Business Studies Essay Paper on Commercial Law: Fiduciary

Commercial Law: Fiduciary

Introduction

The foundation of successful business is premised on trust and confidentiality that is reciprocated by agreeing parties. Where such an agreement lends to either or both parties some information that would if not protected bring harm to it, it is expected that the other party will act with the partners’ best interest in mind. This demands one to act with fiduciary duty. If fiduciary duty is broken, then a fiduciary is liable for the losses or harm incurred by the beneficiary. Thereafter, liability in tort for wrongful acts or omission can be brought against the fiduciary. Where such a fiduciary acted when in a partnership, that is, a business partnership, then the proceedings can be brought against the firm and all partners become liable.

Y & W Partnership

Partnerships are forms of business entities that are allowed under the law for operations of designated professions as registered. Under partnerships, liability in line of business is not limited and for purposes of taxation, each individual/partner does file their tax returns individually.

Y & W Partners is a partnership between Alex Wolfe and Mr. Y. Y & W Partners provides auditing services and taxation advice. Wolfe’s expertise involves taxation advice while my expertise is in the provision of audit services. Such services were rendered to Golden Egg who required taxation expertise services rendered by Mr. Wolfe as part of Y & W Partners.

Obligations of a Professional Accountant

           Under the Code of Ethics for Professional Accountants Section 140 (Confidentiality) and Section 220 (Conflicts of Interest) espoused in the Compiled APES 110 Code of Ethics for Professional Accountants:

“A member shall not allow a conflict of interest to compromise professional or business judgment. Such a threat may be created when the interest of the Member with respect to a particular matter and the interests of the Client for whom the Member provides a Professional Service relate to that matter are in conflict.”

Where such an instance arises, it is expected that the member is to undertake necessary steps to remedy the situation. This may by informing the client of such a conflict or declining to continue to offer services so as to stop the conflict of interest. In the matter, it is expected that the resolutions of the expert are supposed to be towards the well being of the client. Mr. Wolfe failed to adhere to this code of conduct and engaged himself in activities that clearly amounted to conflict of interest, when he set up Super Growth, a direct competitor of Golden Egg.

Further, under the Code of Ethics for Professional Accountants Section 140 (Confidentiality):

“The principle of confidentiality imposes n obligation on the Member to refrain from using confidential information acquired as a result of professional and business relationships to their personal advantage or the advantage of third parties.”

In the preceding scenario, it is expected that situations will be remedied in order to avoid misconduct. Unless permitted by law or by the agreement of the client, it is not acceptable for the information to be disclosed or used for personal gain. Again here, Mr. Wolfe failed as he utilized confidential information of Golden Eggs to his advantage.

It can be said that in more than one occasion, as a member of the Accounting profession, Mr. Wolfe violated several sections of the Code of Conduct. This it should be stressed was without the knowledge and consent of the partner Mr. Y.

Fiduciary Relationship

Fiduciary duty depicts responsibility and as put forward by Coghill et al (2013) represents, “standards of conduct properly to be expected of persons occupying fiduciary positions, that is, persons who, by virtue of position, responsibility or function, are expected to act in another’s interest and not in their own interests”. Fiduciary encompasses the interaction between parties that puts one person (agent) under the obligation of acting for the other’s benefit. Usually, this is a result of such an agent having gained trust and confidence from the beneficiary to act on their behalf and manage their financial interests.

Gold and Miller (2014) state that, “a fiduciary relationship is one which one party (the fiduciary) exercises discretionary power over the significant practical interests of another (the beneficiary)”. It is therefore expected that an individual in a fiduciary relationship with a client will under such duty take action towards the advantage of the other person as to issues covered by the range of their association.

View the ruling of Binnie J. in Strother v 3464920 Canada Inc 2007 SCC 24 at paragraph 1, “fiduciary duties provide the framework within which a particular contractual mandate is to be carried out” … paragraph 22 “ a fiduciary is only obliged to act in a beneficiary’s best interest in relation to the advice he was retained to give”.

Under this perceptive, the fiduciary relationship between Mr. Wolfe and Golden Egg was broken as Mr. Wolfe, in setting up and running Superb Growth, never acted in the greatest welfare, of Golden Egg, as a partner of Y & W Partners as a taxation expert. This is because, Mr. Wolfe utilized the very same taxation advice given to Golden Egg and Golden Egg’s confidential customer records that Mr. Wolfe had received in the course of giving that advice in setting up and running Superb Growth. Mr. Wolfe was therefore able to successfully compete against Golden Egg in the provision of strategic advice to high wealth individuals, the core business of Golden Egg. Therefore resulting from this rivalry, Golden Egg’s financial returns declined significantly, which resulted in a loss of $3 million.

However, fiduciary breach having taken place as a result of Mr. Wolfe endeavors and acting in his own interests was never in the everyday way of business of Y & W Partners. Neither was it in the awareness of the partner, Mr. Y who never either authorized his activities. Fiduciary breach did occur but where can it be classified? This was answered in National Commercial Banking Corporation of Australia v Batty [1986] HCA 21, at paragraph 18, when it was stated:

“The problem of classification is acute when the relevant act is distinguishable from the class of acts done with authority in the ordinary course of business by reference only to the circumstances which make the act fraudulent. It is not the law that an act must be treated as being within the scope of the authority of a partner in the ordinary course of business if the person who relies on the act to establish the firm’s liability knows the facts which take the act outside the scope of such authority.”

