Fiduciary Duty Co-Existing with Contractual Duty

BY Hearsay

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In the recent case of Stellar Vision Operations Pty Ltd v Hills Health Solutions Pty Ltd [2023] NSWCA 102 (18 May 2023), the appellant (Stellar) and another company Questek Australia Pty Ltd (Questek) collaborated in tendering together to supply Patient Entertainment Systems to hospitals.

The respondents – Hills Health Solutions Pty Ltd (Hills) – a publicly listed company, proposed to acquire Questek’s business and the parties agreed, amongst other things, that Hills would commence negotiations in good faith with Stellar in order to draft an agreement that suited both parties for a long-term relationship..

Hills subsequently entered into a supplier agreement with a proposed client of Stellar – Western Sydney Local Health District (WSLHD). Stellar sued for breach of contract constituted by an Undertaking entered into between them, and for breach of fiduciary duties. That claim was dismissed at first instance but that decision was overturned on appeal. Despite the parties being a relatively early stage of their business relationship, the NSW Court of Appeal (comprising Bell CJ, Hammerschlag CJ in Eq and Adamson JA) found, inter alia, that fiduciary obligations did exist between parties. The Court relevantly found as follows, including the setting out of features that made the parties relationship one of mutual trust and confidence:

FIDUCIARY DUTIES

Although it is not strictly necessary to do so, it is appropriate to deal with the fiduciary duty grounds of appeal because we consider that the primary judge erred in finding that the parties were not in a fiduciary relationship but more importantly, because as appears below, we consider that even if the Acknowledgement and Agreement was not binding, Hills nevertheless owed Stellar fiduciary obligations not to exclude Stellar from participation in the WSLHD project or take it for itself.

At trial (and on appeal), Stellar argued that its relationship with Hills was fiduciary in nature, even if the Acknowledgement and Agreement was not binding. It relied on the following passage in United Dominions Corporations Ltd v Brian [1985] HCA 49; (1985) 157 CLR 1 at 12; [1985] HCA 49 (“Brian”):

A fiduciary relationship can arise and fiduciary duties can exist between parties who have not reached, and who may never reach, agreement upon the consensual terms which are to govern the arrangement between them. In particular, a fiduciary relationship with attendant fiduciary obligations may, and ordinarily will, exist between prospective partners who have embarked upon the conduct of the partnership business or venture before the precise terms of any partnership agreement have been settled. Indeed, in such circumstances, the mutual confidence and trust which underlie most consensual fiduciary relationships are likely to be more readily apparent than in the case where mutual rights and obligations have been expressly defined in some formal agreement. Likewise, the relationship between prospective partners or participants in a proposed partnership to carry out a single joint undertaking or endeavour will ordinarily be fiduciary if the prospective partners have reached an informal arrangement to assume such a relationship and have proceeded to take steps involved in its establishment or implementation.

The primary judge’s dispositive reasoning in relation to Stellar’s contention that it and Hills were in a fiduciary relationship was:

465 The difficulty I have is that Stellar Vision and Hills Health Solutions never really progressed beyond “mere negotiation”. I accept that the parties had a mutual aim of working together in relation to the WSLHD project and other ventures but it is clear that they were not agreed as to the form that relationship should take. I do not accept that there was the mutual confidence in their relationship necessary to give rise to a fiduciary obligation.

466 In John Alexander’s Clubs at [87] the plurality approved the identification by Mason J in Hospital Products at 96-97 of the critical feature of a fiduciary relationship being that the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense (from which power or discretion comes the duty to exercise it in the interests of the person to whom it is owed). That feature is missing in the present case.

467 Hence the fiduciary claim also fails.

Hospital Products concerned the relationship between a manufacturer and a distributor of medical products, a relationship which is not an established fiduciary one. In the oft-cited passage at 96-97 (referred to by the primary judge at PJ [466]), Mason J (as his Honour then was) observed that the accepted fiduciary relationships are sometimes referred to as relationships of trust and confidence or confidential relations, that the list of such relationships is not closed and that a critical feature of all such relationships is that the fiduciary undertakes or agrees to act for or on behalf of the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense. His Honour observed that it is partly because the fiduciary’s exercise of the power or discretion can adversely affect the interests of the person to whom the duties are owed and because the latter is at the mercy of the former that the fiduciary comes under a duty to exercise a power or discretion in the interests of the person to whom it is owed. His Honour went on to say:

That contractual and fiduciary relationships may co-exist between the same parties has never been doubted. Indeed, the existence of a basic contractual relationship has in many situations provided a foundation for the erection of a fiduciary relationship. In these situations it is the contractual foundation which is all important because it is the contract that regulates the basic rights and liabilities of the parties. The fiduciary relationship, if it is to exist at all, must accommodate itself to the terms of the contract so that it is consistent with, and conforms to, them. The fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according to its true construction.

The passage in John Alexander’s Clubs Pty Limited v White City Tennis Club Limited (2010) 241 CLR 1; [2010] HCA 19 (“John Alexander’s Clubs”) (cited by her Honour in the same paragraph) refers to what Mason J had said in Hospital Products.

