What Is Fiduciary Duty?
Under the U.S. legal system, a fiduciary duty is the legal term describing the relationship between two parties that obligates one to act solely in the interest of the other. The party designated as the fiduciary owes the legal duty to a principal, and strict care is taken to ensure no conflict of interest arises between the fiduciary and his principal.
A fiduciary obligation exists whenever the relationship with the client involves a special trust, confidence, and reliance on the fiduciary to exercise his discretion or expertise in acting for the client. The fiduciary must knowingly accept that trust and confidence to exercise his expertise and discretion to act on the client’s behalf. In most cases, no profit is to be made from the relationship unless explicit consent is granted at the time the relationship begins.
Breaches in Fiduciary Duty
Case law indicates that breaches of fiduciary duty typically happen when a fiduciary relationship is in effect at the time in question and actions are taken, which are contrary to the interests of the client. The actions are often somehow in the fiduciary’s own self-interest or the interest of a third party. A breach can also be the failure to disclose pertinent information to the client (such as a conflict of interest).
Elements of a Breach of Fiduciary Duty Claim
In order to prevail in court on a claim for this tort, you must be able to prove the following elements:
- Duty: The defendant had a duty or duties to the plaintiff, such as the duty of good faith and fair dealing, the duty of full disclosure, or the duty of loyalty (the exact nature of the duty or duties will depend on the facts of the case).
- Breach: The defendant breached this duty in some way, such as by failing to disclose certain information, misappropriation of funds, misuse of influential position, neglect of responsibilities, or misrepresentation with regard to a statement of fact.
- Damages: The plaintiff must have suffered damages, for which the breach was the proximate cause; a breach without damages is not actionable.
Consequences of a Breach in Fiduciary Duty
A plaintiff, who prevails in a breach of fiduciary duty lawsuit typically will recover for actual damages incurred, but they also may recover punitive damages, if the breach can be proven to have been committed out of malice or fraud. However, calculating the exact amount of damages caused by the breach—or even proving a breach, in fact, occurred—is quite difficult.
Example of Breach of Fiduciary Duty Case
From Virginia, one example of a breach of fiduciary duty case is 2007 Banks v. Mario Indus., 274 Va. 438, 650 S.E.2d 687. In this case, the defendant was an employee of Mario and admitted that he owed Mario a duty of loyalty. Those admissions, combined with the fact that the employee’s job was to faithfully represent Mario’s interest support the claim for breach of fiduciary duty.
Examples of Fiduciary Duty-Defined Relationships
- Trustee/Beneficiary: Estate arrangements and implemented trusts involve a trustee and beneficiary fiduciary duty. An individual named as a trust or estate trustee is the fiduciary, and the beneficiary is the principal. Under a trustee/beneficiary duty, the fiduciary has legal ownership of the property and holds the power necessary to handle assets held in the name of the trust. However, the trustee must make decisions that are in the best interest of the beneficiary as the latter holds equitable title to the property. The trustee/beneficiary relationship is an important aspect of comprehensive estate planning, and special care should be taken to determine who is designated as trustee.
- Guardian/Ward: Under a guardian/ward relationship, legal guardianship of a minor is transferred to an appointed adult. The guardian, as the fiduciary, is tasked with ensuring the minor child or ward has appropriate care, which can include deciding where the minor attends school, that he has suitable medical care, that he is disciplined in a reasonable manner and that his daily welfare remains intact. A guardian is appointed by the state court when the natural guardian of a minor is not able to care for the child any longer. In most states, a guardian/ward relationship remains intact until the minor child reaches the age of majority.
- Principal/Agent: A more generic example of fiduciary duty lies in the principal/agent relationship. Any individual person, corporation, partnership or government agency can act as a principal or agent as long as the person or business has the legal capacity to do so. Under a principal/agent duty, an agent is legally appointed to act on behalf of the principal without conflict of interest. A common example of a principal/agent relationship that implies fiduciary duty is a group of shareholders as principals electing management or C-suite individuals to act as agents. Similarly, investors act as principals when selecting investment fund managers as agents to manage their assets.
- Attorney/Client: The attorney/client fiduciary relationship is arguably one of the most stringent. The U.S. Supreme Court states that the highest level of trust and confidence must exist between an attorney and his client and that an attorney, as fiduciary, must act in complete fairness, loyalty and fidelity in each representation of and dealing with clients. Attorneys are held liable for breaches of their fiduciary duties by the client and are accountable to the court in which that client is represented when a breach occurs.
- Controlling Stockholder/Company: In certain circumstances, fiduciary duties may also apply to controlling stockholders who possess a majority interest in or exercise control over corporate business activities. A breach of a fiduciary duty may result in personal legal liability for the director, officer, or controlling shareholder.