A fiduciary owes fiduciary duties to their principal.
What are the Fiduciary Duties?
The duties imported into any fiduciary relationship are:
- a duty to act in good faith to the principal
- a duty to avoid conflicts of interest with the principal
- a duty on the part of the fiduciary not to unlawfully profit from their privileged position as a fiduciary
When those duties are not complied with, it constitutes a breach of fiduciary duty.
What happens when they're breached?
They become personally liable to the principal for:
- any profit made or benefit received by the fiduciary, and
- any associated loss sustained by the principal.
Directors owe their duties to the company, primarily. That's automatic with their appointment.
Provided the relationship between a director and a shareholder satisfies the relevant legal test, a fiduciary duties can be liable to shareholders too.
So too with managers of a company, or any other person working with or for a company.
Fiduciary Duty Meaning
A person or a business can be placed placed a position of trust for a principal.
The trust and confidence between people dealing with one another can be of different levels and kinds: Sheikh Tahnoon Bin Saeed Bin Shakhboot Al Nehayan v Kent  EWHC 333 (Comm).
That person can be trusted to influence, manage or control the affairs of the principal, be it an individual or a business.
Taking on a position with a high level of trust brings with it the ability for the person to abuse that trust: the person’s behaviour influences or controls the interests of the principal.
In law, people taking on a position which involves a high level of trust attracts a degree of loyalty in response to that placement of trust.
The person is expected to look out for the interests of the principal, to be on the principal's side and look out and look after the principal's best interests, rather than their own.
It’s these situations, the person is expected to conduct themselves with a high level of loyalty – a single-minded loyalty – to the principal.
It's the loyalty required of the person that makes a person a fiduciary.
And that gives rise to the fiduciary duties to the principal.
The Fundamentals of Fiduciary Duties
Human frailties being what they are create the temptation for trusted people to be swayed by their own personal interests.
Especially when they can't be supervised all of the time, and the opportunity presents itself.
The trusted person - the fiduciary – is expected to act in good faith, in the best interests of their principal, rather than in their own personal interests.
When fiduciaries take advantage of their position of trust, they create a conflict of interest.
That’s when the fiduciary puts their own personal interests and above those of their principal: the person that trusted them.
When a conflict of interest arises and the fiduciary makes a profit, the fiduciary has not acted in good faith to their principal.
The duty of good faith means that a fiduciary has a duty to:
- be fair and transparent with their principal, and
- not mislead their principal.
Recovery of Profits
The principal is able to recover any profit from the fiduciary and recover any loss from the fiduciary, and from others assisting the fiduciary breach their duty.
It’s that simple.
But as with most things legal, there’s more to it.
Features of Fiduciary Duties
In law, fiduciary duties:
- prevent abuses of trust and confidence
- are a class of legal duty completely separate and independent of other sorts of duties, such as those arising in:
- contract law, which gives rise to contractual obligations, not fiduciary obligations
- the law of tort, ie the law of civil wrongs
- negligence, which involves a duty of care and standard of care
- criminal law, where fines are payable to the State or give rise custodial sentences
- arise when a principal - commonly a business - is legally entitled to expect a trusted person to be on their side and conduct themselves in the best interests of the business, rather than in the person’s own best interests
- require the trusted person to act in the business’s best interests first, above their own personal interests
- are one-way duties. The duties are owed by the fiduciary to their principal. Principals do not owe fiduciary duties to their fiduciary.
- make available legal remedies to make good the wrongdoing by the fiduciary
- require fiduciaries to account for any profit obtained for themselves as a result of taking advantage of their trusted position
Fiduciary duties exist because misuse of power and authority to represent a principal can seriously compromise the financial position of the principal, its business interests and well-being.
It’s not a case of fiduciary duties arise and then legal obligations are imposed. It’s the other way around: the pre-existing legal obligations – which revolve around loyalty – give rise to the fiduciary duties. Fiduciary duties sit on top of other legal obligations.
Fiduciary duties arise due to:
- the influence the trusted person exercises over the affairs of the principal
- the trust that is placed in the fiduciary
- the dependence of the principal on the fiduciary
- the discretionary powers placed in the fiduciary, and
- the vulnerability of the principal to abuse of the trust.
