What is Fiduciary Duty?
What is the meaning of fiduciary duties?
What are the essential elements you should know!
In this article, we will break down the legal definition of Fiduciary Duty so you know all there is to know about it!
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Table of Contents
Fiduciary Duty Overview
A fiduciary duty refers to a special type of relationship between two parties where one is mandated to decide, act, and perform certain obligations in the best interest of the other.
Typically, the party who has a legal duty to act in the sole best interest of the other is called the “fiduciary” and the party benefiting from such obligation is the “beneficiary”.
The fiduciary owes the beneficiary a duty to act with care, prudence, and loyalty (among other duties) at all times.
The fiduciary duty (or obligation) is one of the highest duties imposed on someone known to the law.
What Is Fiduciary Duty
So, what is a fiduciary duty exactly?
The most common example is the fiduciary duties of the board of directors to the shareholders.
In essence, the board of directors has a fiduciary obligation to ensure that they decide corporate matters in the best interest of the shareholders.
Another good example to illustrate the concept is the fiduciary responsibility that exists between an attorney and a client.
The attorney fiduciary duty implies that the attorney has a legal obligation to act in the best interest of the client while carrying out a legal mandate.
When Does A Fiduciary Relationship Exist
Typically, a fiduciary relationship is formed when:
- There is a level of trust and confidence between the parties
- The fiduciary is asked to make decisions having a direct consequence on the other
- The fiduciary has the ability to exercise discretion
- The fiduciary has a certain level of expertise
For the relationship to be formed, the parties must be aware of the special relationship.
Particularly, the “fiduciary” must know that he or she (or as a group) is asked to act as the fiduciary of another and agrees to act as such.
In other words, the fiduciary is aware of the relationship, accepts the trust of the other, and going forward will make decisions (or execute fiduciary obligations) in light of the other person’s interests.
Who Has Fiduciary Obligation
The fiduciary obligation can be accepted by anyone really.
Most of the time, fiduciaries include people like corporate executives, lawyers, accountants, guardians, financial advisors, trustees in an estate, or other professionals or individuals with certain expertise.
A company employee will also have a fiduciary obligation towards the employer.
In other words, companies expect that their employees will act in the best interest of the company and refrain from acting or behaving in a way detrimental to the organization.
For instance, an employee must not steal from the employer, must not divert business assets, must not take the employer’s trade secrets for personal gains, and so on.
Example of Fiduciary Relationships
Here is a list of who may have a duty in favor of another:
- Lawyer to a client
- Company director or officer to the shareholder
- Stockbroker to an investor
- Employee to an employer
- Executor of an estate to the estate beneficiaries
- Trustee to the trust
- Business partner to the other partners
- Doctor to its patients
- Financial advisor to its clients
- Insurance broker to their client
- Accountant to their client
- Guardian to the beneficiary
- Conservator to the beneficiary
- Real estate agent and the client
The list can go on but you can see the common thread here where there is an “expert” or someone in “authority” making decisions or acting for another.
Fiduciary Duty Definition
How do you define fiduciary duty?
What is the legal definition of fiduciary duty?
A “fiduciary duty” is defined to be an obligation by a person or group of people to act in the best interest of another person or group of people.
According to Investopedia, the fiduciary duties definition is as follows:
A fiduciary duty describes a relationship between two parties that obligates one to act solely in the interest of the other.
The person who has a duty (the fiduciary) in favor of another (the fiduciary beneficiary) must exercise the highest degree of care and devotion in executing its obligations.
The fiduciary must act in the best interest of the beneficiary at all times, avoid any intentional or negligent actions that may be harmful or detrimental.
How do you define fiduciary responsibility?
What are the responsibilities of the fiduciary in favor of the beneficiary?
In summary, the fiduciary must act in the best interest of the beneficiary.
In this context, the fiduciary responsibilities are:
- Duty of care
- Duty of loyalty
- Duty of good faith
- Duty of confidentiality
- Duty of prudence
- Duty of disclosure
Let’s look at each of these aspects briefly so we can better understand what are the fiduciary duties.
Duty of Care
What is the fiduciary duty of care?
The duty of care means that the fiduciary must make informed decisions at all times in favor of the beneficiary.
To make informed decisions, you must obtain all the relevant and material information that may be reasonably required to be able to make the best possible decision based on available information.
The fiduciary is not legally bound to make “perfect” decisions but must weigh the pros and cons of any decision before making them.
Duty of Loyalty
What is the fiduciary duty of loyalty?
The duty of loyalty means that the fiduciary must act solely in the best interest of the beneficiary and nobody else.
Under the fiduciary responsibility law, the duty of loyalty is what helps prevent circumstances where the fiduciary’s personal economic interests or other interests are favored when deciding for the beneficiary.
