02 December 2014

Equity

'Modern fiduciary liability: the sick man of equity?' by Dyson Heydon in (2014) 20(10) Trusts & Trustees 1006-1022 argues that
 Some think that fiduciary liability has shrunk, is shrinking and should be shrunk further. In particular, it has been said that traditional equitable duties of skill and care are not fiduciary, and, indeed, are not even equitable. It has also been said that no positive duty can be fiduciary. The article contends that these trends conflict with established authority, are unsound in principle, and have undesirable effects in practice. 
Heydon begins by stating
 Czar Nicholas I of Russia is a potentate on whom history has not looked kindly. Almost no-one has ever stood to the right of him, and he has correspondingly few supporters. Every time he drifted into the pages of Tolstoy, the author let fly. Things have not improved since. Now his reputation is at its lowest. For President Putin has selected a portrait of his predecessor for visitors to gaze at as they wait in an antechamber before an audience. But he did utter one memorable phrase that provides the theme for this lecture. 
In 1853 Czar Nicholas I had a celebrated conversation with Sir Hamilton Seymour, the British Ambassador to St Petersburg. He broached the ugly subject of dismembering the Ottoman Empire. He remarked:
The affairs of Turkey are in a very disorganised condition. We have on our hands a sick man – a man gravely ill. It would be a grave misfortune if one of these days he slips through our hands, especially before the necessary arrangements are made.
These words were unfortunate, for the Czar soon after succumbed, in the prime of life, to an attack of influenza, shortly before his own Empire lost the Crimean War to a group of allies which included Turkey. 
It was true that by the time the Czar spoke, the rulers of the Ottoman Empire had had to endure, almost every decade, the loss of some additional province in Europe, Africa, or Asia or some humiliating peace treaty or both. The process lasted another seven decades. Every so often the Sublime Porte would default on its loans from foreigners and enter a condition of national bankruptcy, as the process of entering new loans simply to pay the interest on continuing loans reached the conclusion which our own adoption of that technique may soon result in. The world called Turkey “the sick man of Europe”. Innumerable cartoons portrayed the sultan as emaciated, enervated, addicted to the hookah and the harem, clad in primitive looking robe and fez, worn out by vice. These judgments were short sighted. A regime which for centuries had kept both the Balkans and the Middle East under some not wholly inhumane control deserves respect. For there were frightful consequences for the world when the Balkans and the Middle East fell out of control. The sultans and their advisers asked themselves:
Are we on a downward path to inevitable extinction? Or do these setbacks strengthen the Empire by making it more manageable?
In hindsight the second question can probably be answered “Yes”, even though the servants of the Empire were only getting it into a fit shape to fall into the hands of its gravedigger, Mustafa Kemal Ataturk.
Similar questions arise about modern fiduciary liability. For this conference, centred on trusts, they are crucial, because the trustee is the archetypical fiduciary. Is fiduciary liability so sick that its life will soon move peacefully to its close? Or will it, by becoming smaller, also become leaner and more effective? Or will its greedy and expectant heirs—contract, tort, restitution, and, most insatiably greedy of all, statute—, together with the agitation of their academic paladins, cause it to be torn apart by judicial violence?
Heydon concludes
Assessing the health of that body of equity which controls fiduciaries is not easy. If some of what is said in the theses described above is correct, it is already dead. But assessing whether it is actually dead, or even dying, would depend on the happening of various events which have not yet happened. One is a thorough examination, by counsel and court, of both the validity and the utility of the five theses referred to above. At least so far as counsel were concerned, the authority which came closest to this examination is Mothew’s case. But there has not been any post-Mothew examination of the problem in Australia. In the course of that examination, many questions will arise. What did Millett LJ mean by “loyalty”? What did he mean by “fidelity”? What did he mean by “good faith”? What earlier authorities were inconsistent with his analysis? How were they to be dealt with? How could they be dealt with? Why is it that a duty of “loyalty” or “fidelity” does not create strict liability? 
Other questions will arise in relation to the other theses. But there is one fundamental issue to be confronted. It arises in relation to the topics referred to in this lecture. It also arises in relation to other important topics this lecture has not specifically dealt with. One is the courts’ recognition of the power of fiduciaries to contract out of what would otherwise be their obligations. Another is the claim that the generous rules about causation and remoteness in relation to the reconstitution of trust funds do not apply in suits for equitable compensation in relation to other breaches of fiduciary duty.
It is difficult to judge whether standards of fiduciary honesty, and standards of fiduciary care, skill and diligence have risen or fallen in the last century. But it is easy to conclude that modern standards are not high. That is a factor which ought to weigh strongly against any narrowing of the fiduciary regime. For to narrow the fiduciary regime not only reduces the remedies available to principals in particular instances. It also weakens the deterrent effect of the law in relation to future conduct. Thus, writing in criticism of Mothew’s case, Getzler said:
The prophylactic pressures of equitable procedure and remedy as applied to the loyalty duties may have point even in the sphere of duty of care; the stringent rules of causation, for example, are designed to put deterrent pressure on the fiduciary to reach a high standard where proof of misfeasance may be difficult to gather.
What will happen if the fiduciary regime withers or even dies? Are those owed duties by fiduciaries, as a class, likely to be better off if that takes place? Not in my opinion. That is why the signs of continuing or reinvigorated life in the fiduciary regime should be encouraged. The advent of new heirs to the fiduciary empire must be resisted more successfully than the Ottoman Empire resisted its would-be heirs—Greeks, Serbs and other Slavs, Arabs, and Ataturks.