A fiduciary relationship arises when:
- a person takes on responsibilities to act or represent the interests of another person, and
- that other person (ie the principal) is legally entitled to expect them as a trusted person to:
- be on their side, and
- conduct themselves exclusively in their best interests, to the exclusion of their own personal interests,
- they are an agent for the principal.
The person to whom those duties are owed usually called the principal. It’s usually a business, but can be an individual.
The fiduciary is the person that owes the duties to the principal.
As above, they’re one-way duties in that the duties are owed by the fiduciary to the principal, and not the other way around.
Trust: Levels and Types
On the higher end of the scale of trust, individuals might be asked to manage or arrange financial matters for them, arrange or advise on the price for the sale of property, handle trade secrets, help select the suppliers to be chosen by a business, or negotiate pricing and sales on behalf of a business.
Those tasks one way or another involve a level of trust. The trusted person has discretion on how to use the that trust.
Examples of Delegated Tasks
Let's build out how a person might be trusted.
An individual or business might be engaged to:
- negotiate and arrange contracts to be entered by or for the principal
- assemble lists of potential suppliers to a business
- choose the most suitable amongst potential suppliers to meet the business’s requirements
- source sales leads
- introduce potentially suitable buyers
- sell the products or services of the business at the best price able to be obtained
- represent the business to buy or sell real property
- source service providers for the business to work with in partnerships
- represent the business in a joint venture
- make decisions to buy and sell shares on stock markets
- arrange loans or investments, such as through credit brokers
- recommend pricing for products or services, or
- decide or calculate how much a person should be paid.
There's a good deal of breadth in the sort of responsibilities that can be taken on by a person which can serve to attract a fiduciary duties.
Levels of Delegation
The person might be trusted to do any of those tasks or a combination of them:
- without supervision, with a complete delegation of power, to "just get on with it", or
- with limited scope of responsibility and power, being required to report back before taking any action, for a decision to be made by the business, or
- anywhere in between.
Fiduciary duties might arise anywhere within the two extremes of delegation to exercise powers of the principal.
The element of trust arises. It can be of varying degrees. The degree that the law recognises depends on the role and powers that the fiduciary has accepted to take on.
When a principal places trust in the person towards the higher end of the scale, the principal becomes completely reliant and dependent on that other person to perform their role in the best interests of the business: to exercise the power given to them faithfully, and deliver on the trust placed in them.
It requires honesty, integrity, and loyalty to act unselfishly in the best interests of the principal.
In law, it's an unforgiving standard.
Slippage in the standard might happen in the real world all the time in any particular industry. That doesn't change the standard of probity required from fiduciaries when the legal tests are applied to give rise to liability.
The Fiduciary Duties
- conflicts of interest: Fiduciaries must exercise the powers and trust vested in them for the business’s benefit, and not for their own benefit
- making their own profit: Fiduciaries are prevented from making a profit from the relationship that the principal does not know about.
They must act in good faith to the principal.
The high level of trust placed in fiduciaries gives rise to the expectation that they will act for the benefit of the principal, and only the principal. That’s the requirement of loyalty.
That means putting the principal’s interests first before their personal interests. That is, subordinate their own interests to the interests of the principal.
When fiduciaries don’t honour that trust, a betrayal arises. The fiduciary has used their position for their own private advantage.
They place themselves in a position where they have an actual conflict of interest and have not acted in good faith to their principal.
Established Categories Fiduciary Relationship
There are a series of recognised established categories of fiduciary relationship.
These are types of relationships where fiduciary duties presumed to arise for the sole reason that the person and the principal business had one of the established sorts or types of relationship.
The most common are (in fiduciary / principal order):
- agent / principal
- bank / customer
- financial services advisor / customer
- director / company. Directors include de facto directors and shadow directors. Director’s fiduciary duties are now set out in the Companies Act
- promoter / company promoted
- partner / partner in a partnership
That’s not “partners” in the way it is used in the business context. That’s a wider and looser meaning to the sort of partner that we’re talking about here.
We’re referring to the legal meaning a partnership, which is “the relation which subsists between persons carrying on a business in common with a view to profit”, as defined by the Partnership Act.
