A fiduciary duty is a legal requirement that compels one party to act in the best interests of another party. This duty arises in various relationships, such as between trustees and beneficiaries, corporate directors and shareholders and business partners.
Breaching a fiduciary duty occurs when the fiduciary acts in a manner that contradicts their obligation to act in the best interest of the beneficiary. A breach can take many forms and can result in serious legal implications. As a result, it is sometimes necessary for businesses to sue others who have engaged in such breaches, and it is sometimes necessary for businesses to defend against allegations that they have engaged in this kind of misconduct.
The basics
Fiduciary duty is founded on trust and confidence. It encompasses several key responsibilities, including:
- Duty of care: A fiduciary must act with the care that a “reasonably prudent person” would if placed in a similar position. This involves making informed and thoughtful decisions.
- Duty of loyalty: A fiduciary must prioritize the interests of the beneficiary over their own. This duty prohibits self-dealing, conflicts of interest and using the fiduciary position for personal gain.
- Duty of good faith: A fiduciary must act honestly and with sincere intention, working to ensure that their actions are genuinely in the best interest of the beneficiary.
- Duty of disclosure: A fiduciary must fully disclose all relevant information that might affect the beneficiary’s decisions.
A breach of fiduciary duty occurs when any of these obligations are unmet. Common examples include:
- Conflicts of interest: If a fiduciary engages in activities that benefit themselves at the beneficiary’s expense, it constitutes a breach of their duty.
- Mismanagement of assets: Fiduciaries responsible for managing assets, such as trustees or corporate officers, must do so prudently. Mismanaging these assets, either through negligence or intentional misconduct, is a breach of fiduciary duty.
- Failure to disclose: Not providing pertinent information to beneficiaries or stakeholders can be a breach.
- Self-dealing: When fiduciaries use their position to benefit themselves directly, such as transferring trust assets to their own accounts without permission, it is a direct violation of their duty of loyalty.
Breaching a fiduciary duty can lead to serious legal consequences. Beneficiaries or stakeholders who suffer harm due to the breach may file a lawsuit seeking various remedies, including compensatory damages, injunctions and – in some cases – even punitive damages.
Every breach of fiduciary case is unique. It is, therefore, important for business owners and operators on either “side” of this concern to avoid making assumptions about their legal situation before seeking personalized guidance and support.
