A fiduciary is a person who holds a
legal
Law is a set of rules that are created and are law enforcement, enforceable by social or governmental institutions to regulate behavior,Robertson, ''Crimes against humanity'', 90. with its precise definition a matter of longstanding debate. ...
or ethical relationship of
trust
Trust often refers to:
* Trust (social science), confidence in or dependence on a person or quality
It may also refer to:
Business and law
* Trust law, a body of law under which one person holds property for the benefit of another
* Trust (bus ...
with one or more other
parties
A party is a gathering of people who have been invited by a host for the purposes of socializing, conversation, recreation, or as part of a festival or other commemoration or celebration of a special occasion. A party will often feature ...
(person or group of persons). Typically, a fiduciary prudently takes care of money or other
asset
In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that can ...
s for another person. One party, for example, a corporate trust company or the trust department of a bank, acts in a fiduciary capacity to another party, who, for example, has entrusted funds to the fiduciary for safekeeping or investment. Likewise,
financial adviser
A financial adviser or financial advisor is a professional who provides financial services to clients based on their financial situation. In many countries, financial advisors must complete specific training and be registered with a regulatory ...
s,
financial planner
A financial planner or personal financial planner is a qualified financial advisor. Practicing in full service personal finance, they advise clients on investments, insurance, tax, retirement and estate planning.
As a general rule, a financial p ...
s, and asset managers, including managers of pension plans, endowments, and other tax-exempt assets, are considered fiduciaries under applicable statutes and laws. In a fiduciary relationship, one person, in a position of vulnerability, justifiably vests confidence,
good faith, reliance, and trust in another whose aid, advice, or protection is sought in some matter.
[.][.] In such a relation, good conscience requires the fiduciary to act at all times for the sole benefit and interest of the one who trusts.
Fiduciary duties in a financial sense exist to ensure that those who manage other people's money act in their beneficiaries' interests, rather than serving their own interests.
A fiduciary duty is the highest
standard of care
In tort law, the standard of care is the only degree of prudence and caution required of an individual who is under a duty of care.
The requirements of the standard are closely dependent on circumstances. Whether the standard of care has been b ...
in equity or law. A fiduciary is expected to be extremely loyal to the person to whom he owes the duty (the "
principal") such that there must be no conflict of duty between fiduciary and principal, and the fiduciary must not profit from their position as a fiduciary.
(unless the principal consents). The nature of fiduciary obligations differs among jurisdictions. In Australia, only proscriptive or negative fiduciary obligations are recognised,
whereas in Canada, fiduciaries can come under both proscriptive (negative) and prescriptive (positive) fiduciary obligations.
[.]
In
English
English usually refers to:
* English language
* English people
English may also refer to:
Peoples, culture, and language
* ''English'', an adjective for something of, from, or related to England
** English national ide ...
common law
In law, common law (also known as judicial precedent, judge-made law, or case law) is the body of law created by judges and similar quasi-judicial tribunals by virtue of being stated in written opinions."The common law is not a brooding omnipresen ...
, the fiduciary relation is an important concept within a part of the legal system known as
equity
Equity may refer to:
Finance, accounting and ownership
* Equity (finance), ownership of assets that have liabilities attached to them
** Stock, equity based on original contributions of cash or other value to a business
** Home equity, the dif ...
. In the United Kingdom, the
Judicature Acts
In the history of the courts of England and Wales, the Judicature Acts were a series of Acts of Parliament, beginning in the 1870s, which aimed to fuse the hitherto split system of courts of England and Wales. The first two Acts were the Supr ...
merged the
courts of equity (historically based in England's
Court of Chancery
The Court of Chancery was a court of equity in England and Wales that followed a set of loose rules to avoid a slow pace of change and possible harshness (or "inequity") of the common law. The Chancery had jurisdiction over all matters of equ ...
) with the courts of common law, and as a result the concept of fiduciary duty also became applicable in
common law
In law, common law (also known as judicial precedent, judge-made law, or case law) is the body of law created by judges and similar quasi-judicial tribunals by virtue of being stated in written opinions."The common law is not a brooding omnipresen ...
courts.