It has been established there is a violation of fiduciary duty by Mr. Wolfe towards Golden Egg. Although that being the case, it is a different matter for the partner, Mr. Y and Y & W Partners to become culpable in the losses incurred by Golden Egg. As such, the losses to Golden Egg becoming a liability in tort for wrongful acts or omissions by Mr. Wolfe in the ordinary course of the business of the firm cannot arise.

Fiduciary breach

There is no manner that Y & W Partners can be obligated legally or otherwise to reimburse Golden Egg for the $3 million it never got as revenue fees. The business of Y & W Partners is neither in the strategic investment advice neither was any of its partners when the partnership was still operational.

Culpability in terms of fiduciary breach would require that liability of a particular firm be shown for how the wrongful act of partner was committed during the ordinary course of the firm’s business – and the beneficiary suffered a loss or irredeemable damage. This can be found under the provisions of Section 10 of the Partnership Act 1892 (N.S.W.), liability of firms for wrongs:

“where by any wrongful act or omission of any partner in a firm other than an incorporated limited partnership acting in the ordinary course of the business of the firm, or with the authority of the partner’s co-partners, loss or injury is caused to any person not being a partner of the firm, or any penalty is incurred, the firm is liable therefor to the same extent as the partner so acting or omitting to act.”

It is imperative that ‘only by wrongful act or omission’ of Mr. Wolfe ‘acting in the ordinary course of the business of the firm’, Y & W Partners, or with authority from Mr. Y would a loss or injury caused to Golden Egg be liable for pay.

The loss of $3 million to Golden Egg from the activities of Mr. Wolfe and Superb Growth is as a result of their business in the loss in fee income from clients in the provision of strategic investment advice. As earlier stated, Y & W Partners was a partnership between Alex Wolfe and Mr. Y. Y & W Partners provided auditing services and taxation advice. Wolfe’s expertise involved taxation advice while my expertise was in the provision of audit services.

Therefore, in the ordinary line of business of Y & W Partners Mr. Wolfe would be only performing taxation services. Only through his acts or omissions as a taxation expert and any loss to a third party arising thereof would such require compensation from the firm, Y & W Partners. In supporting this argument, similar sentiments can be found in National Commercial Banking Corporation of Australia v Batty [1986] HCA 21, at paragraph 6. The issue in this case is whether Mr. Wolfe, when setting up and operating Superb Growth, ‘was acting in the ordinary course of the business’ of Y & W Partners or with the authority of his co-partner, Mr. Y. It is of course clear that Mr. Wolfe did not have the actual authority of his co-partner to set up and operate Superb Growth. It can be determined that Mr. Wolfe, in setting up and operating Superb Growth, was also not acting in the ordinary course of the business of the firm Y & W Partners.

Tort Liability in Fiduciary Duty

Tort law gives grounds for persons or entities to take legal actions if civil injustices occur. Madden (2005) seem to argue that, “in the case of injuries arising from the actions of autonomous individuals, tort liability often is the primary outside force operating to influence care”. Therefore, to influence concern, tort liability has to be directed towards persons responsible of such concern, that is, individual injurers (Madden, 2005).

It is therefore incumbent upon Golden Eggs to ensure that they seek legal redress against Mr. Wolfe himself.

Conclusion

The behavior of Mr. Wolfe was wrong on many fronts. First, he was unable even to hold the standards of the Code of Ethics for Professional Accountants that is supposed to guide him and be the basis under which his obligation to the clients is practiced. Further, he had fiduciary duty to Golden Egg but that was not the case. He exploited his position and abused the trust bestowed upon him by Mr. Y and by the client Golden Egg.

Though Mr. Wolfe was in a partnership in with Mr. Y, it is expected that he would be held liable as is customary in partnerships where liability arises. It has been shown, although Mr. Wolfe breached fiduciary duty, liability arising from his action cannot be extended to the firm or his partner. His actions were not in the ordinary course of Y & W Partners neither was it known to the partner nor authorized.

Therefore, all tort liability arising from Mr. Wolfe’s actions are to be instituted against him. It cannot then fall on Mr. Y to pay Golden Egg the sum of $3 million that they suffered as a loss out of the actions of Mr. Wolfe.

References

Accounting Professional & Ethical Standards Board. Compiled APES 110 Code of Ethics for Professional Accountants. Australia.

Coghill, K., Sampford, C. J., & Smith, T. (Eds.). (2012). Fiduciary Duty and the Atmospheric Trust. Ashgate Publishing, Ltd.

Gold, A. S., & Miller, P. B. (Eds.). (2014). Philosophical Foundations of Fiduciary Law. Oxford University Press.

Madden, M. S. (Ed.). (2005). Exploring tort law. Cambridge University Press.

National Commercial Banking Corporation of Australia v Batty [1986] HCA 21.

New South Wales (N.S.W.). Partnership Act 1892.

Strother v. 3464920 Canada Inc., [2007] 2 S.C.R. 177, 2007 SCC 24.