In each of these sorts of relationships, some high level of trust is presumed to exist in law. A vast number of cases have gone through the courts throughout history where fiduciary duties were found to exist.
That has made them readily recognisable and established categories of fiduciary relationships.
Presumption of Existence of Fiduciary Relationship
If a case falls within one of the established categories, that’s only the starting point.
In any particular case, whether a fiduciary duty exists is only a presumption. It remains rebuttable with evidence.
That's because any particular case may look as if it falls within an established category. The substance of the relationship on closer examination may show that it does not.
So an alleged fiduciary might be able to dispel the allegation by producing proof - a witness statement - and show that in the circumstances of the case, the relationship was not one of fiduciary and principal.
If that's the case, the presumption doesn't apply and the principal must prove that the incidents of the relationship were such to attract fiduciary duties from the ground up.
Also, simply because you have a bank account with a bank, does not render the bank a fiduciary for you in all possible circumstances.
Other types of Fiduciary Relationship
When the relationship does not fall into one of the recognised established categories, the starting point is that no fiduciary duties arise.
Ad-hoc fiduciary relationships are common.
The circumstances must exist where fiduciary duties are owed. The circumstances justify the imposition of the duties. As is usually the rule, the business alleging that a fiduciary relationship exists with evidence on the balance of probabilities.
To do so requires the relationship to have the special features for the fiduciary duties to arise:
- a high level of trust reposed in the relevant person(s),
- which gives rise to a duty of undivided loyalty to the principal by the person(s).
For example, the following types of relationships have satisfied the requirements for a fiduciary relationship to exist:
- joint venture partners
- customer / service provider
- customer / broker
- borrower / lender
- distributor / supplier
- shareholders / directors, which requires special circumstances.
The special circumstances might involve:
- small companies, where one or more directors have information, and some shareholders do not
- transactions for the sale or purchase of shares, where a director of a company is themselves interested in the sale or purchase, and knows more about the value of the shares than the shareholder.
- family owned companies, which involves family relationships, and a director exploits the relationship to take unfair advantage of the other shareholders
- shareholders in a vulnerable position, where one or more shareholders exposed to misdealing by directors who abuse their position.
What are the Fiduciary Duties?
To recap, there are minimum levels of responsibility which apply to all fiduciaries in all cases.
The fiduciary duties require fiduciaries to:
- act in good faith to the principal
- avoid conflicts of interest
- act in the best interests of the principal, and
- not earn a profit at the expense of the principal.
They must remain loyal to the trust placed in them and not sway from legal standards of honesty and integrity. To do so would betray the trust placed in them.
Put another way, fiduciary duties mean that a fiduciary must:
- not act in own personal interests
- not misuse their position or abuse the trust of the principal
- not place themselves in a position where their duty and the interests of the principal may conflict,
for their own benefit or the benefit of a third person without the informed consent of the principal.
Not doing so means that the fiduciary has not acted with good faith to their principal.
Other specific duties may arise from the fiduciary relationship too. They depend on the responsibilities which were taken on by the person.
It’s those legal duties which make the obligations of a fiduciary different to all other legal duties, such as those required by statute, in contract law, tort law, negligence and the criminal law.
Where those standards are breached, legal remedies available to correct it: to restore the situation as it should have been from the outset.
Scope of Fiduciary Duties
The fiduciary duties are likely to be limited in scope, to some extent.
Fiduciary duties imposed are:
- capable of arising in entirely novel situations
- sensitive to the factual context, and vary with the circumstances of the case
- tailored to those circumstances
It’s the underlying nature of the relationship which generates the duties and their scope.
So a person may be a fiduciary in some activities but not in others.
That means a variety of outcomes are possible, such as:
- the specific obligation breached may not be fiduciary in nature
- the parties’ relationship may be non-fiduciary, however specific obligations may import fiduciary duties in respect of a specific obligation alone, due to the obligations of loyalty.
It’s not that case that fiduciary duties arise, and then legal obligations are imposed.
It’s the other way around: the pre-existing legal obligations give rise to the fiduciary duties.
Once they do exist, fiduciary duties are usually to a wider range of obligations on fiduciaries than contract law, tort or negligence. And they are more stringent.
But then they can be limited by a contract between the principal and the fiduciary.