When a fiduciary duty is imposed, equity requires a different, stricter standard of behavior than the comparable
tortious
A tort is a civil wrong that causes a claimant to suffer loss or harm, resulting in legal liability for the person who commits the tortious act. Tort law can be contrasted with criminal law, which deals with criminal wrongs that are punishable ...
duty of care
In tort law, a duty of care is a legal obligation that is imposed on an individual, requiring adherence to a standard of reasonable care while performing any acts that could foreseeably harm others. It is the first element that must be establi ...
in common law. The fiduciary has a duty not to be in a situation where personal interests and fiduciary duty conflict, not to be in a situation where their fiduciary duty conflicts with another fiduciary duty, and a duty not to profit from their fiduciary position without knowledge and consent. A fiduciary ideally would not have a
conflict of interest. It has been said that fiduciaries must conduct themselves "at a level higher than that trodden by the crowd"
['']Meinhard v Salmon
''Meinhard v. Salmon'', 164 N.E. 545 (N.Y. 1928), is a widely cited case in which the New York Court of Appeals held that partners in a business owe fiduciary duties to one another where a business opportunity arises during the course of the pa ...
'' (1928) 164 NE 545 at 546. and that "
e distinguishing or overriding duty of a fiduciary is the obligation of undivided loyalty".
In different jurisdictions
Different jurisdictions regard fiduciary duties in different lights.
Canadian law
The legal system of Canada is pluralist: its foundations lie in the English common law system (inherited from its period as a colony of the British Empire), the French civil law system (inherited from its French Empire past), and Indigenous ...
, for example, has developed a more expansive view of fiduciary obligation than
American law
The law of the United States comprises many levels of codified and uncodified forms of law, of which the most important is the nation's Constitution, which prescribes the foundation of the federal government of the United States, as well as v ...
,
while
Australian law
The legal system of Australia has multiple forms. It includes a written constitution, unwritten constitutional conventions, statutes, regulations, and the judicially determined common law system. Its legal institutions and traditions are substa ...
and
British law
The United Kingdom has four legal systems, each of which derives from a particular geographical area for a variety of historical reasons: English and Welsh law, Scots law, Northern Ireland law, and, since 2007, purely Welsh law (as a result of ...
have developed more conservative approaches than either the United States or
Canada
Canada is a country in North America. Its ten provinces and three territories extend from the Atlantic Ocean to the Pacific Ocean and northward into the Arctic Ocean, covering over , making it the world's second-largest country by tot ...
.
In Australia, it has been found that there is no comprehensive list of criteria by which to establish a fiduciary relationship.
Courts have so far refused to define the concept of a fiduciary, instead preferring to develop the law on a case-by-case basis and by way of analogy.
Fiduciary relationships are of different types and carry different obligations so that a test appropriate to determine whether a fiduciary relationship exists for one purpose might be inappropriate for another:
In 2014 the
Law Commission (England and Wales)
In England and Wales the Law Commission ( cy, Comisiwn y Gyfraith) is an independent law commission set up by Parliament by the Law Commissions Act 1965 to keep the law of England and Wales under review and to recommend reforms. The organisat ...
reviewed the fiduciary duties of investment intermediaries, looking particularly at the duties on pension trustees. They commented that the term "fiduciary" is used in many different ways.
The question of who is a fiduciary is a "notoriously intractable" question and this was the first of many questions. In ''
SEC v. Chenery Corporation'',
Frankfurter J said,
The law expressed here follows the general body of elementary fiduciary law found in most common law jurisdictions; for in-depth analysis of particular jurisdictional idiosyncrasies please consult primary authorities within the relevant jurisdiction.
This is especially true in the area of Labor and Employment law. In
Canada
Canada is a country in North America. Its ten provinces and three territories extend from the Atlantic Ocean to the Pacific Ocean and northward into the Arctic Ocean, covering over , making it the world's second-largest country by tot ...
a fiduciary has obligations to the employer even after the employment relationship is terminated, whereas in the United States the employment and fiduciary relationships terminate together.
Fiduciary duties under Delaware corporate law
The corporate law of Delaware is the most influential in the United States, as more than 50% of publicly traded companies in the United States, including 64% of the Fortune 500, have chosen to incorporate in that State. Under Delaware law, officers, directors and other control persons of corporations and other entities owe three primary fiduciary duties, (1) the
duty of care
In tort law, a duty of care is a legal obligation that is imposed on an individual, requiring adherence to a standard of reasonable care while performing any acts that could foreseeably harm others. It is the first element that must be establi ...
