This is one of a series of articles in which we review the  judicial interpretation of words, phrases and provisions  that are commonly used in contracts.  Relationship  clauses, which seek to define the legal nature of the relationship between the parties, are regularly included  as one of the standard provisions in commercial  contracts.  In this article we look at whether this style of  clause can prevent fiduciary obligations arising.


Relationship clauses are a commonly used in commercial  contracts to define the legal nature of the relationship  between the parties, and to disclaim any relationship  other than that intended.

Often the clause will expressly state the legal relationship  created by the contract, for example that the relationship  between the parties is that of principal and independent  contractor.  In other cases, the clause will adopt a negative  approach by stating the range of relationships that are not  created.  The following is an example of the negative  approach:

“This agreement does not create any  employment, partnership, joint venture,  fiduciary, agency or other relationship between  the parties.”

A key aim of this negative approach is to avoid the imposition of duties of loyalty and propriety that equity  applies to fiduciaries.

This style of clause can be effective to exclude a fiduciary  relationship arising between parties if they are not within  one of the established fiduciary categories. 1   However, the  effectiveness of the clause will depend on the time at  which it is revealed or communicated, as pre-contractual  dealings can, in the context of certain relationships, give  rise to fiduciary obligations. If this is the case, a  retrospectively implemented relationship clause will not  be able to prevent fiduciary obligations arising.

These issues and the general principles arising out of two  significant cases dealing with corporate and financial  advisers, namely ASIC v Citigroup Global Markets  Australia Pty Ltd [No 4] 2  and Wingecarribee Shire Council v Lehman Brothers Australia Ltd (in liq) 3 , are  explored further in the following discussion.

Scope and content of fiduciary obligations

The obligations owed by a fiduciary are expressed in  proscriptive terms.  That is, a fiduciary is prohibited from  engaging in certain conduct that is inconsistent with a  standard of undivided loyalty. In particular, the  obligations embody the “twin themes” of preventing  undisclosed conflict of duty and interest and of  prohibiting misuse of the fiduciary’s position.

The scope and content of any fiduciary obligation will  depend on the circumstances of the relationship and the  facts of each particular case. It will also depend on the  terms of the engagement or agreement entered into by the  parties.  For example, the scope of the fiduciary duty of an  agent is determined by the express or implied terms of the  contract of agency.

The court will examine the extent of the undertaking  made by the fiduciary and nature of the activity to which  the fiduciary obligations relate.   References might be  made to relevant documents, such as employment  contracts or a partnership deed.  However, as noted by  Dixon J in Birtchnell v Equity Trustees, Executors &  Agency Co Ltd4 , these are not definitive of the scope of the  fiduciary’s obligations:

The subject matter over which the fiduciary  obligations extend is… to be ascertained, not  merely from the express agreement of the  parties, whether embodied in written  instrument or not, but also from the course of  dealing actually pursued by the firm.

Established categories of fiduciary  relationships

There are certain roles and relationships that have been  recognised by the courts as automatically giving rise to  fiduciary obligations.  These are trustees, agents, solicitors, employees, company directors and partners. 5    The scope and content of the fiduciary duties will depend  on which of these relationships exists and the terms of the  agreement between the parties. 

The demanding nature of the duties that may exist was  illustrated, in the context of the solicitor–client relationship, by the case of Law Society of New South  Wales v Foreman. 6   In that case, the entry into a timecharging costs agreement was characterised by the NSW  Supreme Court as giving rise to a conflict between the  solicitor’s personal interest to earn fees and the interests  of the client.  Further, as the solicitor was held to be a  fiduciary prior to entering into any retainer, the solicitor  was required to make full disclosure to the client of the  implications of entering into the time-charging costs  agreement.  That is, the fiduciary obligations, including  the duty of full disclosure, were held to exist not only in  the carrying out of an agreement already made between a  solicitor and a client “but also in respect of the making of  it”. 7

