The Australian Federal Court (Court) handed down a judgment on 28 June 2007 that considered whether the terms of a letter of engagement, under which an investment bank was retained by a large public company to advise it on a proposed takeover and including a clause that on its face excluded the existence of a fiduciary relationship between the investment bank and its client, did so successfully. The judgment also dealt with the adequacy of Chinese walls (the Court’s view of the integrity of which was of concern to the industry), as well as allegations of insider trading that are outside the scope of this briefing.

The existence and scope of fiduciary duties in relation to the protection of confidential information is of great importance to investment banks, as reflected in the common inclusion in investment banks’ standard letters of engagement of a clause seeking to exclude such fiduciary duties. The decision, which refers to both the Australian and English authorities and cites with approval from the UK Law Commission paper entitled Fiduciary Duties and Regulatory Rules (1992), is likely to be persuasive if the English courts have to consider the issue of an investment bank contracting out of a fiduciary relationship.

Background facts

Citigroup Global Markets Australia Pty Limited (Citigroup) is the Australian arm of Citigroup Inc, a global financial services company. It conducts its business in Australia through various operational areas and divisions that include investment banking and equities trading.

Citigroup established Chinese walls to restrict the flow of information between, among others, its ‘private side’ employees (those who work in areas such as investment banking and are likely to be exposed to inside information) and ‘public side’ employees (those who work in areas such as equities and are not expected to have the same exposure).

The case arose out of the purchase of over 1 million shares in Company A by one of Citigroup’s public side employees, a trader working on the proprietary trading desk (situated within the Equities Division) for Citigroup’s own account (the Trader), at a time when private side employees in the Investment Banking Division were acting for another of Citigroup’s clients, Company B, on a proposed takeover bid for Company A.

The shares were bought on the last trading day before the bid was announced.

When private side employees became aware of the purchase, steps were taken to instruct the Trader not to purchase any more shares in Company A. Although the Trader did not purchase any more shares, he did sell nearly 200,000 of the shares he had bought earlier that day half an hour before the close of trading. Citigroup did not inform Company B that it had traded on its own account for shares in Company A and nor did it seek permission from Company B to do so.

Claims brought by ASIC

The Australian Securities and Investments Commission (ASIC) brought a claim against Citigroup contending that the investment bank had breached certain fiduciary duties to its client by failing to obtain the client’s consent to proprietary trading in the takeover target’s shares by another division of the bank. ASIC also contended that the purchase, and subsequent sale, of a portion of the target’s shares constituted insider dealing.

ASIC’s main argument was that Citigroup, as adviser to Company B, had a relationship with Company B that was, in critical respects, fiduciary. As such, it was argued, Citigroup was obliged not to allow itself to be placed in a position of actual or potential conflict between its duty of loyalty to Company B and its interests in the profits sought to be obtained from its proprietary trading in Company A’s shares. ASIC also contended that, if such trading were to be undertaken, Citigroup was required to obtain the informed consent of the client.

The letter of engagement under which Company B had retained Citigroup as adviser specifically excluded the existence of any fiduciary relationship. It expressly provided that Citigroup was engaged: ‘as an independent contractor and not in any other capacity including as a fiduciary’. For this reason, the Court held that the claims failed at the outset and rejected ASIC’s argument that, where the inclusion of particular terms in a contract between a fiduciary and client would create actual or potential conflict of interest between the fiduciary and the client, the fiduciary must obtain the client’s informed consent to the inclusion of that provision (although on the facts of this case, the Judge held that, in any event, Company B had sufficient knowledge of the real possibility of proprietary trading by Citigroup to amount to informed consent). The Court further held that, as a matter of law, an investment bank was not prevented from contracting out of a fiduciary relationship.

ASIC sought to rely on a number of other points to circumnavigate the engagement letter, including the argument that Citigroup did not have in place adequate Chinese walls to prevent the flow of inside information from the private to the public side (contrary to the requirement contained in section 912A(1)(aa) Corporations Act 2001) and that Citigroup had breached other provisions of the Corporations Act and the ASIC Act 2001 prohibiting misleading and deceptive conduct and unconscionable conduct. As these claims also depended on the existence of a fiduciary relationship, they also failed.

Finally, ASIC claimed that there had been a contravention of the insider trading provisions in the Corporations Act (although it did not allege that the Trader possessed inside information when he purchased the shares). These claims failed, among other reasons, because the Court found that Citigroup had in place sufficient Chinese walls. We do not deal here with this aspect of the decision save to note that the Judge made some interesting observations on what might be considered effective Chinese walls, commenting that they ‘may not be as solid as the name implies’ and cautioning against the risk of leakage.

Points of note

The following points of interest emerge from the judgment.

First, it is clear that the relationship between an investment bank and a client may be fiduciary in nature if the adviser holds itself out as an expert on financial matters and undertakes to perform a financial advisory role for the client. This will depend on all facts of the case.

Second, where a fiduciary relationship exists between parties to a contract, the fiduciary relationship ‘must conform to the terms of the contract’.

Third, as a matter of law, where a fiduciary relationship exists, it is therefore open to the parties to a contract to exclude or modify the operation of fiduciary duties ‘particularly where no prior fiduciary relationship exist[s] and the contract defines the rights and duties of the parties’. It is not necessary for the fiduciary to obtain the client’s ‘informed’ consent to the exclusion of the fiduciary relationship.

Fourth, therefore, the question of whether a fiduciary relationship exists and the scope of any duty will depend on the factual circumstances and an examination of the contractual terms between the parties. Accordingly, the existence and/or scope of a fiduciary duty will fall to be determined in accordance with the ordinary rules of construction of contract.

Finally, a person occupying a fiduciary position may be absolved from liability for what would otherwise be a breach of duty by obtaining a fully informed consent.


The existence and scope of fiduciary duties in relation to the protection of confidential information is of great importance to investment banks. It is therefore common for such institutions to have boiler-plate language in their standard letters of engagement to exclude any such fiduciary duties. The extent to which these clauses achieve this purpose does not often get tested before the courts and, indeed, it has been quite some time since this issue has come before the English courts. This decision is useful, as it not only affirms an investment bank’s ability to define the nature of its relationship with its customers through the terms of its letters of engagement but also highlights the capacity for investment banks to exclude liability as a fiduciary, and thereby manage their legal risk, with appropriately drafted contractual language. This decision also underlines the importance of reviewing existing contractual arrangements to ensure they are effective to modify fiduciary obligations or to displace them altogether.

At least one Australian commentator has suggested the imposition of fiduciary obligations on investment banks as a matter of public policy to prevent the erosion of public confidence in the securities and investments markets. However, unless and until such a policy is taken up by the courts or the legislators, it is clear that, in Australia at least, the exclusion of a fiduciary relationship by contract remains not only possible but advisable.