Limitations on Fiduciary Duties
Contracting parties are able to (and do) create and tailor their legal relationship with written contracts of engagement.
The terms of a contract between the parties might operate to define, expand, limit and/or reduce the responsibilities of the person, and with it affect the scope to which fiduciary relationships may arise from the engagement.
Where there is no written contract, a contract may still exist (an oral contract) and be remain governed by:
- relevant statutory law, which might include implied terms from the Sale of Goods Act and/or the Supply of Goods and Services Act, and
- judge-made law, ie the common law.
Also, relationships change over time.
It is well-known that once a contract is signed the relationship between the parties can expand and contract over time. Changes can happen without being recorded or documented with a formal variation. It usually happens more informally as the relationship and trust matures.
Changes of responsibility - such as a wider discretion to manage the affairs of the principal - can also affect the fiduciary duties which are imposed when wrongdoing comes to pass.
Types of Fiduciaries
Common types of fiduciary relationship are set out above.
Each has their own genesis, which arises from the particular business relationship between the parties.
Agents’ Fiduciary Duties and Authority
Just because a person is referred to as an “agent” in general speech or in a written contract does not mean that a fiduciary duty necessarily arises.
Agents usually regarded as owing fiduciary duties are those which:
- have power to change the legal position of another person or business
- are in a position to control or influence the interests of the principal, in the sense that the principal relies on the person to act with their trust and confidence.
Like other established categories of fiduciary relationships, agents which are conferred with special powers. They're required to adhere to their special duties which are of a fiduciary nature.
The duties are imposed by courts when the principal relies on the fiduciary, so as to leave the principal vulnerable to disloyalty by the fiduciary. The principal is so reliant on the agent's good faith.
Agency relationships can where there is:
- No Contract: Even then, a contract doesn’t need to be in place to give rise to the duties.
- No authority: a person may have the same fiduciary relationship with a principal where he acts on behalf of that principal but has no authority to affect the principal's relations with third parties
- No negotiating power: The relationship might be as informal as a person engaged to arrange introductions between the business and others, leaving the principal and the third party to arrange terms of contract between themselves
- No advice or express recommendation of suitability: the recommendation can be implied by the nature of the relationship
- Ex-contractual dealings: Contractual obligations might give rise to a fiduciary relationship, but then events might take place outside the contract might which are of a fiduciary nature
In these cases, an agent may have a more limited ability to affect the legal relations of the principal business.
Still, a fiduciary relationship can arise. It's not necessary that the agent has the actual, apparent or ostensible authority of the principal to bind it to a legal obligation.
The exercise of the agent's power or discretion for the principal may affect the interests of the business in a legal or practical way. The agent has a special opportunity to exercise the power or discretion to the detriment of the business. That makes the business vulnerable to abuse by the agent of their position.
Classic Examples of Agents
- "introduction" agents: agents which have their own list of contacts and introduce or connect business which may be interested in products and services for a commission
- business agents and commercial agents: agents tasked with finding potential purchasers of a business or property, which may go on to negotiate the price
- real estate agents: agents which represent vendors of land and buildings
- property advisors: agents advising on suitable properties for investment
- financial advisors: agents which advise on and/or arrange purchase of suitable stocks, shares, pensions, investments and other financial products and services
- advertising agents: sales agents who arrange advertisements on websites, radio or television. Agents may pre-buy advertising space in bulk at a discount which is then sold on to advertiers
- art dealers
- brokers, such as stockbrokers, commodity brokers and insurance brokers , loan brokers, and credit brokers
They’re just some of the common instances.
Examples: Agents in Breach of Duty
Here are a few examples where agents have fallen foul of their duties:
- An introducing agent referred its own clients to a financial institution in return for commission. The commission was calculated by the amount of money the client invested with the financial institution which the client didn’t know about. The commission was a secret commission
- A consultant received a rebate from their own supplier on frequently purchased services provided to their own client. The consultant didn’t pass the rebate on to client. Again, it was a secret commission
- An agent for a business purchased shares in a company. The agent came to know about the availability of sales for purchase because they were agents of the principal
- Shares were transferred by a person to a business as part of a deal to encourage individuals to become directors of his company. Part of the deal was to entice those individuals to agree that their company would buy land from the introducer's company
- A company secretary was promised shares in a profitable business by its owners, to support the acquisition of the business
- A business agent recommended that a business he was advising use specific stockbrokers. The stockbrokers paid the business agent a commission. It was a secret commission
- Bid rigging: fixing the outcome of a bid or competitive tender process to a favoured company
- Manipulation of price levels and price increases, discounts and other related pricing actions to increase the agent's own commission
Fiduciary Duties of Employees
Employees are usually agents of the company in one capacity or another. However, it's not always the case.
