Can contractors owe fiduciary duties to principals?

A fiduciary duty describes a relationship of utmost faith between two (2) or more people or entities.  It is established law that, generally, an employee owes a fiduciary duty to their employer.^[1]  Whether such a duty is owed in the case of a contractor or consultant undertaking work for a corporation pursuant to a contract is a separate question.

When does a fiduciary duty arise for a contractor?

The categories of fiduciary relationships are not closed, meaning that the facts of each situation may give rise to the existence of a fiduciary duty.^[2]  This of course includes the case of an independent contractor.  Recognising this, the Federal Court in SBA Music Pty Ltd v Hall (No 3) [2015] FCA 1079 (SBA Music) held the following at [13]:

“The critical feature of fiduciary relationships is 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.  The relationship between the parties is therefore one which gives the fiduciary a special opportunity to exercise the power or discretion to the detriment of that other person who is accordingly vulnerable to abuse by the fiduciary of his position.”^[3]

Importantly it has been recognised in various cases that an independent contractor can owe fiduciary duties to a principal.  Generally, fiduciary duties were owed on the basis that the independent contractor was a director of the relevant company.^[4]  An exception, however, is the case of Redwood Anti-Ageing Pty Ltd & Anor v Knowles & Anor [2013] NSWSC 508, wherein an independent contractor in their capacity as a consultant owed a fiduciary duty to a company notwithstanding that they were not a director.^[5]  Further, and more generally, a fiduciary relationship may be more readily implied in circumstances where the features common to an employment relationship are observable in the relationship subsequent to the retention of an independent contractor.^[6]

Features of contractual relationship establishing fiduciary duties

In the case of Commonwealth v Davis Samuel Pty Ltd (No 7) [2013] ACTSC 146, at [306], the following factors were held to be relevant in determining that an independent contractor owed a fiduciary duty to the Commonwealth, who had retained the contractor’s services:

• there was a clear relationship of confidence;
• there was an undertaking by the contractor to provide specified services to the Commonwealth in the interests of the Commonwealth, which were to be carried out in a way that was in large measure indistinguishable from those carried out by an employee;
• the contractor had scope unilaterally to exercise a power or discretion which may affect the rights of the Commonwealth which was, therefore, put in a position of vulnerability because of access given to the Commonwealth’s facilities;
• the Commonwealth was dependent on and vulnerable to the contractor; and
• the contractor was provided with access to confidential information and obliged to respect the confidence of the Commonwealth in that information.^[7]

In SBA Music, the question of whether a contractor or consultant owed a fiduciary duty to the company retaining their services was considered.  That case concerned SBA Music, a business providing music ‘solutions’ to retail stores and other businesses.  SBA Music retained Mr. Hall as an independent contractor to provide senior management services which ultimately resulted in him becoming a director of the company.  He undertook the following duties:

• managing the daily running of SBA’s business;
• responsibility for strategic direction and planning of SBA Music;
• managing SBA’s client relationships, including marketing and relationship building;
• securing new business opportunities;
• liaising with and building relationships with suppliers and licencing organisation;
• recruiting, supervising and managing staff; and
• overseeing finances and expenditure.

Ultimately the Court held, taking into account the above facts, that as an independent contractor who was also a company director, Mr. Hall owed both fiduciary and director’s duties to SBA Music.

Statutory duties under the Corporations Act

As has been recognised as a common theme in the cases considering fiduciary duties of an independent contractor, such duties are often owed as a result of the contractor being a company director.  Further obligations may be impressed upon such independent contractors.  Namely, duties of:

• good faith;^[8]
• proper use of position;^[9] and
• proper use of information.^[10]

For more information on these statutory fiduciary duties, please read our article on this topic here.

Takeaways

Ultimately, independent contractors who are authorised and empowered to act on behalf of their principal in such a way as to be able to effect the legal or practical interests of that person or entity, will likely owe the principal fiduciary obligations.  This is particularly so if they are carrying on ‘employment like’ work.  Importantly it is not required that an independent contractor be a company director in order to owe a fiduciary duty to a principal.

Links and further references

Legislation

Corporations Act 2001 (Cth)

Case law

Commonwealth v Davis Samuel Pty Ltd (No 7) [2013] ACTSC 146

Equity 8 Pty Ltd v Shaw Stockbroking Ltd [2007] NSWSC 413

Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6

Redwood Anti-Ageing Pty Ltd & Anor v Knowles & Anor [2013] NSWSC 508

SBA Music Pty Ltd v Hall (No 3) [2015] FCA 1079

Hospital Products Limited v United States Surgical Corporation [1984] HCA 64

Further information about independent contractors

If you need advice on the obligations of independent contractors, contact us for a confidential and obligation-free discussion:

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

[1]           See SBA Music Pty Ltd v Hall (No 3) [2015] FCA 1079, [28] – [30].

[2]           Hospital Products Limited v United States Surgical Corporation [1984] HCA 64, [67].

[3]           See also: Hospital Products Limited v United States Surgical Corporation [1984] HCA 64, [68].

[4]           SBA Music Pty Ltd v Hall (No 3) [2015] FCA 1079, [13]; Commonwealth v Davis Samuel Pty Ltd (No 7) [2013] ACTSC 146; Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6, [68]; Equity 8 Pty Ltd v Shaw Stockbroking Ltd [2007] NSWSC 413, [43]-[58].

[5]           Redwood Anti-Ageing Pty Ltd & Anor v Knowles & Anor [2013] NSWSC 508, [58].

[6]           Equity 8 Pty Ltd v Shaw Stockbroking Ltd [2007] NSWSC 413, [32].

[7]           As summarised in SBA Music.

[8]           Corporations Act 2001 (Cth) s 181.

[9]           Corporations Act 2001 (Cth) s 182.

[10]         Corporations Act 2001 (Cth) s 183.

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