Where provisions in the deed embody covenants made with unitholders, they can be enforced by unitholders as promisees. In respect of an exercise of power or discretion by the trustee which is without good faith or otherwise wrongful, unitholders can sue the trustee for breach of trust. In the case of the manager, unitholders may bring an action for an abuse of power on the basis of a breach of fiduciary duty. Thus, there is no problem of standing to sue for aggrieved unitholders.

Lifestyle ChoicesAs between the manager and the trustee, the position is less clear if a claim cannot be based on contract. There are numerous situations where this may happen. Both the trustee and the manager may exercise powers as fiduciaries of unitholders. The exercise of some of these powers by one fiduciary may cause damage or injury to the other fiduciary. For example, the trustee of an authorized unit trust may abuse the power under the Financial Services (Regulated Schemes) Regulations 1991 that enables it to give notice in writing to the manager to remove the manager if for good and sufficient reason it is of the opinion that a change of the manager is desirable in the interests of unitholders. The trustee may also take actions claimed to be pursuant to its duty to take all reasonable care and to exercise all due diligence ‘to exercise such degree of supervision of the manager’s operation of the scheme as is appropriate’. The trustee may also use its power to require the manager to furnish information concerning the management and administration of the scheme” 8 for its own ulterior motive. The trustee may convene a unitholders‘ meeting not for the purpose contemplated by the Regulations or the trust deed but with a view to embarrass the manager. This type of action by itself will at least cause disruption to the business of the manager. Likewise, the manager may abuse its powers. For example, it may refuse to approve an increase of remuneration where the terms of the trust deed require its approval as a condition .

In the exercise of these powers, the power holder stands in a fiduciary relation to the unitholders and any abuse can give rise to a cause of action by the unitholders based on fiduciary principles. Since the manager and the trustee are independent contractors standing at arm’s length to each other, the question arises whether any abuse of such power by one of them to the detriment of the other will give the other party victimized the right to sue.

In Parkes Management Ltd. v. Perpetual Trustee Co. Ltd. ,the Court of Appeal of the Supreme Court of New South Wales held that such a right did exist on the particular facts of the case. The issue was seen as one of contractual construction of the particular unit trust deed and the construction adopted by their Honours was strained. It is submitted that their Honours could have framed the issue as one of fiduciary duties between co-fiduciaries, i.e., the trustee and the manager.

The question in this type of situation is whether the manager and the trustee, as fiduciaries of unitholders, could also be fiduciaries between themselves. If the answer is yes, in what particular circumstances will this situation arise? Before Parkes Management is examined, it may be instructive to consider the principles under which one of two persons may be characterized as a fiduciary of the other.

Thus, in an authorized unit trust, both the manager and the trustee cannot be regarded as a subordinate of the other.

The position appears to be the same for other unit trusts. In Parkes Management Ltd. v. Perpetual Trustee Co. Ltd. , the manager of a unit trust sought to challenge the certificate by the trustee that it would be in the interest of the unitholders for the manager to retire. It was argued (inter alia) by the trustee that an injunction should not be granted to continue a personal relationship. This was rejected by Hope JA on the ground that the manager was neither the agent nor employee of the trustee:

It was then submitted that no injunction would be granted in a case such as the present because of the principle that injunctions will not be granted to continue a personal relationship … I do not think that this principle is to be applied to the present case. The Manager is in no sense to be regarded as an employee or agent or in some analogous relationship with the Trustee, or as seeking to ensure the continuance of such a relationship. It is entitled to ensure, in the interests of itself and of the unitholders, that the Trustee properly performs its functions and duties. Its position in the whole scheme was central to that scheme and its removal in a very real sense changed in an important way the character of the scheme.”

The absence of an agency at a general level does not preclude the finding of an agency relationship in some specific transactions of a trust’s operation. The Financial Services (Regulated Schemes) Regulations 1991 clearly contemplates the possibility of the manager of an authorized unit trust selling and buying units as an agent of the trustee, rather than the manager acting as a principal.It also requires the trustee to appoint the manager or the manager’s nominee as an agent in exercising the voting rights of underlying assets.’ These are not the only matters permitted by the Regulations. Under regulation 7.15, delegation between the trustee and the manager is generally permitted, except that the trustee’s functions of oversight and custody cannot be delegated to the manager or its associate. A trust deed may expressly provide that the manager shall be the trustee’s agent on specific matters. Little has been written on the way the day-to-day business of a trust is conducted but it is conceivable that delegation is inevitable in some circumstances and an agency may therefore arise from a course of conduct. For example, in an offshore trust that invests in the share markets, the manager, after making the choices for its portfolio, may simply instruct the broker to buy shares in the name of the trustee. It is simply acting on behalf of the trustee in giving instructions to the broker. Likewise, a manager in a property trust may be collecting rents and paying rates and other outgoings for the trustee as part of its daily management of the properties.’