Ad hoc fiduciary relationships

Outside the established categories of fiduciary  relationships, Australian courts have refrained from  providing a general test for determining when a person  stands in a fiduciary relationship.  The courts have instead  preferred to develop the law on a case by case basis.   Perhaps the most that can be said is that a fiduciary  relationship exists where a person has undertaken to act  in the interests of another and not in his or her own  interests. 8

However, the courts have identified a number of factors as  pointing to the existence of a fiduciary relationship.  As  Professor Finn (as his Honour then was) noted in “The  Fiduciary Principles”, 9  these factors will be important  only to the extent that they disclose an expectation in one  party that the other will act in his or her interests:

What must be shown, in the writer’s view, is  that the actual circumstances of a relationship  are such that one party is entitled to expect that  the other will act in his interests in and for the  purposes of the relationship.  Ascendancy,  influence, vulnerability, trust, confidence or  dependence doubtless will be of importance in  making this out, but they will be important only  to the extent that they evidence a relationship  suggesting that entitlement.  The critical matter  in the end is the role that the alleged fiduciary  has, or should be taken to have, in the  relationship.  It must so implicate that party in  the other’s affairs or so align him with the  protection or advancement of that other’s  interests that foundation exists for the ‘fiduciary  expectation’.

Where an arrangement between parties is of a pure  commercial kind and they deal at arm’s length and on an  equal footing, generally a court will be reluctant to find  that a fiduciary relationship exists.  However, all of the  facts and circumstances must be carefully examined to see  whether the relationship is, in substance, fiduciary.  For  example, participants in a joint venture cannot simply  assume that by having a “joint venture agreement”, they  will necessarily be treated differently from partners in a  partnership.  Depending on the circumstances, joint venturers can also owe fiduciary duties to one another and  they will, of course, owe fiduciary duties if their relationship is in substance a partnership. 10   Courts will  ultimately take a “substance over form” approach in determining the nature of a relationship and the scope of  duties owed by the parties.

The Citigroup case

The Citigroup case, which attracted considerable media  and industry attention when the judgment was handed down in 2007, illustrates the role a relationship clause can  play in shaping a contractual relationship and defining the  scope of the duties and obligations (including any  fiduciary duties) of the contracting parties.

Citigroup Global Markets Australia Pty Ltd (Citigroup)  conducted business through various divisions and  business segments, including the Investment Banking division (IBD), the Equity Capital Markets division  (ECM) and the equities trading department (Equities).  The employees of IBD and ECM were exposed to  confidential, market sensitive information (“private side  employees”) whilst the employees of Equities were not  exposed to such information (“public side employees”).   Citigroup had established “Chinese walls” to restrict the  flow of information between different business divisions.

The proceedings against Citigroup, commenced by ASIC,  arose after an Equities employee purchased a significant  amount of shares in Patrick Corporation Limited  (Patrick) on the ASX.  This was done at a time when the  IBD and ECM were acting for Toll on a proposed takeover  bid for Patrick.  The shares were purchased on the last  trading day before Toll announced its bid for Patrick.

One of the allegations made by ASIC was that Citigroup,  as an adviser to Toll, was in a fiduciary relationship, and  that by purchasing the Patrick shares, Citigroup placed  itself in a position where its duty of loyalty to Toll  conflicted with its own interests (and had therefore  breached certain statutory provisions regulating financial  services providers). 11

Importantly, the engagement letter under which Toll retained Citigroup as its adviser expressly excluded the  existence of a fiduciary relationship, through the following  clause:

The Company acknowledges that Citigroup has  been retained hereunder solely as an adviser to  the Company … and that the Company’s  engagement of Citigroup is as an independent  contractor and not in any other capacity  including as a fiduciary.

ASIC sought to overcome the effect of this clause by  arguing that the entirety of the relationship between  Citigroup and Toll, including events preceding the signing  of the mandate letter, ought to be considered to determine  whether the “hallmarks” of a fiduciary relationship existed. 12   Based on the existence of a fiduciary  relationship, ASIC argued that Citigroup had a duty to obtain Toll’s prior consent to proprietary trading in  Patrick shares.