, (2) the
duty of loyalty The duty of loyalty is often called the cardinal principal of fiduciary relationships, but is particularly strict in the law of trusts. In that context, the term refers to a trustee's duty to administer the trust solely in the interest of the ben ...
and (3) the
duty of good faith
A duty (from "due" meaning "that which is owing"; fro, deu, did, past participle of ''devoir''; la, debere, debitum, whence "debt") is a commitment or expectation to perform some action in general or if certain circumstances arise. A duty may ...
.
The duty of care requires control persons to act on an informed basis after due consideration of all information. The duty includes a requirement that such persons reasonably inform themselves of alternatives. In doing so, they may rely on employees and other advisers so long as they do so with a critical eye and do not unquestionably accept the information and conclusions provided to them. Under normal circumstances, their actions are accorded the protection of the business judgment rule, which presumes that control persons acted properly, provided that they act on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.
The duty of loyalty requires control persons to look to the interests of the company and its other owners and not to their personal interests. In general, they cannot use their positions of trust, confidence and inside knowledge to further their own private interests or approve an action that will provide them with a personal benefit (such as continued employment) that does not primarily benefit the company or its other owners.
The duty of good faith requires control persons to exercise care and prudence in making business decisions—that is, the care that a reasonably prudent person in a similar position would use under similar circumstances. Control persons fail to act in good faith, even if their actions are not illegal, when they take actions for improper purposes or, in certain circumstances, when their actions have grossly inequitable results. The duty to act in good faith is an obligation not only to make decisions free from self-interest, but also free of any interest that diverts the control persons from acting in the best interest of the company. The duty to act in good faith may be measured by an individual's particular knowledge and expertise. The higher the level of expertise, the more accountable that person will be (''e.g.'', a finance expert may be held to a more exacting standard than others in accepting a third party valuation).
At one time, courts seemed to view the duty of good faith as an independent obligation. However, more recently, courts have treated the duty of good faith as a component of the duty of loyalty.
Fiduciary duty in Canadian corporate law
In Canada, directors of corporations owe a fiduciary duty. A debate exists as to the nature and extent of this duty following a controversial landmark judgment from the
Supreme Court of Canada in ''
BCE Inc. v. 1976 Debentureholders''. Scholarly literature has defined this as a "tripartite fiduciary duty", composed of (1) an overarching duty to the corporation, which contains two component duties — (2) a duty to protect shareholder interests from harm, and (3) a procedural duty of "fair treatment" for relevant stakeholder interests. This tripartite structure encapsulates the duty of directors to act in the "best interests of the corporation, viewed as a good corporate citizen".
Relationships
The most common circumstance where a fiduciary duty will arise is between a
trustee
Trustee (or the holding of a trusteeship) is a legal term which, in its broadest sense, is a synonym for anyone in a position of trust and so can refer to any individual who holds property, authority, or a position of trust or responsibility to ...
, whether real or juristic, and a
beneficiary. The trustee to whom property is legally committed is the legal—i.e., common law—owner of all such property. The beneficiary, at law, has no legal title to the
trust
Trust often refers to:
* Trust (social science), confidence in or dependence on a person or quality
It may also refer to:
Business and law
* Trust law, a body of law under which one person holds property for the benefit of another
* Trust (bus ...
; however, the trustee is bound by equity to suppress their own interests and administer the property only for the benefit of the beneficiary. In this way, the beneficiary obtains the
use
Use may refer to:
* Use (law), an obligation on a person to whom property has been conveyed
* Use (liturgy), a special form of Roman Catholic ritual adopted for use in a particular diocese
* Use–mention distinction, the distinction between using ...
of property without being its technical owner.
Others, such as corporate
directors
Director may refer to:
Literature
* ''Director'' (magazine), a British magazine
* ''The Director'' (novel), a 1971 novel by Henry Denker
* ''The Director'' (play), a 2000 play by Nancy Hasty
Music
* Director (band), an Irish rock band
* ''D ...