The possibility of specific agency situations, such as those above discussed, does not undermine the basic proposition that there is no general agency relationship between the trustee and the manager.

It cannot be denied that by entering into the trust deed, both the manager and the trustee are entering into a venture that provides services to their `customers’ and that produces their income. This is cooperation in business, but is unlikely to constitute them a partnership. Basically, the test of the existence of a partnership is by reference to the definition of a partnership discussed and also by reference to the statutory rules regarding co-ownership of assets, sharing of gross return, and also sharing of profit.

There is no business in common. The demarcation of functions under the unit trust deed draws the line of business between them. In essence, the trustee is carrying on the business as a professional trustee and the manager is carrying on the business of investment management. They have different contractual obligations under the unit trust deed, the trustee as a trustee of properties, a registrar of unitholders, and also as a supervisor of the manager and the manager as a dealer in units and as a fund manager. In the unit trust deed, the trustee and the manager are making covenants severally rather than jointly and severally. There is clearly no intention to constitute themselves mutual agents so as to give rise to any inference of a business ‘in common’.

Sharing of profit provides prima facie evidence of the existence of a partnership. Sharing of gross return is also a factor. Each party receives its service fees for the services rendered to the unit trust. The manager may receive additional income in the process of buying and selling units. These are gross returns rather than profits. Whether the manager or the trustee makes any profit will depend on whether there is any amount remaining after payment out of this income of all the expenses incurred by it as a separate business unit. In any event, there is no sharing of these returns between the trustee and the manager. There is also no sharing of profit between them.

Both therefore are acting as principals on their own account.

B. Agency

The manager and the trustee are not in any relationship of agency at a general leve1. Agency is the result of a grant of power by the principal and the assumption of obligations by the agent. At the inception of a unit trust, the manager and the trustee are contracting as principals to constitute the unit trust that enables both to act for investors according to their divided responsibilities.

The trustee cannot be regarded as the agent of the manager. It is not an agent holding properties for its principal; the properties in a unit trust do not belong to the manager. If it is an agent of the manager, it will be under an obligation to obey the order and directions of the principal. It is true that, in the majority of cases, the manager’s management powers are to be exercised in the form of directions to the trustee as regards the buying and selling of assets in the portfolio.”⁾ This does not mean that the trustee has to obey every direction. The trustee owes the unitholders a duty to supervise the manager. As part of this duty, the trustee is not bound to follow the direction if the directed exercise is a matter within the trustee’s discretion or if the direction involves a breach of the manager’s fiduciary duty, the terms of the trust deed, or the provisions of any statute.

Equally, the manager cannot be regarded as the agent of the trustee. If the manager can direct the trustee as to investments, it can hardly be regarded as the agent of the person that is subject to its direction. Moreover, in a commercial sense, the unit trust is a financial product of the manager and is often only a part of the manager’s financial services. The manager is in truth ‘the source and origin of the trust‘ and also ‘the entrepreneur of an investment scheme‘. The manager has interests in its own right and not merely subordinate interests as an agent.

This position is recognized by the Financial Services (Regulated Schemes) Regulations 1991. A juxtaposition of regulation 7.02 and regulation 7.09 reveals this. Regulation 7.02 provides:

1. It is the duty of the manager to manage the scheme in accordance with: (a) the trust deed, and (b) these regulations, and (c) the most recently published scheme particulars.
2.  . . . it is the manager’s right and duty to make decisions as to the constituents of the property of the scheme in such a way as appears to him likely to secure that the objectives of the scheme are attained . . .

And regulation 7.09 provides:

1. It is the duty of the trustee to take reasonable care to ensure—(a) except in relation to Part 5, that the scheme is managed by the manager in accordance with regulation 7.02.1, and (b) in relation to Part 5, that decisions about the constituents of the property of the scheme do not exceed the powers conferred on the manager.