In reaching the conclusion that Citigroup did not owe a  fiduciary duty to Toll, Jacobson J identified that, where a  fiduciary relationship is said to be founded upon a contract, the ordinary rules of construction of contracts  apply.  Thus, whether a party is subject to fiduciary  obligations is to be determined by construing the contract  as a whole in the light of the surrounding circumstances  known to the parties and the purpose and object of the  transaction.  In other words, the effectiveness of the  exclusion of or the scope of the modification to the  fiduciary relationship between Citigroup and Toll had to  be determined by the proper construction of the mandate  letter between them. 13   Here, the words in the mandate  letter could only be given their plain meaning – Citigroup  was retained as an adviser to Toll, in the capacity of an  independent contractor and not as fiduciary.  The express  statement that Citigroup was an “independent contractor  and not in any other capacity” suggested that the parties  had in mind the distinction between independent  contractors and other relationships that may give rise to  fiduciary obligations. 14

But for the express terms of the mandate letter, the precontractual dealings between Citigroup and Toll would  have pointed strongly toward the existence of a fiduciary  relationship in Citigroup’s role as an adviser. 15

The Lehman Brothers case

Five years after the Citigroup case, the Federal Court  again had the opportunity to consider whether an  investment bank owed fiduciary duties to its client.  In  this instance, Rares J found that the Australian branch of  Lehman Brothers, formerly Grange Securities Ltd  (Grange), had breached its fiduciary duty in providing  financial and investment advice to local councils. 16

The three plaintiff Councils, Wingecarribee, Swan and  Parkes were representative applicants in a class action for  72 Australian investors who lost approximately $250 million on their investments during the global financial  crisis (GFC). The Councils sought to recover losses they  had suffered due to their acquisition, through Grange, of  synthetic collateral debt obligations and other complex  financial products (SCDOs).

Prior to dealing with Grange, the Councils had  conservative investment policies, investing in relatively  low-risk bank products such as bank bills, term deposits  and bank issued floating rate notes (FRNs).  None of the  Councils had any significant experience with investment  in complex financial instruments. Each Council was  conscious of its legislative and policy-based duties to  avoid risk of loss to public money.

Grange began selling SCDOs to Parkes and Swan in 2003  on an ad hoc basis and both Councils traded in a  significant number of SDO products between then and 2008.  In early 2007, Wingecarribee and Swan also  entered into individual managed portfolio agreements  (IMP agreements) with Grange, which permitted  Grange to trade in SCDOs on their behalf.

At the time the SCDOs were issued, these products had  credit ratings which were better or equivalent to the credit  rating of the four major Australian banks, and offered  interest rates better than that of most products issued by  Australian banks. Grange’s marketing strategy  consistently represented to each of the Councils that  SCDOs were FRNs, and suggested that there was no real  likelihood of the products’ default or the council suffering  any loss.

As a result of the GFC in mid-2007, the value of the  SCDOs plummeted, with several SCDOs wiped out  completely.  The Councils claimed against Grange in respect of their losses on a number of grounds, including  breach of contract, negligence, misleading or deceptive  conduct and breach of fiduciary duties. All claims  succeeded.

In relation to the Councils’ claim for breach of fiduciary  duty, Rares J held that Grange owed fiduciary obligations  in equity to each Council as a financial adviser,  independent of any contractual obligation owed by  Grange to the Councils. 17

Rares J found that Grange owed fiduciary obligations to  Swan and Parkes since the inception of the financial  dealings between them, prior to entry in the IMP  agreements. 18   These obligations required the fiduciary  not to obtain any unauthorised benefit from the  relationship unless informed consent has been provided  by the person to whom the obligations are owed, and not  to be in a position where the interests or duties of the  fiduciary conflict (or there is a real or substantial  possibility they may conflict) with the interest of the  person to whom the duty is owed. 19

By portraying itself as, and in fact acting as, a financial  adviser to each Council, Grange “voluntarily assumed the  well established obligations such a person owes to its  client to the extent that it did not exclude those  obligations contractually”. 20

Rares J observed that the Councils had made clear to  Grange that in arriving at a decision about investing the  Council’s funds in sophisticated financial products, they  were dependent on Grange’s advice.  Grange held itself  out to Swan and Parkes at all times from about mid-2003  as an adviser on matters of investment and undertook to  advise on those matters. The Councils had reposed trust  and confidence in Grange acting as its investment adviser.  Grange undertook, from when it negotiated the SCDO  transactions, to act in the interests of the Councils.