In other words, the company director, officer, lawyer, attorney, or other must not be in a conflict of interest when holding a position based on trust and confidence.
Duty of Good Faith
The duty of good faith is pretty straightforward.
Based on the fiduciary duty law of good faith, the fiduciary must act in accordance with the highest standards of ethics, integrity, honesty, must not breach the law, or deliberately perform their duties in a way detrimental to the interests of the client.
Duty of Confidentiality
The duty of confidentiality entails that the fiduciary must ensure to maintain any confidential information given to it by the client.
Considering the fiduciary relationship is based on trust and confidence, the beneficiary may share highly confidential information, sensitive material, or other non-public information.
Any fiduciary information obtained during the relationship must be kept confidential.
Duty of Prudence
The duty of prudence is similar to the duty of care and in some cases, the terms are used interchangeably.
The duty of prudence is a fiduciary duty to act with a degree of skill and caution that another fiduciary in the same circumstances would have exercised.
To be prudent is to act with a degree of care or refrain from taking unnecessary risk.
Duty of Disclosure
What is the fiduciary duty of disclosure?
The duty of disclosure is the duty to ensure that the fiduciary shares all the information with the beneficiary (the good and the bad).
The fiduciary must not withhold any information while exercising the role of a fiduciary.
Breach of Fiduciary Duty
What does a breach of fiduciary duty mean?
How do you determine that a fiduciary has violated or breached its fiduciary duties?
Elements of a Claim
What do you need to prove in order to succeed in a breach of fiduciary duty claim?
In general, the elements are similar to that of a negligence case.
Although the elements may differ from one jurisdiction to another, typically you will need to prove that the fiduciary had a duty to the plaintiff, the duty was breached, there were damages caused as a result of the breach, and causation.
Once these elements are proved, the person acting as the fiduciary will be held accountable and liable to compensate the beneficiary for any damages suffered.
Fiduciary negligence is when the fiduciary acts in a negligent manner causing harm or damage to the beneficiary.
The concept of negligence implies that the fiduciary may not have formulated an intention to cause harm but the result of the person’s actions is harmful to the beneficiaries.
For example, a company director may fail to exercise care and prudence in making an important decision about issuing dividends or a merger.
As a result of that decision, the company goes bankrupt.
If another fiduciary in the same circumstances would have reasonably decided otherwise, then the beneficiaries may file a lawsuit against the fiduciary for negligence.
Another example is a doctor that does not take exercise skill and care in properly diagnosing a patient for cancer.
That may result in medical malpractice or negligence lawsuit against the doctor who had a fiduciary duty to the patient.
Fiduciary Conflict of Interest
What are the consequences of entering into a fiduciary relationship?
When a person enters into a fiduciary relationship with another, the law imposes certain obligations on the fiduciary.
Particularly, the person who is entrusted to act for another must not place his or her own personal interest or the interests of another group in conflict with that of the person represented.
The law prohibits acts, conducts, decisions, or other behavior on the part of the fiduciary that may be adverse to that of the client during the performance of the fiduciary mandate.
A fiduciary agreement (or fiduciary contract) is a contract entered into between the fiduciary and the beneficiary (for example, a company director and the company) where the terms and conditions of the relationship are spelled out.
When an agreement is in writing, the terms and conditions of the contract will govern the relationship of the parties.
To the extent the agreement is silent, the law will supplement the duties imposed on the fiduciary.
However, in some cases, you do not need to have a formal written agreement to have a fiduciary duty.
The fiduciary duty can potentially apply even without an “express” agreement.
For instance, an employee is subject to fiduciary duties in favor of the employer without knowingly having signed an agreement called “fiduciary agreement”.
Quite often, employees are governed by the employer’s Code of Conduct or Handbook outlining some of the fiduciary obligations of the employee but without calling it “fiduciary obligations”.
Termination of Fiduciary Duty
When do fiduciary duties end?
In the event an express contract is entered into between the parties, the fiduciary duty will end upon the realization of the objective of the contract or the arrival of the term.
For example, a company board member elected for a one-year term will have a fiduciary obligation for a year.
Once the mandate is finished, the fiduciary responsibilities end.
On the other hand, if the fiduciary responsibilities are not specifically called out in a contract, it will end when the beneficiary expresses the desire to end the relationship.
When that happens, the fiduciary must ensure that there is a proper transition of responsibility from the fiduciary to either the beneficiary directly or another designated person.
If the fiduciary “abandons” the mandate causing damages or harm, that may result in a claim for breach of the fiduciary duty of care, prudence, or good faith.
So, what does fiduciary duty mean?
What is fiduciary responsibility?
Let’s look at a summary of our findings.
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