Commercial Contracts and Fiduciary Relationships

Federal Court clarifies commercial contracts unlikely to give rise to fiduciary relationships.


Parties to sophisticated commercial agreements, which are often arrived at and agreed upon after a protracted period of careful negotiation, compromise and the incurring of substantial legal costs, have a legitimate expectation that their commercial relationship will be governed and regulated by the terms and conditions of the contract between them, no more and no less.

Commercial men who enjoy equal bargaining power and who contract with each other at arm’s length jointly more often than not undertake various business ventures solely in their own respective interests and for their own respective benefit. They do not intend to create any relationship of trust and confidence, and would, unless they have taken leave of their senses (commercial or otherwise), dismiss as manifestly absurd any suggestion that they ought to be loyal to one another in their commercial dealings.

The phrase “trusted business partner” is thus arguably rhetoric. The reality is that the imposition of fiduciary obligations upon parties to complex commercial instruments is antithetical to the very nature and substance of such commercial relationships.

In the recent case of Solid Investments Ltd v Alcatel-Lucent (Malaysia) Sdn Bhd (Civil Appeal No. 02(f)-61-08/2012(W), 30 October 2013), the Federal Court had occasion to consider whether the law should recognize fiduciary relationships in a commercial context. The plaintiff in Solid Investments sought to argue that a series of consultancy agreements, to which the defendant was not a party but was involved in the invoicing and payment process thereunder, had the effect of creating a fiduciary relationship between the plaintiff and defendant pursuant to which the defendant was under a duty to account to the plaintiff. The High Court allowed the plaintiff’s claim, which in turn was reversed by the Court of Appeal.

The plaintiff’s appeal to the Federal Court was dismissed. The Federal Court observed that although the class of fiduciary relationships is never closed, the authorities show that the courts are quite reluctant to find a fiduciary relationship between businessmen who enter into commercial dealings. However, the Federal Court also approved the observations of the Court of Appeal in Tengku Abdullah Ibni Abu Bakar v Mohd Latiff Shah Mohd [1996] 2 MLJ 265 that whether a particular set of circumstances ought to attract a fiduciary duty is a question of judicial policy which depends upon the standard of commercial morality that the Courts of a particular jurisdiction may choose to impose upon parties to a transaction, having regard to the cultural background and circumstances of the society in which they function.

The Federal Court went on to observe that a fiduciary relationship could be found on the facts of a particular case rather than a contract, and the court ought to apply a flexible approach in ascertaining whether a fiduciary relationship exists in a given circumstance.

On the facts of Solid Investments, the Federal Court held that no such fiduciary relationship existed between the plaintiff and the defendant. The Court observed that:-


the business relationship between the Plaintiff and the Defendant did not fall under the accepted traditional categories of fiduciary relationship. Even if we were to apply the flexible approach to the circumstances of the case we are of the view that such fiduciary relationship did not exist in the case. This is because commercial transactions often do not give rise to fiduciary duties because they do not meet the criteria for characterization as fiduciary in nature …

The circumstances of the relationship in the instant case could not, in our view, give rise to a relationship of trust and confidence. It was not appropriate to expect a commercial party to subordinate its own interests to another commercial party as they had dealt with each other at arm’s length and on equal footing.”

On a separate issue, the Federal Court also appears to have implicitly endorsed the validity of “entire agreement clauses” in commercial contracts, which are increasingly commonplace. However, the Federal Court held that an entire agreement clause contained in a contract operates only as between the parties to that contract, and does not preclude the existence of a collateral agreement between a party to the contract and a non-party to such contract. On the facts of Solid Investments, the Federal Court held that even if the existence of a collateral contract between the plaintiff and the defendant could be established, such contract was void for want of consideration.

The decision of the Federal Court in Solid Investments has helpfully clarified that the courts will not easily recognize the existence of a fiduciary relationship between parties to commercial transactions who deal with each other at arm’s length and on an equal footing, as each commercial party is entitled to have regard solely to its own interests unless otherwise provided by their agreement. The reluctance of the courts to introduce any fiduciary or equitable obligations or free-standing duty of good faith into sophisticated commercial contracts can also be seen in the recent Court of Appeal decision in Aseambankers Malaysia Berhad & Ors v Shencourt Sdn Bhd & Anor (Civil Appeal No. W-02-808-2009, 27 September 2013), where Mohamad Ariff JCA held that the twin requirements of certainty and predictability in commercial transactions have to be accorded primacy consistent with commercial needs and sensibilities: see our previous article titled “The Myth of Good Faith” (9 October 2013).

However, it should be noted that while the Federal Court in Solid Investments has held the courts must that apply “a flexible approach” in ascertaining whether a fiduciary relationship exists in any given case, the court understandably did not provide any detailed guidance on what such a “flexible approach” entails, although the court appears to have regarded the existence of a relationship of trust and confidence as being of great significance. It is also important to note that the Federal Court did not state that a fiduciary relationship could never exist in the context of a commercial relationship.

It would appear therefore that the inquiry in each case is necessarily fact-sensitive, having regard to the circumstances as a whole including the nature of the relationship, the conduct of the parties and the relevant terms of any contract between the parties.

In this regard and in particular, the Federal Court should not be taken as laying down a principle that the terms of a contract are never relevant in determining whether a fiduciary relationship exists between the contracting parties. Indeed, it is not unusual for the parties to a contract to expressly stipulate that their contract does not have the effect of creating any fiduciary relationship or fiduciary obligations. Such a stipulation, read together with a properly-worded entire agreement clause, would clearly have the effect of excluding the imposition of any fiduciary duties or obligations upon the parties to the contract.

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