Regulation 7.02 applies to the manager. It has two limbs, one dealing with the management of the scheme in general and the other dealing with investment of scheme property in particular. The duty of supervision of the trustee specified in regulation 7.09 mirrors this two-limb structure.

Where provisions in the deed embody covenants made with unitholders, they can be enforced by unitholders as promisees. In respect of an exercise of power or discretion by the trustee which is without good faith or otherwise wrongful, unitholders can sue the trustee for breach of trust. In the case of the manager, unitholders may bring an action for an abuse of power on the basis of a breach of fiduciary duty. Thus, there is no problem of standing to sue for aggrieved unitholders.

As between the manager and the trustee, the position is less clear if a claim cannot be based on contract. There are numerous situations where this may happen. Both the trustee and the manager may exercise powers as fiduciaries of unitholders. The exercise of some of these powers by one fiduciary may cause damage or injury to the other fiduciary. For example, the trustee of an authorized unit trust may abuse the power under the Financial Services (Regulated Schemes) Regulations 1991 that enables it to give notice in writing to the manager to remove the manager if for good and sufficient reason it is of the opinion that a change of the manager is desirable in the interests of unitholders. The trustee may also take actions claimed to be pursuant to its duty to take all reasonable care and to exercise all due diligence . . . ‘to exercise such degree of supervision of the manager’s operation of the scheme as is appropriate’. The trustee may also use its power to require the manager to furnish information concerning the management and administration of the scheme” ⁸ for its own ulterior motive. The trustee may convene a unitholders‘ meeting not for the purpose contemplated by the Regulations or the trust deed but with a view to embarrass the manager. This type of action by itself will at least cause disruption to the business of the manager. Likewise, the manager may abuse its powers. For example, it may refuse to approve an increase of remuneration where the terms of the trust deed require its approval as a condition .

In the exercise of these powers, the power holder stands in a fiduciary relation to the unitholders and any abuse can give rise to a cause of action by the unitholders based on fiduciary principles. Since the manager and the trustee are independent contractors standing at arm’s length to each other, the question arises whether any abuse of such power by one of them to the detriment of the other will give the other party victimized the right to sue.

In Parkes Management Ltd. v. Perpetual Trustee Co. Ltd. _,the Court of Appeal of the Supreme Court of New South Wales held that such a right did exist on the particular facts of the case. The issue was seen as one of contractual construction of the particular unit trust deed and the construction adopted by their Honours was strained. It is submitted that their Honours could have framed the issue as one of fiduciary duties between co-fiduciaries, i.e., the trustee and the manager.

The question in this type of situation is whether the manager and the trustee, as fiduciaries of unitholders, could also be fiduciaries between themselves. If the answer is yes, in what particular circumstances will this situation arise? Before Parkes Management is examined, it may be instructive to consider the principles under which one of two persons may be characterized as a fiduciary of the other.

The status-based category includes a core of well established relationships such as trustee-beneficiary, guardian-ward, director-company, principal- agent, solicitor-client, employer-employee, and partner-partner. They are relationships which are regarded by equity as fiduciary per se. It is debatable as to what is the common denominator behind these relationships but it is not a matter of concern here.

The fact-based category is of more immediate interest as it may embrace the trustee-manager relationship. This category must have derived from the view that the category of cases of fiduciary relationships is no more closed than the categories of negligence at common law. Unfortunately, the law is fluid and it is a category that defies definition. There are three possible bases or tests, which are not mutually exclusive , according to which the court may find the existence of a fiduciary relationship.

The first test is trust and confidence. This is generally regarded as the conventional basis of the status-based fiduciary relationships. As Sealy has pointed out, breach of trust or confidence is one of the traditional heads of Chancery’s jurisdiction from which the more technical concept of the trust is derived. The general principle is that if confidence is reposed, and that confidence is abused, a court of equity will grant relief whether or not there is any trust of property. This traditional test is best summed up in the words of McMullin J in Farrington v. Rowe McBride & Partners:

A fiduciary relationship exists whenever there is a relationship of confidence such that equity imposes duties or disabilities upon the person in whom the confidence is reposed in order to prevent the possible absence of confidence.

The second is the undertaking test. The major proponent appears to be Scott, who states in the California Law Review that:

A fiduciary is a person who undertakes to act in the interests of another person. It is immaterial whether the undertaking is in the form of contract. It is immaterial that the undertaking is gratuitous.