Contracts of employment usually contain an implied term to serve an employer in good faith and with fidelity. It’s known as "the duty of fidelity".
The duties imposed by the implied term vary according to the position of the employee.
For employees, the extent of the duty of fidelity is decided by reference to a series of factors which include the employee’s:
- level of seniority and managerial responsibility
- degree and autonomy in decision-making
- independence in their role, and
- role and vulnerability of the employer if the employee does the wrong thing.
The more senior the employee, the more rigorous and stringent the duty of fidelity. The damage which might be done is likely to be greater due to the increased vulnerability of the employer.
Also, an employee of one company within a larger group of companies might be found to owe duties to other companies in the same group of companies
Also, in keeping with the general principles of fiduciary obligations, employer does not owe any fiduciary duty to employees.
Examples: Employee Breaches of Fiduciary Duties
The implied term of fidelity is usually breached when an employee:
- passes on confidential information of the employer or uses it in a way which damages the business of the employer
- engages in activity which competes with the employer while the employment relationship continues. For example, the employee might come to work with a competing business, or a business which operates in a closely market which draws on the same sort of customer base
- receives or diverts money that is properly received by the employer. It's usually treated as the money of the employer, whether or not it's a secret commission
- copies an employer’s secret list of customers
- poaches lists of prices charged to specific customers which is kept secret by the employer
- misuses an expense account or overclaims expenses
- makes side deals with customers or suppliers – sometimes referred to as “making something on the side”. It’s a secret commission.
- campaigns to take the employer’s customers over to a new business established by the employee, or diverts incoming business to another company which the employee has an interest
Treating the employer’s company as their own personal piggy bank will almost certainly fall over wrong side of the line.
Even then employees are not permitted to set the groundwork for diverting a maturing business opportunity, at least while they are an employee.
Filtering of Communications
Breaches of the implied duty of fidelity commonly take place where the person receives and communicates information on the business’s behalf.
A discretion on handling and passing on communications can influence changes in their principal's legal position. That in turn can indirectly affect the legal position of the principal.
The focus starts on what the functions that the employee took on, and the gravity of the misbehaviour in respect of those functions.
Fiduciary Duties: Directors
Like other fiduciaries, directors are not permitted to take up engagements where they have a personal interest which may conflict with the interests of a company they are bound to protect.
They provide a set of standards to which directors are expected to behave and require directors to:
- act within their powers
- promote the success of the company
- exercise independent judgment
- exercise reasonable care, skill and diligence
- avoid conflicts of interest
- not accept benefits from third parties
The duties can also arise by being a shadow director of one or more companies. Shadow directors are persons whose directions or instructions the company customarily follows. So, a person does not even need to be formally appointed as a director to owe fiduciary duties to a company.
Taking Up Opportunities Post-Termination
Subject to a contractual commitment not to do so, a director may resign at any time.
After resignation, directors are perfectly entitled to their general skill and knowledge and personal connections to compete with the company, subject to post-termination restrictions in their contract (such as restrictive covenants).
But then there are at least 3 potential types of breach of fiduciary duty which prevent directors diverting business opportunities away from the company:
- Active Diversion during Appointment: failing to disclose a relevant business opportunity and:
- diverting the business opportunity to themselves and/or
- sabotaging it for the company while a director, and then resigning to pursue it
- Preparatory Steps: Taking steps while still a director to compete post-resignation
- Post-termination adoption: Taking business opportunities of the company after the director has left the company, where the resignation has been influenced by an intention to acquire the business opportunity of the company
Examples: Breach of Fiduciary Duties by Directors
Directors might also breach their fiduciary duties when:
- using the result of work done while still a director (ie preparatory steps), as part of the business of another company, even though a contract for the poached opportunity is not entered until after the director resigns
- participating in a sale of an asset of a company to a related company which the director has an interest, at a value where the best price was not obtained
- using confidential information such as price lists and customer lists acquired during an appointment as a director, for their own purposes after the appointment ended
- arranging for sale of assets of a company by public auction, where the purchaser is a company connected to the director
Fiduciary duties don’t just extend to businesses owned by the conflicted fiduciary and to business associates of the conflicted person.
