Course:Law3020/2014WT1/Group M/Introduction

Group M - Legal Perspectives Wiki:

Welcome to Group M’s Legal Perspectives Wiki. Each week we will be looking at the case of Hodgkinson v Simms through the lens of a different theoretical perspective. This Wiki will provide insight into some of the dominant classical and modern theories regarding the nature of law. For your convenience a case brief of Hodgkinson v Simms has been provided below.

Hodgkinson v Simms, [1994] 3 SCR 377

Facts:

Hodgkinson (plaintiff) was a stockbroker who had little experience with tax planning. As a result Hodgkinson retained to Simms (defendant), an accountant who specialized in tax shelter advice, to advise him respecting his tax planning and tax sheltering needs. Hodgkinson heavily relied on Simms advice and the relationship was such that Hodgkinsons did not really questions Simms about his advice. Simms advised Hodgkinsons to invest in 4 income tax shelter properties and Hodgkinsons lost heavily when the value of them declined. What Hodgkinsons did not know was that Simms was in a financial relationship with real estate developers and got money every time he sold a tax shelter property to a client. Hodgkinsons then took action against Simms for breach of fiduciary duty and breach of conduct. The focus here is on breach of fiduciary duty.

Issues:

Did Simms owe a fiduciary duty to Hodgkinsons?

If so, does failure to disclose a potential conflict of interest constitute breach of a fiduciary duty?

Does breach of a fiduciary duty give rise to liability in these circumstances?

Ratio:

Where a comparatively vulnerable individual engages in business transactions with the assistance of an adviser, the adviser owes a fiduciary duty. The duty arises from the client's vulnerability or lack of knowledge in comparison to the adviser. The adviser's failure to disclose a potential conflict of interest is a breach of the fiduciary duty. Where the Defendant is in breach of a fiduciary duty, the Plaintiff is entitled to restitutionary damages, so as to be put in the position he would have been had the breach not occurred.

Analysis:

Majority:

A party becomes a fiduciary where it, acting pursuant to statute, agreement or unilateral undertaking, has an obligation to act for the benefit of another and that obligation carries with it a discretionary power. The following are three indications of a fiduciary duty: 1) scope for the exercise of some discretion or power 2) that power or discretion can be exercised unilaterally so as to effect the beneficiary’s legal or practical interests 3) a peculiar vulnerability to the exercise of that discretion or power.

A fiduciary duty is all about the relationship of the parties. It is essential to look at the nature of the relationship. Factors such as trust, confidence, loyalty, reliance, and vulnerability are indicative of a fiduciary duty. However, there need not be complete reliance or dependence for a fiduciary duty to exist. Furthermore, policy considerations may be taken into account.

The relationship of broker and client may not always give rise to a fiduciary relationship. Where the elements of trust and confidence and reliance on skill and knowledge and advice are present, the relationship is fiduciary and the obligations that attach are fiduciary. Where a fiduciary duty is claimed in the context of a financial advisory relationship, it is a question of fact as to whether the parties’ relationship was such as to give rise to a fiduciary duty on the part of the advisor. In the present case the retainer paid by Hodgkinsons, combined with the disclosure of confidential information, was strong evidence of trust and reliance placed in Simms – indicators of a fiduciary duty.

Policy considerations support fiduciary relationships in the case of financial advisors because this is a relationship in which the client gives their trust to the advisor to control large sums of money. By enforcing a duty of honesty and good faith, the courts are able to regulate an activity that is of great value to commerce and society generally. In many advisory relationships norms of loyalty and good faith are often indicated by the various codes of professional responsibility and behavior set out by the relevant self‑regulatory body. In the present case the standards set by the accounting profession at the relevant time compelled full disclosure by the respondent of his interest with the developers. While there was no prohibition against the respondent’s representing both a developer and an investor in relation to a real estate tax‑shelter investment, the respondent had a duty to disclose the true state of affairs to both sides.

Thus, given the elements of trust and reliance inherent in the present broker client relationship a fiduciary duty was found to exist. Furthermore, this fiduciary duty is supported by policy considerations. This is a situation in which the client gave their trust to their advisor to control large sums of money. It is clearly important and beneficial (for both the individuals involved and the overall community) to enforce a duty of honesty and good faith in such a situation.

The proper approach to damages for breach of a fiduciary duty is restitutionary. Hodgkinson is entitled to be put in as good a position as he would have been in had the breach not occurred. Hodgkinson was found at trial to have changed his position because of a material non‑disclosure and Simms did not meet the burden of proving the Hodgkinson would have suffered the same loss regardless of the breach. Mere speculation was found to not be enough. Notwithstanding the general economic recession, the particular fiduciary breach initiated the chain of events leading to the investor’s loss and the breaching party accordingly must account for this loss in full.

Dissent:

Two considerations may act as false indicators of a fiduciary relationship. First, conduct that incurs the censure of a court of equity in the context of a fiduciary duty cannot itself create the duty. Secondly, the “category” into which the relationship falls, such as doctor/patient or lawyer/client, is not determinative for not every act in a so-called fiduciary relationship is encumbered with a fiduciary obligation and, conversely, fiduciary obligations may arise in relationships not traditionally considered fiduciary. The relationship here was not a traditional “fiduciary relationship”.

A total reliance and dependence on the fiduciary by the beneficiary is necessary to establish a fiduciary relationship. The question is thus whether Hodgkinson had given, and Simms had assumed, total power over the affairs in question (note that this is a higher standard than was set by the Majority). In the present case the evidence did not establish a total grant of power as Simms had done some consulting with Hodgkinson and given him some information. As a result, no fiduciary duty was found.

Conclusion:

There was a fiduciary duty and a breach of that duty was found. Appeal allowed.