It has received its refinement by Finn, Fiduciary Obligations:

[A fiduciary] is, simply, someone who undertakes to act for or on behalf of another in some particular matter or matters. That undertaking may be of a general character. It may be specific and limited. It is immaterial whether the undertaking is or is not in the form of a contract. It is immaterial that the undertaking is gratuitous. And the undertaking may be officiously assumed without request.

This test was subsequently applied by the New South Wales Court of Appeal in the seminal case of Hospital Products Ltd. v. United States Surgical Corporation and was accepted by some of their Honours in the High Court—with qualifications , modifications or extensions.

The third can be labelled as the ‘vulnerability‘ test. It emphasizes the vulnerable position of the objects of the fiduciary power. The leading statement is the dissenting judgment of Wilson J in the Supreme Court of Canada in Frame v. Smith, which was approved in the leading Canadian case on fiduciary law, LAC Minerals Ltd. v. International Corona Resources Ltd. Wilson J said:

[T]here are common features discernible in the contexts in which fiduciary duties have been found to exist and these common features do provide a rough and ready guide to whether or not the imposition of a fiduciary obligation on a new relationship would be appropriate and consistent. Relationships in which fiduciary obligation has been imposed seem to possess three general characteristics:

1. The fiduciary has scope for the exercise of some discretion or power.
2. The fiduciary can unilaterally exercise that power or discretion so as to affect the beneficiary’s legal or practical interests.
3. The beneficiary is peculiarly vulnerable to or at the mercy of the fiduciary holding the discretion or power.

This test is also supported by the judgment of Dawson J in the Hospital Products case:

There is, however, the notion underlying all the cases of fiduciary obligation that inherent in the nature of the relationship itself is a position of disadvantage or vulnerability on the part of one of the parties which causes him to place reliance upon the other and requires the protection of equity acting upon the conscience of that other . . The trust and confidence test has been regarded by Gibbs CJ in the Hospital Products case as ‘neither necessary for nor conclusive of the existence of a fiduciary relationship‘. His Honour gave the example of a trustee not trusted by his beneficiaries. Dawson J also suggested that business persons might have misplaced confidence in others and this did not make the relationship a fiduciary one. Yet it may be argued that the trust and confidence in the fiduciary flows from the weak, disadvantaged, and vulnerable position that the beneficiary is in. The vulnerability test is, in substance, the other side of the same equation.

The undertaking test has been received in Australia with enthusiasm. However, it is submitted that, as the litigation in the Hospital Products case demonstrates, all commercial contracts for services have the ‘undertaking‘ element and the test by itself cannot distinguish those that create a fiduciary relationship from those that do not. Further criteria must therefore be admitted in the identification of the existence of a fiduciary relationship. Even its main proponent, Finn, has moved away from his earlier position that the test is ‘an accurate and a workable one for the purposes of the conflict rule’ to the suggestion that ‘[alt best, all one can give is a description of a fiduciary—and one which, if it expresses the fiduciary idea, is no more precise than a description of the tort of negligence’. Indeed, there are signs that the learned author is also placing less emphasis on the ‘undertaking‘ element. In ‘Fiduciary Law and the Modern Commercial World’, Finn defined a fiduciary in the following terms:

A person will be a fiduciary in his relationship with another when and in so far as that other is entitled to expect that he will act in that other’s interests or (as in a partnership) in their joint interests, to the exclusion of his own several interests. In this definition, the fiduciary’s undertaking has been replaced with the beneficiary’s entitlement to maintain an expectation. That entitlement, as explained in a footnote, ‘may arise from what one party undertakes or appears to undertake . . . for the other; from what actually is agreed between the parties; or, for reasons of public policy, from legal prescription’. ^“7 There appears to be a shift from the act of the fiduciary to the ‘right’ or expectation of the beneficiary. In a way, perhaps a subtle one, this is in line with the vulnerability test and the trust and confidence test which look at the beneficiary’s position in the transaction. Indeed, other proponents of an undertaking definition have found it necessary to embrace the elements of confidence reposed in the fiduciary, reliance and vulnerability. Even Mason CJ’s description of a fiduciary relationship in the Hospital Products case embraces all elements of the three theories:

