H. The Fiduciary and Tortious Relationships
| Author | M.H. Ogilvie |
| Profession | LSM, B.A., LL.B., M.A., D.Phil., D.D., F.R.S.C. Of the Bars of Ontario and Nova Scotia Chancellor's Professor and Professor of Law, Carleton University |
| Pages | 193-216 |
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In Foley v. Hill, the House of Lords stated that the bank and customer relationship could occasionally be fiduciary, in addition to being contractual in nature, but the evolution during the last quarter of the twentieth century of fiduciary obligation as an important branch of private law has impacted on banking law in ways the mid-nineteenth-century law lords might not have imagined.
The modern development of banking law in which the contract between bank and customer is subject to superadded or implied obligations drawn from fiduciary and tort law dates to the decision in 1959 of Salmon J. in Woods v. Martins Bank,93which stated in a tentative fashion that a bank owes a fiduciary duty, then characterized as a duty of care, to a customer. In 1963, in Hedley Byrne & Co. Ltd. v. Heller and Partners Ltd.,94the House of Lords further stated, in obiter dicta, that a bank may owe a duty of care not to make negligent misstatements about a customer, and in 1975, in Lloyds Bank Ltd. v. Bundy,95an influential English Court of Appeal found that banks could also be subject to the equitable doctrines of undue influence and the newly formulated unequal bargaining power, as well as fiduciary obligation, in relation to customers.
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Since these cases, which have been applied and extended in numerous cases in Canada and England, it has become settled law that the bank and customer relationship can also be fiduciary and tortious in nature. However, the precise scope and application of these principles remains contested for two reasons. First, the substantive doctrinal content of fiduciary obligation, undue influence, unequal bargaining power, and negligent misrepresentation, as well as the doctrine of unconscionability, which is also increasingly invoked, remains imprecise in the private law generally and in banking law specifically. Secondly, the courts frequently apply several of these doctrines concurrently to the same fact situation, thereby suggesting either that each is found in that fact situation or that the doctrines themselves are indistinguishable or nearly indistinguishable in either content and/or application.
Many of the leading cases in the private law generally in this area are banking law cases and deal typically with fact situations, including giving financial or investment advice to customers, giving credit references to third parties in relation to customers, taking security for loans to customers, and arranging life insurance as a security for loans to customers. Prior to discussing these specific fact situation categories, it is necessary to assess the current formulations of the legal principles applied in them.96
In Woods v. Martins Bank, a plaintiff described by the judge as "the very prototype of the lamb waiting to be shorn. And he did not have long to wait,"97was persuaded by a local branch manager to invest his inheritance in a company known to be in significant difficulty and lost the en-
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tire sum when the company failed. The manager failed to disclose the facts to the plaintiff or to advise him that the bank’s regional office had expressed considerable concern about the company. To the young man’s case against the bank for breach of a duty of care, the bank argued that it owed no duty because he was not an account-owning customer at the time the advice was given, although subsequently became one.
Salmon J. rejected this argument for two reasons: (i) the bank’s own advertisements expressly stated that it offered investment advice; and (ii) the manager held the bank out as being in the business of giving investment advice. He further found the manager to be grossly negligent although not fraudulent, and that he ought to have disclosed the bank’s conflict of interest to the young man. He characterized the bank’s legal duty variously as fiduciary, a duty of care, a duty to avoid a conflict of interest, and gross negligence, without further precision or clarification, although this is to be expected in a case that preceded Hedley Byrne, in which the House of Lords clarified the negligence standard of care for banks. Nevertheless, Woods stated that a bank is responsible for advice giving to anyone, including customers, although whether the standard of care is fiduciary or one of reasonableness remained ambiguous.98
In Standard Investments Ltd. v. CIBC,99the Ontario Court of Appeal confirmed that a bank may owe fiduciary duties to a customer, relying on the earlier English Court of Appeal decision in Lloyd’s Bank Ltd. v. Bundy.100
In Standard Investments, the bank’s president provided assistance to an investment company at the same time as its board chairman was assisting other parties in relation to an attempted takeover of a trust company. Neither apparently knew of the conflict until several years later when the president learned the facts on becoming chairman of the board. The takeover bid failed and the investment company sued the bank to recover the lost value in the shares they had purchased after the share value fell, arguing that the bank was in breach of a fiduciary duty. At trial, Griffiths J. decided that there was a fiduciary relationship which required the bank to disclose its conflict of interest as between
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its two customers but that there was no breach of duty because even with such disclosure, the investment company would have continued with its takeover bid. Although he found the bank’s conduct to be legal, he expressed his personal view that the bank’s policy was "morally offensive."101
The Ontario Court of Appeal agreed that the relationship was fiduciary but found the bank to be in breach of its fiduciary duty by not disclosing its conflict. The court did not require disclosure of another customer’s affairs, which would constitute breach of its duty of secrecy to the customer, but merely disclosure of the fact of conflict and the result that it could not further assist the investment company.102
Goodman J.A. relied on the discussion of the nature of a fiduciary relationship of Sir Eric Sachs in Bundy, in which it was characterized as a relationship of trust and confidence, inducing reliance and loss on the part of a beneficiary.103
The Supreme Court of Canada has never considered the fiduciary nature of the bank and customer relationship, although it has considered fiduciary obligation in numerous other contexts, including commercial contexts.104
In Hodgkinson v. Simms,105the court confirmed that the essential requirement for finding a fiduciary relationship in the factual context of giving financial or investment advice is a voluntary undertaking to act on behalf of another with the result that there is trust, vulnerability, reliance, and loss. Although the court found on the facts that there was a fiduciary relationship in Hodgkinson, it has emphasized on several other occasions that fiduciary relationships are the exception, rather than the rule, in commercial transactions,106and that position is borne out in the banking jurisprudence in relation to fiduciary obligation generally.
A model statement of the modern nature of fiduciary obligation in commercial contexts is that of Millett L.J.:
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A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of the fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or for the benefit of a third person without the informed consent of his principal. This is not intended to be an exhaustive list, but it is sufficient to indicate the nature of fiduciary obligations. They are the defining characteristics of a fiduciary.107
Once it is clear that a fiduciary relationship arises only when there is a voluntary undertaking to act on behalf of another, it is equally clear that a bank could expressly exclude or restrict such an obligation by contract,108so that the bank and customer relationship would be one strictly of contract without any superadded fiduciary obligation.109
It would be open to a future court to treat such a clause strictly and to subject it to the requirements of unconscionability and contra proferentem as a potential abuse of superior bargaining power.
An alternative approach to resolving disputes between bank and customer in which the customer alleges that the bank acted inequitably in the performance of its obligations is to characterize the bank’s conduct as undue influence. Whereas fiduciary duty typically arises when banks give advice, undue influence typically occurs when a customer is obliged to give a security to a bank for a loan either to the customer or to a third party. The starting point for the modern law is Lloyd’s Bank Ltd. v. Bundy, in which a bank took a series of charges over a family farm from a father to secure the indebtedness of his son’s business in the form of a substantial overdraft. The charges amounted to £11,000, although the
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market value of the farm was £10,000. When the son’s business failed, the bank sought vacant possession of the property against the father who was old and had little business experience, although he had received independent legal advice to give charges for up to about one-half the value of the property.
The English Court of Appeal found unanimously that the bank had exercised undue influence on the father and set aside...
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