When fiduciaries act contrary to their fiduciary obligations, those who cooperate with them to do so are susceptible to be being liable with them.
Involvement of family members generates suspicion of involvement due to the nature of the relationship.
That in turns leads to questions whether the transaction in question was a fair dealing with the principal’s assets.
Such is the hardened approached of courts to breaches of trust which accompany breaches of fiduciary duties, the interest in the forensic investigation by a court may well be relentless. Courts analyse the substance of transactions rather than the form they take, their presentation, or what they are called.
It’s the true nature of the transaction which counts, rather than how it might appear or be described.
In appropriate cases, the consequences of breaches of fiduciary duties will extend apply to husbands, wives, partners, sons and daughters of the fiduciary.
Fiduciary v Contract Law v Duty of Care in Negligence
When fiduciary duties are found to exist, contractual obligations, duties of care in negligence, tortious liability (aka the law of civil wrongs) and other forms of legal protection continue to apply concurrently.
That means that the same acts or events might constitute several causes of action. A single act by a fiduciary may give rise to several causes of action.
Fiduciaries and Contract law
In contract law, the usual situation is that two contracting parties engage one another with a view to at least one of them receiving a profit for the products and/or service supplied.
The party which receives services from the other party is entitled to rely on that other party to perform its contractual obligations without having to monitor performance, even if it is unable to monitor performance.
When fiduciary duties are involved:
- the contracting party is not permitted to profit from the relationship, or extract a speculative profit from knowledge gained during the relationship which the principal does not know about.
- The relationship is based on the fiduciary’s acceptance of a role which involves judgment and making discretionary decisions for the principal.
Contractual Trust and Confidence
The kind of trust and confidence where fiduciary relationships arise is completely different to simple contractual arrangement.
In a contractual arrangement, of course the counterparty is entitled make a profit.
When a fiduciary duty is involved, the person (a fiduciary) can only make a profit that the principal knows about.
Also, in any particular case, the contract might exclude obligations which give rise to fiduciary duties or narrow them down to specific acts or omissions.
Duties of Care and Negligence
Likewise with negligence and breaches of duties of care.
The tort of negligence is a different cause of action with different legal tests to establish liability.
Fiduciary duties and breaches arising from them are unconnected with the law of negligence.
Negligence imports concepts of:
- duties of care
- standards of care for carelessness and remoteness of loss,
to establish liability.
Those concepts have nothing to do with the sort of factors which give rise to fiduciary duties.
Those concepts to not apply directly in breach of fiduciary duty cases.
The legal remedies for breaches of fiduciary duties are more analogous to a right to be indemnified for the profit which the principal was deprived, along with any damage suffered by reason of the breach of fiduciary duty.
In addition, when fiduciary duties have been breached, fewer defences are available and the ones that may available are completely different to the defences available to a negligence claim.
Differences in Remedies
The legal remedies for breach of fiduciary duties also differ.
When a party is liable for breach of fiduciary duty, the remedies are better (There’s more on remedies further down).
In the worst types of breaches of fiduciary duty, presumptions of fact apply to displace the usual method of recovery of loss being the law of damages.
- breach of contract rights, which give rise to a series of contractual remedies dictated by the terms of the contract and contract law
- tortious liability, such as the law of negligence, which imposes a duty not to be careless.
Also, fiduciary duties are so strict that they do not require:
- deliberate or dishonest wrongdoing
- willing impropriety, and/or
- negligence or incompetence
However, behaviour involving the first two of those sorts of wrongdoing gives it a substantially different character.
The rigour with which the legal remedies available to a principal to correct the wrongdoing are applied increases markedly.
There's an example of extreme it can get below.