The accepted fiduciary relationships are sometimes referred to as relationships of trust and confidence or confidential relations; cf. Phipps v. Boardman, viz., trustee and beneficiary, agent and principal, solicitor and client, employee and employer, director and company, and partners. The critical feature of these 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. The expressions ‘for’, ‘on behalf of and ‘in the interests of signify that the fiduciary acts in a ‘representative’ character in the exercise of his responsibility . . :

Perhaps, the truth is that no single definition is possible or desirable. All we can do is to give ‘a description of a fiduciary‘ or describe ‘the critical feature of’ or ‘common features discernible in’ a fiduciary relation. Of these three tests, therefore, none should be read as exclusive of the others; they should be considered as ‘factors’ to be weighed up in identifying a relationship that would give rise to fiduciary obligations.

It is submitted for the Trustee that it is only a beneficiary who can challenge the exercise by a trustee of a power . . . There would appear to be three answers to this submission. Firstly, that the Manager was a beneficiary; secondly, that the provisions of cl. 20(1) of the Deed entitled the Manager to ensure that the Trustee exercised any power under the Deed bona fide without indirect motive, and with a fair consideration of the issues; and thirdly that being a party to the Deed the Manager was entitled to challenge the certificate . . .

While this judgment supports the contractual nature of the unit trust, the discussion suggests that the three grounds given by his Honour are open to criticism. His Honour did not cite any authority to support his conclusion that the manager was a beneficiary. Some trusts cases suggest that for some purposes trustees’ remuneration constitutes an interest in the trust funds. It is unsure if his Honour was relying on these cases and if so what would constitute the basis for extending them to a manager. If a manager’s remuneration is contractual in nature, this ground is not a valid one. The second ground involves implying a new term without reference to precedents or principles on contractual implied terms. The third ground is the weakest of all. The fact that the manager is a party does not automatically give rise to a cause of action. The court should establish that the manager was the promisee of the relevant covenant. In the case of an authorized unit trust, it is not clear who is the promisee when the Financial Services (Regulated Schemes) Regulations 1991 are incorporated into the trust deed. There are strong grounds to construe the unitholders as the covenantees. There is therefore a possibility that the factors, such as the second and third grounds, considered by his Honour may not be present in other unit trusts.

It is submitted that fiduciary principles offer a better theoretical basis if similar situations were to arise.

At a general level, the trustee-manager relationship is not a fiduciary one. The relationship per se certainly is not an established class of status- based fiduciary. There is no question that the trustee and the manager act as principals in their negotiation of the terms of the unit trust. The result of this negotiation is that both ‘undertake’ to act for the unitholders, not for the other party to the transaction. Invariably, there are no elements of trust and confidence, reliance and vulnerability in the relationship itself.

However, a person ‘may be in a fiduciary position quoad a part of his activities and not quoad other parts: each transaction, or group of transactions must be looked at’. It is possible for the trustee or the manager to be characterized as fiduciary of the other in limited matters. In this context, it is important to bear in mind that both the trustee and the manager are dealing at arm’s length. The court will not find the existence of a fiduciary relationship that would alter the intended operation of the contract terms according to their true construction or merely for the purpose of providing proprietary remedy or of achieving priority over general creditors^.

In a unit trust, there are specific matters in which the manager or the trustee will act as an agent for the other. That agency status will trigger the flow of fiduciary obligations incidental to that transaction. The scope of fiduciary relationship may be very limited and the fiduciary elements in it may be less intense than those arising in their respective relationships with unitholders.

In the situation of an abuse of power by a co^fiduciary exemplified by Parkes Management, there is no element of an undertaking. The trustee does not undertake to exercise its powers contained in the trust deed ‘for’, ‘on behalf of or ‘in the interests of the manager. Nor does the manager undertake anything in the interest of the trustee. The ‘undertaking‘ is an undertaking to act for the benefit of the unitholders.

Arguably, it can be said that there is an expectation that each of them will take into account the interest of the other in the exercise of a power that will cause damage or injury to that other. In the second formulation of Finn’s definition of a fiduciary, the learned author’s focus is on the ‘entitlement’ to an expectation that one will act in the interest of the other. That entitlement may arise from an undertaking, which does not exist between the manager and the trustee. It also cannot be regarded as a contractual term between them. There is also no public policy reason for equity to impose such a fiduciary obligation. It would seem that a fiduciary relationship cannot be supported on an undertaking theory.

