Eaton v Rare Nominees Pty Limited

The existence of a fiduciary relationship turns upon whether the fiduciary has undertaken or agreed to act for or on behalf of or in the interests of a beneficiary in the exercise of a power or discretion which will affect the interests of the beneficiary. Where those parties are in a contractual relationship with each other, it is possible for a fiduciary obligation to arise. However, as exemplified in this decision, if a fiduciary obligation would be inconsistent with the contractual relationship, a fiduciary relationship will not exist.

Philippides and McMurdo JJA and Davis J

13 September 2019

The appellant had been the controller of a company called E-Coastal Developments (now in liquidation). [1]. In 2006, the respondent entered into a joint venture agreement (JVA) with E-Coastal for facilitation of a project to develop and sell serviced residential lots. [2]. The progress progressed to completion, however, the respondent was never paid its alleged entitlements under the JVA as a contributor to the project. [2]. The trial found that the appellant had caused E-Coastal to use significant funds to pay for matters outside the ambit of the JVA or in preference to making payments to the respondent. [25]. Under the JVA, the respondent, as a contributor, was entitled to a percentage of the “Receipts”. [27]. At trial, the primary judge found that E-Coastal had owed the respondent fiduciary obligations which were breached and that the appellant was liable accessorially to the respondent in the sum of $226,000.55. [3].  

The Court of Appeal allowed an appeal. The appeal turned on whether E-Coastal owed a fiduciary obligation to the respondent. [50]. Justice Philippides held that it had not. [64]. In explaining the relevant principles, her Honour observed that “express contractual exclusions of fiduciary duties have generally been effective”. [63]. Justice Philippides considered that the trial judge had not given proper weight to the fact that the posited fiduciary relationship had to accommodate the JVA’s terms, and not be inconsistent with them:

“Fiduciary and contractual relationships may co-exist. However, superimposing the fiduciary obligation as the trial judge did, in the circumstances of the present case, had the effect of altering the operation which the contract was intended to have according to its true construction. The relationship between the parties, on a proper construction of the JVA, did not allow for the imposition of the fiduciary obligation found by the trial judge.”  [64].

The JVA gave express and detailed attention to the relationship between the parties [65]. It stated that the relationship was not one of partnership or agency, that E-Coastal had all legal and beneficial interest in the asset and that the asset was not held on trust for contributors. [65]. Contributors were limited to their entitlement under the JVA. [65]. Significantly, the JVA specifically excluded, to the extent permitted by law, “rules of equity” and “duties of a fiduciary nature”. [65].

Her Honour observed that given the detail in which the parties had addressed their relationship and the “express circumspection and limitations in the contract” upon that relationship, it was difficult to see what basis there was for finding a fiduciary relationship had existed. [66]. Superimposing a fiduciary obligation was inconsistent with the contract. [67]. The matters identified by the trial judge did not overcome this inconsistency. [68]. The trial judge’s finding that trust placed in the appellant was contrary to the contractual allocation of risk and the evidence at trial. [69]. Secondly, the trial judge’s finding that the respondent was vulnerable to the appellant keeping information from it did not give adequate consideration to the appellant’s contractual entitlements to information. [70]. Finally, the trial judge’s finding that the purpose of the respondent’s contribution to the joint venture was to achieve an entitlement protected from commercial risks failed to consider how a fiduciary obligation would be consistent with the contractual relationship. [71].

Justice McMurdo agreed with the orders proposed by Philippides JA. [73]. His Honour also rejected the matters relied upon by the trial judge to support the alleged fiduciary obligation. First, the trust placed in the appellant due to prior commercial dealings provided no indication that E-Coastal would act as a fiduciary. [77]. Secondly, a breach of the JVA by the appellant by keeping information from the respondent could not be a basis for characterising the relationship under the JVA as a fiduciary one. [78]. Furthermore, it was not appropriate to reach such a conclusion based upon the premise that E-Coastal would breach its express obligations under the JVA to provide a proper accounting of the amounts the respondent was entitled to. [79]. Finally, the objective of the JVA was to protect against commercial risks associated with the project, not the risk of the investor not being paid what it was due from a successful project. [80]. In addition, there were terms of the JVA that strongly indicated there should be no fiduciary obligation. [81]. By the terms of the JVA, it was clear that E-Coastal did not undertake to act in the interests of the respondent in preference to any other interest when disposing of its own money. [82].

Justice Davis agreed with the separate reasons of both Philippides JA and McMurdo JA and the orders proposed by Philippides JA. [87], [101]. His Honour addressed the remaining two grounds of appeal, concluding that the trial judge had not erred in assessing the sum payable to the respondent under the JVA ([88]–[93]) and that the accessorial liability claim had been adequately pleaded. [94]–[100]. McMurdo JA also agreed with Davis J’s resolution of these grounds. [83], [87].

S Walpole