, may be held to a fiduciary duty similar in some respects to that of a trustee. This happens when, for example, the directors of a bank are trustees for the depositors, the directors of a corporation are trustees for the stockholders or a guardian is trustee of their ward's property. A person in a sensitive position sometimes protects themselves from possible conflict of interest charges by setting up a ''
blind trust
A blind trust is a trust in which the trust beneficiaries have no knowledge of the holdings of the trust, and no right to intervene in their handling. In a blind trust, the trustees ( fiduciaries, or those who have been given power of attorney) ...
'', placing their financial affairs in the hands of a fiduciary and giving up all right to know about or intervene in their handling.
The fiduciary functions of trusts and agencies are commonly performed by a
trust company
A trust company is a corporation that acts as a fiduciary, trustee or agent of trusts and agencies. A professional trust company may be independently owned or owned by, for example, a bank or a law firm, and which specializes in being a trust ...
, such as a
commercial bank
A commercial bank is a financial institution which accepts deposits from the public and gives loans for the purposes of consumption and investment to make profit.
It can also refer to a bank, or a division of a large bank, which deals with co ...
, organized for that purpose. In the United States, the
Office of the Comptroller of the Currency
The Office of the Comptroller of the Currency (OCC) is an independent bureau within the United States Department of the Treasury that was established by the National Currency Act of 1863 and serves to charter, regulate, and supervise all natio ...
(OCC), an agency of the
United States Department of the Treasury
The Department of the Treasury (USDT) is the national treasury and finance department of the federal government of the United States, where it serves as an executive department. The department oversees the Bureau of Engraving and Printing and ...
, is the primary
regulator of the fiduciary activities of
federal savings associations
Federal savings associations (also called "federal thrifts" or "federal Savings Banks"), in the United States, are institutions chartered by the Office of Thrift Supervision which is now administered by Office of the Comptroller of the Currency a ...
.
When a court desires to hold the offending party to a transaction responsible so as to prevent unjust enrichment, the judge can declare that a fiduciary relation exists between the parties, as though the offender were in fact a trustee for the partner.
Relationships which routinely attract by law a fiduciary duty between certain classes of persons include these:
*
Trustee
Trustee (or the holding of a trusteeship) is a legal term which, in its broadest sense, is a synonym for anyone in a position of trust and so can refer to any individual who holds property, authority, or a position of trust or responsibility to ...
/
beneficiary;
[.]
*
Conservators and
legal guardians /
ward
Ward may refer to:
Division or unit
* Hospital ward, a hospital division, floor, or room set aside for a particular class or group of patients, for example the psychiatric ward
* Prison ward, a division of a penal institution such as a pris ...
s
*
Agent
Agent may refer to:
Espionage, investigation, and law
*, spies or intelligence officers
* Law of agency, laws involving a person authorized to act on behalf of another
** Agent of record, a person with a contractual agreement with an insuranc ...
s, attorney in fact usually from written grant of authority by principal,
broker
A broker is a person or firm who arranges transactions between a buyer and a seller for a commission when the deal is executed. A broker who also acts as a seller or as a buyer becomes a principal party to the deal. Neither role should be confu ...
s and
factor
Factor, a Latin word meaning "who/which acts", may refer to:
Commerce
* Factor (agent), a person who acts for, notably a mercantile and colonial agent
* Factor (Scotland), a person or firm managing a Scottish estate
* Factors of production, suc ...
s /
principals;:
[.]
*
Buyer agent
A buyer brokerage or buyer agency is the practice of real estate brokers and their agents representing a buyer in a real estate transaction rather than, by default, representing the seller either directly or as a sub-agent. In the United Kingdom ...
(
real estate broker) / buyer client
* Confidential advisor including
financial adviser
A financial adviser or financial advisor is a professional who provides financial services to clients based on their financial situation. In many countries, financial advisors must complete specific training and be registered with a regulatory ...
and
investment advisor
A financial adviser or financial advisor is a professional who provides financial services to clients based on their financial situation. In many countries, financial advisors must complete specific training and be registered with a regulatory ...
/ advisee or client;
[.][.]
*
Lawyer/client; A solicitor is presumed to have a fiduciary duty.
*
Executors and
administrators /
legatee
A legatee, in the law of wills, is any individual or organization bequeathed any portion of a testator's estate.