The existence of a fiduciary duty can, however, be justified in terms of the ‘vulnerability‘ test, as the relationship has the three characteristics described by Wilson J in Frame v. Smith. This can be illustrated by using the factual circumstances of Parkes Management. A trustee certifying that it is in the interest of unitholders to dismiss the manager is exercising some form of discretion or power. This exercise satisfies the second characteristic of her Ladyship’s formulation, as the trustee can ‘unilaterally’ exercise the power to affect ‘the beneficiary’s legal or practical interests‘. There is no doubt that the manager, as the person who initiates the unit trust scheme, has ‘practical’ interests in the scheme. It is particularly vulnerable because any abuse can be made under the cloak of protection of the unitholders.

Perhaps, the position can be better understood if the content of the obligations that may arise from this fiduciary finding is also examined. A finding of a fiduciary relationship between the manager and the trustee must imply that the fiduciary, be it the manager or the trustee, has the duty to consider the interest of its co-fiduciary in addition to that of the unitholders. Is it in breach of the undivided loyalty rule? The answer appears to be no. As Fletcher Moulton LJ has reminded us, it is absurd ‘that every kind of fiduciary relation justifies every kind of interference . . . The nature of fiduciary relationship must be such that it justifies the interference.’ Fiduciary relationships may take a variety of forms and may give rise to a wide variety of obligations.

In the context of the unit trust, the trustee or the manager ‘undertakes’ to exercise the powers ‘for’, ‘on behalf of or ‘in the interests of the unitholders. That undertaking is part of the covenants in the unit trust deed and the co-fiduciary, as a party to that deed, must have consented to such an arrangement. The character of the venture dictates that the interests of the unitholders must be paramount. There is no question that the trustee and the manager cannot be regarded as in a position of ‘vulnerability‘ on all matters of the unit trust.

Vulnerability occurs only when (1) honesty and good faith are missing in relation to an exercise of a particular power of a fiduciary which affects the ‘legal or practical interests‘ of the co-fiduciary and (2) that power is exercised under the cloak as an exercise for the benefit of unitholders.

Therefore, it is submitted that when the trustee or the manager exercises a power in the interest of unitholders which prejudicially affects the interest of its co-fiduciary, it has a duty towards that co-fiduciary to exercise that power ‘without indirect motive, with honesty of intention and with a fair consideration of the issues’. This is the same conclusion as was reached in Parkes. However, this is not reached on the basis that the manager is a beneficiary of a unit trust. It is reached by resorting to first principles of fiduciary law. A fiduciary analysis offers a consistent basis for actions for breaches of other fiduciary duties owed by the trustee where the manager can establish a fact-based fiduciary relationship between them. It also enables the trustee to sue the manager in a converse situation on the same theoretical foundation.

If the above arguments are valid, it is submitted that the direct import of the company law formula on the power to alter articles is not justified. Does it then follow that there is no limitation on the exercise of voting powers by the majority in a unit trust? The answer is probably no. It is most likely that the court will intervene if a majority of unitholders votes for a purpose outside the scope of purposes for which the voting power is conferred. This can be justified on either or both of the following grounds.

The first ground is the equitable doctrine of fraud on a power. The company law formulation that the power must be exercised bona fide for the benefit of the company as a whole is best to be regarded as a specific application of the broader doctrine of fraud on a power. Dixon J in Peters’ case itself saw the company law rule as a formula to invalidate any apparently regular exercise of voting power which is really ‘a means of securing some personal or particular gain, whether pecuniary or otherwise, which does not fairly arise out of the subjects dealt with by the power and is outside and even inconsistent with the contemplated objects of the power‘ .

If a specific formula cannot be applied, it is most likely that the court will resort to first principles.

The doctrine is a broad one. It applies not only to voting powers but also to other powers as wel1. It guards against any abuse of power and not merely fraud in the narrow sense of dishonesty. In Duke of Portland v. Topham, Lord Westbury said:

The settled principles of the law upon this subject must be upheld, namely, that the donee, the appointor under the power, shall at the time of the exercise of that power, and for any purpose for which it is used, act with good faith and sincerity, and with an entire and single view to the real purpose and object of the power, and not for the purpose of accomplishing or carrying into effect any bye or sinister object (I mean sinister in the sense of its going beyond the purpose and intent of the power) which he may desire to effect in the exercise of the power.