We consider that her Honour fell into error both in finding that Stellar and Hills never progressed beyond mere negotiation and that they were not agreed as to the form their relationship should take. For the reasons set out earlier, they bound themselves by way of the Acknowledgement and Agreement which stipulates for the form and terms of their immediate relationship.
We consider that her Honour fell into error in finding that the relationship did not involve mutual confidence or an undertaking or agreement on Hills’ behalf to act for or on behalf of the interests of Stellar in the exercise of a power or discretion which would affect the interests of Stellar in a legal or practical sense.
Beyond the finding that the parties were not agreed as to “the form that relationship should take” (which we read as referring to the form of the prospective long-term relationship), her Honour’s reasons do not reveal the basis for a finding that mutual confidence or the required undertaking were not present.
In a well-known passage in Brian at page 10, Mason, Brennan and Deane JJ (as their Honours then were) observed that the term “joint venture” is not a technical one with a settled common law meaning and that, as a matter of ordinary language, it connotes an association for the purposes of a particular commercial or other financial undertaking or endeavour with the view to mutual profit, with each participant usually (but not necessarily) contributing money, property or skill. Such a joint venture will often be a partnership, however the term is apposite to refer to a joint undertaking or activity carried out through a medium other than a partnership.
It was further observed at page 11 that whether or not the relationship between joint venturers is fiduciary will depend on the form which the particular joint venture takes and upon the content of the obligations which the parties to it have undertaken. Any fiduciary duties will be moulded to the character of the particular relationship.
At least the following features of the parties’ relationship make it clear that it was necessarily one of mutual trust and confidence:

(a) the relationship commenced effectively with respect to the QCH project and was the subject of the Outline of Agreement. One provision of the Outline of Agreement was Questek’s warranty that it was Stellar’s fiduciary with respect to the technical know-how and intellectual property which Stellar was allowing Questek to use;

(b) the 24 October 2013 response to the RFP had both Questek and Stellar’s logos and referred to their combined resources offering a “true partnership”. The RFP itself made it clear that Questek and Stellar’s tender was a joint endeavour;

(c) the Undertaking acknowledged that the relevant tenders were joint, although Hills as the only named party in the contract with WSLHD would be the party to have the direct dealings with WSLHD;

(d) Stellar had contributed to the WSLHD tender by assisting with the technical specifications and providing information about its financial capacity, technical expertise and experience;

(e) the Due Diligence material specifically referred to in the Purchase Agreement included a document recording that if a joint venture agreement was not finalised, Stellar’s name would be on the contract;

(f) the Undertaking embodied a binding agreement with elements analogous to a partnership, in relation to the Annexure A contracts. Hills and Stellar agreed to each contribute 50% of all contract implementation costs; Stellar agreed to license the end user to use its software; both acknowledged that a core part of the value that they were contributing to the arrangement was Hills giving access to the Questek customer base and Stellar giving access to its software and related support services; they agreed to split the profit 50/50; and both parties were to have open access to all project and financial information as required; and

(g) Hills’ ASX announcement referred to a partnership with Stellar.

Having regard to these features, it can hardly be suggested that the parties’ relationship accommodated:

(a) Hills being entitled to pursue its own interests without regard to Stellar’s;

(b) Hills being entitled to use its position or otherwise exclude Stellar from participation in the WSLHD project;

(d) Hills being entitled to take the benefit of the WSLHD project for itself; or

(e) Hills being entitled to use its position to exclude Stellar from participating in the WSLHD project and take the benefit of the whole of it for itself or contract out to someone else for the provision of services which Stellar was entitled to provide.

It is self-evident that Stellar reposed trust and confidence in Hills not to act in this fashion.
As the party dealing directly with WSLHD and ultimately the only contracting party, Hills was manifestly in a position where it could exercise a discretion which would affect the interests of Stellar, both in a legal and practical sense. Proof of this resides in the mere fact that Hills was able to bring about the exclusion of Stellar from the WSLHD project and bring in Lincor in its place. It can hardly be suggested that Hills was free to act in this way or that it had not undertaken not to act in this way. So much follows from the mere fact that they were joint tenderers.
It also reveals the extent to which, in their relationship, Stellar was in a position of vulnerability to Hills’ breach. Such vulnerability may be a characteristic of those to whom fiduciary duties are owed (although on its own it is not sufficient to create a fiduciary relationship): John Alexander’s Clubs at [83].
Hills argued that the present case was distinguishable from Brian because there, the prospective parties had reached an informal arrangement to assume such a relationship and had proceeded to take steps involved in its establishment or implementation, whereas here, the parties did not proceed beyond mere negotiation. Even if, contrary to our view, as set out earlier, one could properly characterise the parties’ dealings as not having proceeded beyond mere negotiation, the nature of their dealings was such that the mutual confidence and trust which would underlie the most consensual fiduciary relationship, was readily apparent in this case.