Federal Court pings real estate agency for breach of fiduciary duties

The property developer, the real estate agency, and the purchasers of lot 170 & lot 191

Investa Properties Pty Ltd (Investa Properties) is a property developer. Investa Residential Group Pty Ltd (Investa Residential) is its wholly-owned subsidiary.

Investa Residential owned two parcels of property near Ipswich in Queensland. These parcels were commonly referred to as Lot 170 and Lot 191.

Purchase of lot 170 with Two Eight Two Nine Pty Ltd

• October 2008 - Investa Residential appointed Oliver Hume South East Queensland Pty Ltd (Oliver Hume) as its agent for the purpose of selling Lot 170.
• 16 July 2009 - Investa Residential appointed Oliver Hume as its real estate agent for the purpose of selling Lot 191. Mr Adam Barclay (Mr Barclay) was a director of Oliver Hume who acted for Investa Residential in relation to these lots.
• 20 February 2009 - Investa Residential entered into a Deed of Put and Call for the purchase of Lot 170 with a company called Two Eight Two Nine Pty Ltd, which was directed by Mr David Tonuri (Mr Tonuri). The exercise price was about $1.45 million.

The secret agreement

The court ultimately determined that Mr Ashley Nankervis (Mr Nankervis) (who was a senior employee of Investa Properties), Mr Barclay and Mr Tonuri entered into an arrangement whereby they agreed to develop Lot 170 and share the profits equally. They kept this a secret from Investa.

Purchase of lot 191 with Queensland Property Centre Pty Ltd

On 23 December 2009, Investa Residential entered into a Deed of Put and Call with Queensland Property Centre Pty Ltd for the purchase of Lot 191. The exercise price was $195,000.

Unknown to Investa, the company that purchased Lot 191 was a company controlled by Mr Barclay's wife. She subsequently transferred the company's interest in the Deed of Put and Call to a company that was controlled by her daughter. The court concluded that Mr Barclay and Mr Nankervis also secretly took steps to subdivide Lot 191 and thereby increase its value.

The Investa parties alleged (among other things) that Oliver Hume, Mr Barclay and Mr Nankervis breached fiduciary duties owed to it, and they sought equitable compensation against each of those parties.

Mr Nankervis, Mr Barclay and Oliver Hume denied any liability or responsibility to Investa for their above conduct.

The court decision at first instance

In summary, her Honour reached the following conclusions (amongst others):

• Mr Nankervis breached fiduciary duties owed to Investa Properties in respect of Lots 170 and 191;
• Mr Nankervis did not owe fiduciary duties to Investa Residential;
• Mr Barclay and Oliver Hume breached fiduciary duties owed to Investa Residential in respect of Lot 191;
• Mr Barclay and Oliver Hume did not owe fiduciary duties to Investa Residential in relation to Lot 170; and
• Mr Barclay and Oliver Hume did not owe fiduciary duties to Investa Properties.

The Investa parties, Oliver Hume and Mr Barclay appealed or cross-appealed against most of her Honour's findings. The appeal was heard by Justices Dowsett, Greenwood and White.

The appeal

The trial judge found that although Mr Nankervis owed fiduciary duties to Investa Properties, he did not owe fiduciary duties to Investa Residential.¹

On appeal, it was found that Mr Nankervis owed fiduciary duties to both Investa Properties and Investa Residential on the basis that:

• Investa Residential and its assets were effectively in the care, control and management of Investa Properties;² and
• Mr Nankervis assumed or undertook the burden of protecting and safeguarding the interests of Investa Residential (as well as owing duties as the employee of Investa Properties).³

The fact that Mr Nankervis was an employee of Investa Properties was not inconsistent with Mr Nankervis owing fiduciary duties to Investa Residential.⁴

Mr Barclay and Oliver Hume tried to argue that disclosing the information about the sale of Lot 170 to Mr Nankervis (a senior employee of Investa) was sufficient to discharge their fiduciary duty of disclosure. This argument was rejected. The duty could not be discharged by disclosing the facts to Investa Residential, because all the decision-making in respect of Lot 170 fell to Investa Properties, and in any event Mr Nankervis was complicit in the illicit activities.⁵

Mr Nankervis breached his fiduciary duties

The Court also found that Mr Nankervis was required to act in the best interests of both Investa Properties and Investa Residential,⁶ and ensure that there was no conflict between his private interests and the interests of Investa Residential and Investa Properties.⁷ By failing to disclose the arrangement between himself, Barclay and Tonuri, Mr Nankervis breached his fiduciary duties in relation to Lot 170.⁸ By failing to disclose the identity of the purchaser of Lot 191 and the potential for Lot 191 to be subdivided, Mr Nankervis breached his fiduciary duties in relation to Lot 191.