As emphasized by Lord Parker in a later case, Vatcher v. Paull,term fraud in connection with frauds on a power does not necessarily denote . . . any conduct which could be termed dishonest or immoral. It merely means that the power has been exercised for a purpose, or with an intention, beyond the scope of or not justified by the instrument creating the power.’

Thus, the width of the doctrine should enable the court to set aside a majority resolution where there is any abuse. An apparent difference of this approach is that there is no ‘for the benefit of the unitholders as a whole‘ requirement suggested by Malcom CJ. Another possible difference, which may not be immediately apparent, is that the equitable doctrine is operating in a negative manner by ‘negativing’ an exercise of a power which may otherwise be valid but the company law formulation is more in the nature of a positive duty.

The second ground is that the majority in particular circumstances is a fact-based fiduciary of the minority. This may sound novel. But if the ‘trust and confidence’, ‘undertaking’ or ‘vulnerability’ test is satisfied, there is no reason why fiduciary duties may not be imposed. Indeed, the departure from the ruling in Percival v. Wright in the leading company law case of Coleman v. Myers must suggest that such a possibility cannot be precluded. Thus, where the court establishes that a majority of unitholders in a particular unit trust is a fiduciary of the minority on the facts, the majority may be under a duty to act in good faith in its exercise of its voting power.

Of course, as in companies, in order for actions to be taken by a large aggregate of individuals, meetings and rules for majority decisions are necessary. Voting rights simply are parts of the rights constituting units. Once the majority in a meeting is given the power to bind the minority, there emerges the tension between voting powers as property rights and the notion of fairness in the exercise of those powers.

The starting-point is that when unitholders vote in a unitholders‘ meeting, they vote in respect of their units, which are their property, and the right to vote is attached to a unit as an incident of property to be enjoyed by its owner. There is no reason why, in the absence of other factors, an owner of units in the course of enjoying this property right should be under a duty to other unitholders. This was the conclusion reached by the Full Court of the Supreme Court of Western Australia inGra-ham Australia Pty. Ltd. v. Perpetual Trustees WA Ltd. by relying on leading cases concerning shareholders of companies. In this case, the redemption price provided in the trust was based on the value of underlying assets seven days before the redemption request. Immediately after the collapse of the stock market in October 1987, the manager made no payment until after a meeting of unitholders had resolved that redemption should be made on the basis of current asset value. It was held that the power of a majority of unitholders to amend the trust deed waswide enough to make amendments that would defeat the vested or accrued rights of a unitholder.

In coming to this conclusion, Malcom CJ stated that the following propositions from the judgment of Latham CJ in Peters’ American Delicacy Co. Ltd. v. Heath ‘apply equally to a trust deed for a unit trust as they did to a deed of settlement of the kind under which limited companies were once established’. In Peters’ case, Latham CJ said:

. . . (ii) The contract between members of the company and between the company and its members which is constituted by the articles must be regarded as containing among its terms a provision that articles may be altered in the manner provided by the Act. An alteration in a particular case may constitute a breach of contract witha shareholder, but such a breach does not invalidate the resolution to alter the article.

Where the rights of members of the company depend only upon the articles, it is possible to alter the rights of members or of some only of the members by altering the articles. The fact that an alteration prejudices or diminishes some of the rights of the shareholders is not, in itself, a ground for attacking the validity of an alteration. Any other view would, in effect, make unalterable and permanent any articles which conferred rights upon a class of shareholder, or possibly upon any shareholder, if they or he desired that those rights should continue to exist unchanged. It is plainly not the law that the fact that an alteration of articles alters the rights or prejudices the rights of some shareholders is sufficient to prevent the alteration from being validly made.

The power to alter articles must be exercised bona fide. It is generally said that the power must be exercised bona fide for the benefit of the company as a whole. (v) When the validity of a resolution of shareholders is challenged, the onus of showing that the power has not been properly exercised is on the partycomplaining. The court will not presume fraud or oppression or other abuse of power.

In upholding the validity of the amendment, the court in Gra-ham must have impliedly held that the majority had exercised their power properly. Thus, at one stroke, the court both recognized the voting rights incident to units and admitted into the law of unit trusts the company law principle that the power to alter articles ‘must be exercised bona fide for the benefit of the company as a whole’. This principle arguably has two requirements: (1) that the alteration should be made bona fide and (2) that it should tend to benefit the company as a whole. It has its origin in the equitable doctrine of fraud on a power, rather than fiduciary principles.

