial receipt— Stephens travel service Note: A bank is not generally in beneficial receipt unless it is a security OR the bank is in overdraft—Stephens Knowledge of the breach from the time of knowledge of breach Farah—Badens Scale 1-4— A recipient is liable only if he has actual knowledge of a breach or at least knowledge of the circumstances which would indicate a breach of fiduciary duty to a reasonable and honest person. Also Wambo Baden Scale 1) Actual Knowledge 2) Willful blindness 3) Willfully and recklessly failing to inquire 4) Knowledge of circumstances that would indicate facts to honest and reasonable person 5) Knowledge of circumstances to H&R person upon inquiry A dishonest and fraudulent Breach of trust Farah Constructions—not merely negligent. Assistance in the breach Breach would not have occurred without the assistance or the breach committed earlier than w/o assistance (ReEngine) Knowledge of breach Badens 1-4 (Farah) followed Consul— Burden of proof lies on the party seeking to rely on it Remedies: Prop remedies available (if prop exists. Otherwise personal remedy). Can trace the property if available: Onus on recipient to show that he is a GFPFVWN In Farah, prop remedies assumed for knowing receipt. Remedies: Only personal remedies available for knowing assistance: equitable compensation, to compensate the loss NOTE: CONSUL DEVELOPMENT established that proof of knowledge would be required, and affirmed in Farah as meaning the first four points—as an assister who knows of the circumstances that would indicate a breach to an honest and reasonable person. Tracing 1 (a) Trustee mixes trust money in his own bank account and spends some of the money: Re Halletts—Trustee spent his money first. B’ee entitled an equitable lien over the unspent moneys, and they needed to be replaced into the trust. Applied in Brady v Stapleton A method of identifying property that has been taken out of the trust and misused (misapplication of trust funds). Common law tracing rules apply when property is specifically identifiable, but are limited. Equity has many better, more flexible methods than the common law. Equity has rules for mixed property, can impose equitable liens, impost a resulting and constructive trust etc. Usually involves a fiduciary relationship but not always (Foskett v Mckeown) Mixing money in a bank account Equity has special rules in different circumstances 1 (b) Trustee mixes trust money with his own, later buys property with some of the money before exhausting the money remaining in the account Re Oatway— where a mixed fund has been withdrawn into an identifiable product, beneficiaries can claim a charge over that product so that the beneficiaries are able to satisfy their claim from the remainder of the mixed fund/product before the trustee. 1 (c) Trustee mixes trust money in personal account and makes payments in and out of the account Lofts v Macdonald—Lowest intermediate balance rule applies. They will have not have proprietary remedies, but only personal for the remainder. Unless the moneys were replaced with the intention of benefiting the B’ee, that money cannot be traced. 2. Trustee mixes b’ee money with his own, withdraws some and invests successfully Foskett v Mckeown—substitution of assets in proportion. Followed in Scott v Scott 3. Trustee mixes monies of more than one beneficiary in a bank account and spends some of the money in the account Re French Caledonia—rejects Claytons case (FiFo) in favour of rateability distribution. Re Magarey—Intention of the parties important Defences: Property untraceable (Assoc Alloys—proceeds not traceable) Recipient is a GFPFVWN (Re Diplock) Change in position (Gertsch v Atsas) 4. Trustee pays the b’ee money into an innocent party who mixes the money with his own acct Cannot trace into acct of a GFPFVWN: Re Diplock; Some assets can be traced but not all. Priorities Legal v Legal Nemo Dat principle—first legal owner has priority as the 2nd so called legal title holder never had good title. Earlier legal v Later Equitable Whipp: If the fairness of the case is balanced, then the legal interest prevails Did the ‘prior legal interest holder’s conduct contribute to the equitable interest, or cause them to lose priority? Where the legal owner has assisted in or connived at the fraud Legal owner has given the mortgager/agent authority to raise money being careless/negligent isn’t enough to postpone What if you don’t get the deeds? You don’t keep priority if someone else uses them, unless you have made reasonable inquiries or give a good reason. Whipp Earlier Equitable v Later Legal Earlier Equitable v Later Equitable Later legal interest will prevail if taken by a bona Initially Dearle v Hall - first to notify legal owner Now ruled by Moffett v Dillon: 1. If the 2nd owner has notice of there being a first, no priority and it goes to the first directly. 