Investa Residential and Oliver Hume did not execute a real estate agent appointment form

In concluding that Mr Barclay and Oliver Hume did not owe fiduciary duties to Investa Residential in relation to Lot 170, the court placed significant emphasis on the fact that Investa Residential and Oliver Hume did not execute a real estate agent appointment form pursuant to the Property Agents and Motor Dealers Act 2000 (Qld) (PAMDA). On appeal, it was considered that the operation of PAMDA did not exclude the existence of a fiduciary relationship between a real estate agent and its client.⁹

The scope of Mr Barclay and Oliver Hume's fiduciary duties

It was found that the scope of Mr Barclay and Oliver Hume's fiduciary duties included the following things:

• an obligation to act in the best interests of Investa Residential;
• an obligation to convey offers for purchase of Lot 170 to Investa Residential;
• an obligation to disclose to Investa Residential matters that were material to the sale of Lot 170;
• obligations to not put themselves in a position of conflict between their personal interest and their duties owed to Investa residential; and
• an obligation to disclose the arrangement for development of Lot 170 agreed to between Messrs Nankervis, Barclay and Tonuri.

This matter will now go back to the first instance judge so that the quantum of compensation due to Investa for the breaches of fiduciary duty can be determined.

Lessons regarding the fiduciary duties owed to clients

This case is a warning to real estate agents and their employees that the fiduciary duties owed to their clients are paramount. The absence of a formal agreement required by law will not prevent a fiduciary duty from being established.

The decision makes clear that the existence of an employment relationship between an employee and Company A does not necessarily preclude that employee from owing fiduciary duties to Company B, as long as the contract of employment is not inconsistent with the existence of a fiduciary duty owed to Company B.¹⁰ Mr Nankervis's employment by Investa Properties did not preclude him from owing fiduciary duties to Investa Residential.

This existence of a fiduciary duty owed to Company B will depend on the degree of the engagement between the three parties, and on whether the relationship between the employee and Company A is 'binary'.¹¹ The resolution of this question will depend on the facts and contextual circumstances.¹² These may include:

• the things that the employee does for each of the parties;
• the level of responsibility that the employee has; and
• the appreciation and awareness the employee has for the vulnerability of other parties to the decisions that the employee makes.

Finally, the case is a warning to real estate agents that fiduciary duties may continue to be owed to a client after the termination of a contractual relationship. On 8 February 2010, Investa Residential terminated Oliver Hume's appointment as real estate agent in respect of Lot 191.¹³ Mr Barclay and Oliver Hume contended that they did not owe any fiduciary duties to the Investa parties after this date.¹⁴ The Full Court rejected this argument.¹⁵

The court noted "Every day of non-disclosure beyond 8 February 2010 was another day that each of Mr Barclay and Oliver Hume engaged in a continuing breach of fiduciary duty owed to Investa Residential."¹⁶ In the judges' view, as a matter of law, these fiduciary duties continued beyond the termination of the appointment.

This decision reaffirms that a director's knowledge is attributable to a company if the director is acting within the scope of his or her actual or apparent authority. The scope of this authority will depend on the circumstances of the company. If the director engages in fraudulent conduct that is not totally in fraud of the company and by design or result the fraud benefits the company, then the director's knowledge will be attributable to the company. In this case Mr Barclay acted on behalf of Oliver Hume in arranging for the sale of Lot 191 to his wife's company. This activity benefited Oliver Hume. Therefore Mr Barclay's knowledge relating to his breach of his fiduciary duties to the Investa parties was attributable to Oliver Hume.

Given the breadth of a typical director's duties, and the difficulty in establishing that a director's conduct is totally in fraud of the director's company, the Full Court's decision ensures that it will remain very difficult for a company to avoid having their directors' knowledge of wrongful conduct imputed to it.