The application of this principle to unit trusts was justified by Malcom CJ on analogy with the deed of settlement company. This may perhaps be questioned. It is clear from Smith v. Anderson that certificate holders were not considered as ‘associating’ for the purpose of carrying on business despite the use of a deed of settlement. The deed of settlement company for trading purposes was regarded as a large partnership with transferable shares. The court in Smith v. Anderson must have impliedly made a distinction between unit trusts (using deeds of settlement as their constitutions) and deed of settlement companies themselves which later evolved into the registered company. That distinction could possibly be between the carrying on of investment activities by trustees and the carrying on of business by agents of shareholders. The court could of course have concluded that this distinction was unimportant but the issue was not addressed at all in Gra-ham.

In crude terms, in a unit trust, the manager performs all the functions of management of the trust assets that would have been carried out by the trustee if the trust were a private trust used as a means of disposition of properties. This leads to the question whether the manager can be considered as a trustee, by analogy to the statutory scheme contained in the Public Trustee Act 1906 that allows the simultaneous appointment of a custodian trustee and a managing trustee. A custodian trustee under this Act is one who gets in and holds the title to the trust property. The management of the trust property and the exercise of any power or discretion are vested in the managing trustee. As between the custodian trustee and the managing trustee, a custodian trustee has the custody of all securities and documents of title relating to the trust property, but the managing trustee is permitted free access to them and is entitled to take copies or extracts. A custodian has to concur in and perform all acts.’”

One is therefore tempted to conclude that the manager is a managing trustee as it resembles the managing trustee created by the statute. But one has to recognize that a trust with a custodian and a managing trustee is a statutory class of its own. The office of a managing trustee is a creature of an enabling statute. In order to be so considered all the requirements of the relevant statute have to be complied with. What a private trust instrument can achieve depends on equitable principles, not on an inapplicable statute. Furthermore, law reports do contain examples of powers of investment being reserved to the settlor, to one of the beneficiaries or to a third party. None suggests that power, without more, can make a person a trustee. This is because trusts are fastened upon the property of legal owners, the trustees. There is no trust without property. Powers may be fiduciary in nature but it does not follow that their holder is a trustee. Moreover, in a unit trust, the manager may have powers that are not fiduciary in nature.

It follows from the above analysis that a manager is not a trustee in the strict sense of the word.

B. The Manager as a Fiduciary

When the first unit trust schemes appeared in the 1860s, they were used as alternatives to the registered company. It is not surprising that they were marketed in the same manner as shares. The manager, as the entrepreneur of the unit trust, inevitably involved itself in the promotion of the unit trust. Such activities accord the manager the status of a promoter for ‘the term promoter is a term not of law, but of business’. It has been held to cover not only persons who get up a company but also persons inviting people to join in partnerships.

In Elders Trustee and Executor Co. Ltd. v. EG Reeves Pty. Ltd. ,Gummow J held that a manager of a unit trust was also a promoter and, as such, fell into the status-based category of fiduciary. He also held that as a consequence the manager owed fiduciary duties to unitholders. It ought to be stressed, however, that this fiduciary status should be confined to promotional activities such as issuing the prospectus or scheme particulars and contracting to purchase properties on the unit trust’s behalf. Beyond that, the question whether the manager is a fiduciary or not depends on the nature of activities in which it may engage. In considering the significance of the Elders Trustee case, it should be noted that in cases involving company promoters, the duties recognized are owed to the company to be formed, not to the shareholders in it. In a unit trust situation, it is the relationship with the unitholders that is in issue.

When the manager manages the investment of the unit trust, it assumes functions analogous to that of a managing trustee under statute. Whilst it cannot be characterized as a trustee, its activities as a fund manager are most likely to be accepted by the court as establishing a fact-based fiduciary. The manager has control of properties belonging to others, although it does not hold their title. It is undertaking activities in the interest of other persons, the unitholders. It is a holder of power that can unilaterally affect the interest of the unitholders. In a commercial sense, the unitholders are in a vulnerable position for they have no right to interfere with the management of their own money. In most cases, the speed with which transactions have to be done preclude them from having any knowledge at all. Moreover, it is their confidence in the manager’s investment expertise that attracts investors to become unitholders. These c