Breach of Fiduciary Duty
The fundamental underlying nature of fiduciary duties are proscriptive: they define what must not be done by a fiduciary, as opposed to what may be done.
And the point of reference for what may be done is set out above.
To recap, a fiduciary must not:
- allow their own personal interests to conflict with the interests of their principal
- make a profit out of the trust placed in them by their principal which the principal does not know about.
And in the course of avoiding those consequences, the fiduciary must act in good faith to their principal.
Preliminary Steps to Assess Breach
To assess a potential breach of fiduciary duty, a series of steps apply:
- Relationship Established: The alleged fiduciary and the principal must be identified.
There cannot be a breach of a fiduciary duty unless the parties in the litigation are in a relationship which is properly characterised as a fiduciary relationship.
The status of a person as a fiduciary may be within an established category (such as agents, employees, brokers), or due to the type of responsibilities which the person took on.
The closer the person comes to being in a position to influence or have an impact the affairs of the principal, the more likely the person is a fiduciary.
- Fiduciary Duties Defined: The fiduciary duties owed by the fiduciary to the principal must be identified.
Fiduciary duties are imposed by law as a reaction to particular circumstances of responsibility assumed by one person in respect of the conduct of the affairs of another.
So, the fiduciary duties are moulded to the relationship.
It’s not a “one size fits all” situation.
The relationship between the parties is affected by:
- course of dealing actually pursued between them, ie the history of the relationship between the parties
- the contracts which may have been signed or agreed orally
- the responsibilities which have been taken on voluntarily outside the terms of contracts agreed
- what the wrongdoing alleged actually is
- Wrongful Act(s) Identified: The alleged wrongful acts or omissions can then be assessed against the (1) the particular relationship, and (2) those defined fiduciary duties.
With that done, whether or not an alleged breach of fiduciary is actually a breach of fiduciary can be assessed.
Assessing Breaches of Fiduciary Duties
- act in good faith to the principal: the fiduciary must treat the principal fairly, be transparent and not mislead them
- avoid conflicts of interest:
The fiduciary must act exclusively in the best interests of the principal.
When a conflict of interest situation arises, the fiduciary is in a position where they cannot discharge that duty.
It is immaterial that:
- the conduct has been to the benefit of the fiduciary’s principal
- the fiduciary acts honestly
- the transaction is fair to either the principal or the fiduciary. The “fairness” of the transaction does not come into it
- the principal had some kind of interest in the opportunity
- the principal could have obtained the profit for itself
- avoid making a profit: It follows that when a fiduciary makes a profit from their fiduciary position (for their personal advantage), that itself is a conflict of interest.
Making a profit is not even permitted where:
- the conduct leading to it does not involve fraud or bad faith. The relevant element is the fact of the profit being made:
- the principal had the opportunity to obtain the profit itself, or passed on the opportunity when it was presented
- no loss is caused by the fiduciary’s conduct
When a fiduciary relationship exists, the fiduciary is not permitted to pursue their own separate interests.
Assisting Breaches of Fiduciary Duties
Fiduciary duties set very high standard of conduct on the part of fiduciaries.
Part of their purpose and the extensive legal remedies available is to deter other persons from assisting those in a fiduciary position to breach their duties. That is, the wrongdoing won't pay in the long run.
Just as it is unfair for someone to breach their fiduciary duties, so it is that those taking part in the breach should be permitted to retain any benefit that resulted from it.
Those assisting or playing a secondary part by encouraging or procuring the breach are exposed to liability.
Accordingly, a person paying the bribe or secret commission is also likely to be liable with the fiduciary.
Accessories to the breach do not even need to be aware of the details of the underlying breach of duty.
It’s that harsh.
They may be required to account for the benefit they received from the corruption of the agent.
Secret commissions are a form of profit which might be made by a fiduciary.
They are received when a person pays or offers a commission to an agent of the principal which the principal does not know about.
- payments of money, no matter how it is calculated
- benefits which have a monetary value, such as:
- memberships to clubs
- offers to award benefits, such as discounts and rebates
Secret commissions can arise in all sorts of ways.
Typically they arise from side-deals with the fiduciary, where the fiduciary is paid something (or anything which is not trivial) which compromises their ability to faithfully discharge their duties to the principal.