Grange sought to rely on disclaimers in its product presentations to the Councils, which typically warned the  reader not to act on any recommendation contained in the  presentation slides without first consulting their  investment adviser. 21   While accepting that the terms of a  contract can modify or extinguish a fiduciary obligation22 ,  Rares J found that Grange did not draw the disclaimers to  the attention of any of the Councils or tell any of them  that it was not acting as their financial adviser.

Importantly, Grange never suggested that it might be in a  position of conflict, as the Councils’ financial adviser for  the transaction it was proposing and that the Councils  should obtain independent financial advice. 23

Grange also contended that a number of provisions in the  IMP agreements operated to exclude the existence of a  fiduciary relationship between it and each of Swan and  Wingecarribee. Clause 2.5 of the IMP agreement recorded  that each Council consented to Grange entering into transactions as a principal with the Council and also on  the opposite side to the Council.  Schedule 3 to the IMP  agreement disclosed that Grange may be entitled to fees  paid by the issuer of a security in relation to its placement.

Rares J found that these provisions modified the fiduciary  obligation that Grange would otherwise owe to Swan and  Wingecarribee, with the result being that the Councils  were not entitled to complain that Grange breached its  fiduciary obligation merely by acting as a buyer or seller  to the Council of financial products or receiving payment  from its sales to them of SCDO products. 24   However, as  his Honour pointed out, they did not operate to extinguish  or exclude all the fiduciary obligations Grange owed to  each Council. 25

Conclusions and some practical lessons

As a general proposition, parties in a commercial  relationship that is not within one of the established  fiduciary categories can, through a provision in their  contract, define the relationship between them and  expressly agree that it is not fiduciary in nature. 26   In  other words, an appropriately drafted relationship clause  can be effective to exclude fiduciary obligations.  In this  respect, it is prudent to include in the relationship clause  an express statement that negates a fiduciary relationship.   Parties to a relationship that is within one of the established fiduciary categories (including a relationship  that is, in substance, within one of these categories)  cannot avail themselves of this approach and must work  within the principles of informed consent to make any  modification to their fiduciary duties.

As illustrated by the Lehman Brothers case, the time at  which a contract that expressly negates a fiduciary relationship is put in place can be critical to its effect.   Accordingly, the first practical lesson is that, where  parties are proposing to enter into a commercial  relationship that is outside of the established fiduciary  categories but may give rise to a suggestion that fiduciary  obligations apply, they should put in place a written  agreement containing a relationship clause that negates  fiduciary obligations at the earliest opportunity.  The risk  in delay is that the pre-contractual dealings between the  parties may already establish a fiduciary relationship.  If  this is the case, the subsequent relationship clause will not  be able to prevent fiduciary obligations arising.

The practical significance of a relationship clause that  negates fiduciary duties was clearly demonstrated in the  Citigroup case. For Citigroup, it meant that their group  activities were not constrained by those duties.  However, from the perspective of a client, it means that they do not  have the benefit of the obligations of loyalty and propriety  that they might have assumed existed.

Accordingly, a further practical lesson is that, where a  party is establishing a commercial relationship (such as a  corporate advisory relationship) in which it has  expectations that might broadly be identified as loyalty or  exclusivity, it needs to carefully consider the implications  of a relationship clause that negates fiduciary obligations.   It should also recognise that, in order to give effect to its  relationship expectations, it will need to include  appropriate express provisions in the contract regulating  that relationship.