Fiduciary duties of parents to their adult children: Potential for change

A recent High Court case confirmed that settlors of family trusts are free to dispose of property as they see fit and, as the law currently stands, do not owe fiduciary duties to their adult children who are not beneficiaries. However, recent comments by Associate Judge Johnston and the Law Commission signal the need for Parliamentary reform in this area.

Background

In A B and C v D and E Ltd and Ors [2019] NZHC 992, three adult children brought a claim against the surviving trustee of the family trust settled by their late father. The father had three children with the claimants’ mother in the 1960s and 70s. Evidence was brought showing the father was physically abusive towards his wife and the children for two decades. In the early 1980s when the marriage broke up, the father commenced a second relationship with a woman who already had three children. In 2014, two years before he died, he settled a family trust and placed all his property in the trust for the benefit of the three children of the woman of his second relationship, leaving no assets for the children of his first relationship.

The claimants originally lodged a Family Protection Act 1955 application for maintenance and support in the Family Court. However, when they found out what their father had done, they immediately brought this proceeding in the High Court. The claimants argued that their father breached an alleged fiduciary duty. They submitted that because of their abusive upbringing, which had so affected their adult lives, alienation of the assets in question constituted a breach of fiduciary obligations owed to them by their father. The defendants, the surviving trustee company, brought a summary judgment application to strike out the claim.

Parents and fiduciary relationships

Associate Judge Johnston reviewed the law as put before him by the claimants’ solicitor on fiduciary duties of parents to their children. In the Canadian case of M(K) v M(H) [1992] 3 SCR 6, the Supreme Court of Canada concluded that being a parent of a minor child is a unilateral undertaking that is fiduciary in nature. The High Court of Australia in Clay v Clay [2001] HCA 9 found the relationship of guardian vis-à-vis ward was also one in which fiduciary obligations existed. Finally, the claimants’ solicitor referred to Rule v Simpson (2017) NZHC 2154 where the Court refused to strike out a claim based on an alleged fiduciary duty owed by a father to his adult son.

Based on these cases, the claimants asked the Court in A v D to conclude that their father had a fiduciary duty to his children. This effectively prevented him from alienating the assets by transferring these assets to the family trust in order to defeat their interests.

Does the parent-adult child relationship fit the fiduciary duty test?

The New Zealand High Court summarised the two broad circumstances where fiduciary duties arise in the Commonwealth jurisdictions:

• Specifically recognised relationships such as director to company, and solicitor to client. In these relationships, the law imposes fiduciary obligations unless circumstances dictate otherwise;
• Outside specifically recognised relationships, the law imposes additional obligations only where the circumstances justify it.

Looking at the second category, the New Zealand High Court referred to the test formulated by the Supreme Court of Canada in Frame v Smith [1987] 2 SCR 99:

• The fiduciary has scope for the exercise of some discretion or power;
• The fiduciary can unilaterally exercise that power or discretion, so that it affects the beneficiary’s legal or practical interests;
• The beneficiary is peculiarly vulnerable to or at the mercy of the fiduciary holding the discretionary power.

Referring to the leading text by Paul Finn “Contract and the Fiduciary Principle”, Associate Judge Johnston concluded that there was a reasonable argument that the claimants could satisfy the test on all three criteria. However, Associate Judge Johnston concluded it would be a bold step for him to take. Currently, the parent-adult child fiduciary relationship does not exist. He qualified that by saying that the Law Commission had recently proposed changing the law to cater for this exact situation, but this is not yet in force. He left the door open for a parent-adult child fiduciary relationship.

Observations

This case confirms the current position that a settlor can deal with property as it sees fit. However, it shows that, under the general fiduciary duty test, theoretically a parent could owe fiduciary duties to its adult children. With inter-family relationships, the authorities confirm each case will be decided on its specific circumstances. For instance, a natural mother does not necessarily owe fiduciary duties to her adopted daughter, nor is there a fiduciary relationship between siblings (Sister v Brother  [2001] NZAR 930 (HC). Normally an uncle is not a fiduciary, but if the child is placed in his care with an expectation of safety and the child suffers harm, the Courts have found a fiduciary relationship (J v J [2013] NZHC 1512). In the present case of a parent-adult children relationship, if the current status of the law is changed to create a general fiduciary duty (as the Law Commission and the High Court indicate it could), the case indicates that Parliament is the proper body to make the change, not the Courts.

If you would like further information, please contact Daniel Shore on 07 958 7477.