Do your business arrangements require more than compliance with contractual terms?

It is generally understood that parties to certain types of business arrangements, such as partnerships and joint ventures, are subject to fiduciary obligations in addition to the legal obligations arising from the arrangement. But are you aware that it is possible for fiduciary obligations to be imposed due to the nature of the roles assumed by the parties in the course of a standard contractual arrangement? In this article, solicitor Rachel Woods discusses a recent Supreme Court decision which found on the facts that a contracting party was not only entitled to adherence to the contractual terms but also to the duty of utmost loyalty in the performance of a function which the other side had agreed to perform.

It is well settled that certain commercial relationships, including partnerships and joint ventures, attract fiduciary duties of utmost loyalty. In such relationships, the fiduciary must act in the best interests of the other party and their obligations will be strictly enforced. In a recent decision, Maruha Corporation v Amaltal Corporation Ltd¹, the Supreme Court held that it was possible for fiduciary duties to apply to certain aspects of other, non-fiduciary, commercial relationships.

The facts

Amaltal and Maruha were the shareholders of ATL. ATL's business had previously been conducted under a partnership structure between the two shareholders. Under the agreement to continue operations in the guise of ATL, Amaltal assumed responsibility for the accounting and tax return functions of ATL. For this purpose, an accountant employed by Amaltal was seconded to ATL.

Due to the misrepresentation of tax liability by Amaltal, Maruha made overpayments for expenses to ATL, which were then paid to Amaltal. Maruha sued Amaltal in deceit and for breach of fiduciary duty.

In the High Court, Maruha was successful on both grounds. However, the breach of fiduciary duty finding was overturned by the Court of Appeal. Maruha appealed to the Supreme Court.

The decision

The Supreme Court held that the relationship between the two parties was not, in general, of a fiduciary nature. The court stated that where "commercial parties elect to use an incorporated vehicle for a venture that can only loosely be called a joint venture, it is unlikely that their relationship as a whole will be fiduciary in nature". However, the court went on to find that Amaltal was subject to fiduciary obligations in respect of the accounting and tax functions it had taken on under the agreement. The court held that fiduciary obligations will apply where "one party is entitled to rely upon the other, not just for adherence to contractual arrangements between them, but also for loyal performance of some function which the latter has either agreed to perform for the other or for both or has, perhaps less formally, even by conduct assumed".

Factors that the court considered to indicate that fiduciary duties existed were:

• Amaltal had taken responsibility for all aspects of the accounting functions of ATL, providing personnel and facilities for those functions.

• The court held that the accountant seconded to ATL was an agent of Amaltal, which was in turn an agent of Maruha. Therefore, Maruha could expect the accountant to act with loyalty to both shareholding parties.

Significantly, the court held that fiduciary obligations were not negated by the fact that Maruha had employed a "watchdog" to audit the accountancy carried out by ATL's accountant. An entitlement to rely on a fiduciary will not be destroyed by the fact that the other party elects to confirm that that reliance is well founded. Further, the fact that any such supervision is deficient will not provide a defence to an allegation of breach of fiduciary duty. This emphasises the strict nature of fiduciary obligations.

Practical implications

What then are the implications of a finding of fiduciary obligations in a commercial relationship? The role of a fiduciary requires that the fiduciary act with utmost loyalty to the other party, and that it act in the interests of that other party. Such duties will be applied strictly, and few if any defences or mitigating factors will be relevant to such a breach.²

Parties to commercial relationships should be aware of the possibility that fiduciary duties will be imposed due to the nature of the roles assumed by the parties. This is especially relevant where one party has undertaken a role in which it has comparatively greater power or experience, and in which it undertakes to act on behalf of all of the parties. In such a situation, it is possible that a court may find that it is reasonable for the other parties to expect the more experienced party to act in their best interests. As with this case, such a finding may be made despite the fact that the parties generally have similar business experience or power.

¹ [2007] NZSC 40

² The Supreme Court assumed that contributory negligence was available in respect of breach of fiduciary duty, without making any finding on that point.

Enquiries and information

For more information on any of the cases, articles and features in Commercial Quarterly, please email Diane Graham or call her on 64 9 916 8849.