2. First in time prevails unless 2nd has Better Equity. fide purchaser for value without notice (BFVWN) (Pilcher v Rawlins) What is notice? Actual notice Constructive possession: if you don’t have a good root to title- assumes you went back 30yrs- s53 (3)CA) & actual documents given to you. Imputed notice – agents S164 CA (1)(a) is within actual knowledge, or would have come into knowledge if inquiries and inspections were made that ought reasonably to have been made. Or (b) agent same as above. Tenancy and notice: purchaser is bound same as vendor if had notice Possession is notice of some interest. Barnhart Can look at the lease and assume the rights are as stated. Smith Co-occupiers – if someone is an occupier, you need to inquire as to their interest, even if it can be said to be consistent. Hodgson PERSONAL PROPERTY SECURITIES ACT The priority of competing security interests in the same personal property can be summarised as follows: •a perfected security interest will have priority over an unperfected security interest •with two perfected security interests, the first perfected security interest will have priority, and •with two unperfected security interests, the first security interest to have ‘attached’ to the personal property will have priority. Both Mere Equities An equity is an unexercised personal remedy to go to court equitable interest/legal interest prevails if acquired by a BFPVWN of the prior equity (Latec v Hotel Terrigal) language? Kitto J in Latec – mere equities. Taylor J gets same result, but says its a special interest requiring assistance of the court Remedies Monetary remedies in equity Equitable remedies Specific performance Contractual Equitable Remedy 2 conditions: 1. Fairness Mutuality (Price v Strange). Ready and Willing 2. Supervision Usually court will not make an order for SP if the court cannot determine sufficiently supervise (Argyll). However, in Aust Diagnostic X-ray distinguished Argyll and ruled for SP to keep petrol station open >>> SP not usually for chattels unless in a special category (Dougan v Ley—taxicab) >>> SP for personal services generally not provided as it would amount to slavery and would put two opposing parties together. However, in Posner v Scott-Lewis, it was found that personal services could be provided by SP as it was only part of executing the contract and simply requires “a” person to be hired. Prerequisites 1. Contact must be specifically enforceable 2. Valuable consideration (not nominal) 3. Inadequacy of damages Injunction 4 types: A. mandatory or prohibitory B. Perpetual, interim, interlocutory C. Ex parte—urgent request to stop D. Quia timet—injunction before right is infringed Injunctions have a statutory basis: Supreme Court Act (NSW) s 66(4) Criteria to award an injunction: 1. P must show D committed a legal, equitable or statutory wrong, 2. P must show wrong is likely to continue or be repeated—looks to the future to avert intended harm 3. Damages must be shown to be inadequate—eg building a bomb factory next to a school— damages inadequate. Equitable Damages Awarded by Statute when SP or injunction not available or to supplement (Mills v Ruthol) Supreme Court Act (NSW) s 68 Not clear if applies to equitable wrongs Account of Profits Designed to strip profits made in breach of Fiduciary obligations, preventing the wrongdoer from benefiting from his own wrong. Response to breach of trust, fiduciary obligations and breach of confidence Only Net profits are stripped—not punitive, but compensatory in nature Warman v Dwyer is the authority—see p for the findings Equitable Compensation Re Dawson and Youyang are the authorities Trustee must reconstitute trust, but in exceptional cases the beneficiary the appropriate recipient Nocton—solicitor ordered to pay equitable compensation to client for breach of fid duty Since Nocton equitable compensation widely used for breach of fid duty (CBA v Smith, Stewart v Layton) Equ compensation aims to put P in position she would have been had the defendant not wronged her. No intervening act, no contributory negligence. Because the b’ee in a fid relationship is not expected to take care of her own interest (Re Dawson) In Re Dawson, the higher amount ($A5829) was ordered to be repaid to reconstitute trust. In Youyang the simple but-For test was used and the solicitors were ordered to reconstitute the misused trust monies on the value from the day of judgment rather than date of breach. Again, remoteness, forseeability and causation are irrelevant However, Equitable compensation does not apply to the no profit rule—makes no sense, only the no conflict rule, and when a loss is made. However, the common sense role of causation was applied in Canson to deny equitable compensation Plaintiff must show a sufficient link on a common sense standard between the breach and loss (Maguire v Makaronis) Steps to quantifying equitable compensation: 1. Identify the duty breached 2. A “sufficient connection” between breach and loss 3. Application of the but-for test to determine (2) Proprietary remedies in equity NOTE: THERE ARE TWO PROPRIETARY REMEDIES: 1. CONSTRUCTIVE TRUST (trust imposed by court over property to be held for b’ee 2. EQUITABLE LIEN (useful when you do not want the property even though available, but you want to hold the value of it in monetary terms to compensate the loss caused by breach) (Also called Equitable Charge, though slightly different)
Equity and Trusts Flowcharts 1
Course: Equity and Trusts (LAW317)
University: Macquarie University
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