Legal Remedies for Breach of Fiduciary Duty
When money, benefits or property are received by a fiduciary, they’re treated in law as having been acquired the benefit of the principal.
- All profits derived from a breach of fiduciary duty are treated as owned by the principal.
The profits are not just accrued profit, seen in narrow accounting terms.
For the purposes of compensation, unrealised profits are treated as actual profits where there is no reason to expect that payment will not come to pass
- All profits acquired by the fiduciary arising from the breach of fiduciary obligations which are not approved by the principal are owned by the principal
- It includes all advantages and interests covertly derived from dealing or speculating with the principal's interests and property
- The obligation of the fiduciary is to account for and pay over the full value of any benefit received.
The employee, agent or director is not permitted to retain what might be thought of (in legal terms) as a gift taken from the principal. The gift is restored to the person which should have owned it in the first instance: the principal
The remedies for breach of fiduciary aren’t like remedies for breach of contract. They are restitutionary rather than compensatory.
Accordingly, it is not a matter of whether the principal has suffered loss; even then, proved loss suffered by the principal remains recoverable.
Compensating the principal for the breach of duty may involve:
- court orders to assign ownership of specific assets acquired by the fiduciary to the principal
- an award for the financial gain received by way of equitable compensation
- an account of profits, and/or
- rescission of contracts with third parties. Transactions can be set aside, even if it was very beneficial to the principal company.
Recovery of Secret Commissions
Where a person receives a benefit in breach of their fiduciary duty, they are is required to:
- account to the principal for the a benefit received, and pay in effect a sum equal to the profit as equitable compensation
- pay the amount of that benefit
That's the starting point for recovery.
Compensation payable to the principal might be subject to:
- a deduction for expenses incurred by the fiduciary to make the profit, or
- in the case of a consultant, reasonable fees for the skill expended in acquiring the benefit for the principal.
If the principal has suffered financial loss as a result of the breach of duty, those losses are in reasonable prospect that they are added on to the compensation payable.
The outcome of an application of the remedies for breach of fiduciary duties can be quite dramatic.
Recovery: Example Case
In one case:
Two ex-employees setup their own company.
The purpose of the new business was to acquire business from the customers of their former employer.
In legal terms, it was for the purpose of obtaining the benefit arising out of the breaches of fiduciary duty.
This meant the profits recoverable by the former employer included the total capital value of the business arising from the acquisition of the business connections, which was:
- about £8,100,000
- the net present value of the future profits of the business.
In commercial terms, that was the value of the business connections appropriated by the ex-employees.
Problematic Assessment of Profit
It's not uncommon occurrence for defendant fiduciaries to make the calculation of profit, loss or compensation difficult or impossible.
That could come to pass in a number of ways. The most common is by not producing evidence of their wrongful activities, as defendants are required to do as part of the legal process.
Where an accurate determination of damage or loss has been made problematic, doubtful questions are resolved against that party which has made the assessment the exercise more difficult.
As such, compensation is assessed in a robust manner with a presumption against the wrongdoers, and resolving doubtful questions against that party.
Fiduciary duties come into play when a person in a fiduciary position is swayed by their personal interest rather than by duty.
Although it might be human nature to do so, that does not excuse it, or make it lawful.
Decisions like that prejudice the interests of the people that the fiduciary is bound to protect.
A fiduciary is a person is in a relationship with another which gives rise to an expectation that the fiduciary will not utilise their position to adverse to the interests of the principal.
Fiduciary obligations arise when a person undertakes to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense.
That requires the fiduciary not to take advantage of the position at the expense of the principal.
The position cannot be used to allow the personal interests with the principal to conflict, make a profit out of the trust or act for their own benefit without the principal's informed consent.
Law Firm: Breach of Fiduciary Duties
Breaches of loyalty betray trust.
It undermines the basic premise for business: that trusted people will do the right thing and work with the team and not undermine it.
We're a law firm with extensive experience assisting businesses right wrongs when their people have gone off and done the wrong thing, and looked after themselves first, before the business which engaged them.
If you're in business and facing down what to do when employees, consultants, distributors or agents have done the wrong thing and want to do something about it, contact us on +44 20 7036 9282 or firstname.lastname@example.org for a confidential initial discussion.