Usage
Depending upon local custom, legatees may be called "devisees". Traditionally, "legatees" took personal property under will a ...
s and
heirs;
* Corporate
partner
Partner, Partners, The Partner, or, The Partners may refer to:
Books
* ''The Partner'' (Grisham novel), by John Grisham, 1997
* ''The Partner'' (Jenaro Prieto novel), 1928
* ''The Partners'' (book), a 1983 book by James B. Stewart
* ''Partner'' (m ...
s,
joint venture
A joint venture (JV) is a business entity created by two or more parties, generally characterized by shared ownership, shared returns and economic risk, risks, and shared governance. Companies typically pursue joint ventures for one of four rea ...
rs,
directors
Director may refer to:
Literature
* ''Director'' (magazine), a British magazine
* ''The Director'' (novel), a 1971 novel by Henry Denker
* ''The Director'' (play), a 2000 play by Nancy Hasty
Music
* Director (band), an Irish rock band
* ''D ...
and officers / company and
stockholder
A shareholder (in the United States often referred to as stockholder) of a corporation is an individual or legal entity (such as another corporation, a body politic, a trust or partnership) that is registered by the corporation as the legal own ...
s;
[.]
*
Board of directors /
company;
* Partner/partner;
[.]
* Senior employee / company;
*
Retirement
Retirement is the withdrawal from one's position or occupation or from one's active working life. A person may also semi-retire by reducing work hours or workload.
Many people choose to retire when they are elderly or incapable of doing their j ...
plan administrators (including
401(k) plans) / retirees and workers;
*
Retirement account advisors;
*
Promoters / company and related subscribers;
*
Liquidator/company;
*
Mutual savings bank
A mutual savings bank is a financial institution chartered by a central or regional government, without capital stock, owned by its members who subscribe to a common fund. From this fund, claims, loans, etc., are paid. Profits after deductions a ...
s and
investment corporation
An investment company is a financial institution principally engaged in holding, managing and investing securities. These companies in the United States are regulated by the U.S. Securities and Exchange Commission and must be registered under th ...
s / their depositors and
investor
An investor is a person who allocates financial capital with the expectation of a future return (profit) or to gain an advantage (interest). Through this allocated capital most of the time the investor purchases some species of property. Type ...
s;
*
Receivers,
trustees in bankruptcy and
assignee
An assignment is a legal term used in the context of the law of contract and of property. In both instances, assignment is the process e
whereby a person, the ''assignor'', transfers rights or benefits to another, the ''assignee''.For the assig ...
s in
insolvency
In accounting, insolvency is the state of being unable to pay the debts, by a person or company ( debtor), at maturity; those in a state of insolvency are said to be ''insolvent''. There are two forms: cash-flow insolvency and balance-sheet i ...
/
creditors
* Governments /
indigenous peoples
Indigenous peoples are culturally distinct ethnic groups whose members are directly descended from the earliest known inhabitants of a particular geographic region and, to some extent, maintain the language and culture of those original people ...
; ''
Seminole Nation v. United States
''Seminole Nation v. United States'', 316 U.S. 286 (1942), was a United States Supreme Court case.
Background
The original suit was decided by the Court of Claims in favor of petitioner, the Seminole Nation, in the amount of $1,317,087.27. The ...
''
*
Doctor
Doctor or The Doctor may refer to:
Personal titles
* Doctor (title), the holder of an accredited academic degree
* A medical practitioner, including:
** Physician
** Surgeon
** Dentist
** Veterinary physician
** Optometrist
*Other roles
** ...
/
patient
A patient is any recipient of health care services that are performed by healthcare professionals. The patient is most often ill or injured and in need of treatment by a physician, nurse, optometrist, dentist, veterinarian, or other hea ...
- in Canada,
not in Australia;
*
Guardian/
ward
Ward may refer to:
Division or unit
* Hospital ward, a hospital division, floor, or room set aside for a particular class or group of patients, for example the psychiatric ward
* Prison ward, a division of a penal institution such as a pris ...
;
[.]
*
Teacher
A teacher, also called a schoolteacher or formally an educator, is a person who helps students to acquire knowledge, competence, or virtue, via the practice of teaching.
''Informally'' the role of teacher may be taken on by anyone (e.g. whe ...
/
student;
*
Priest
A priest is a religious leader authorized to perform the sacred rituals of a religion, especially as a mediatory agent between humans and one or more deities. They also have the authority or power to administer religious rites; in particu ...
/
parish
A parish is a territorial entity in many Christian denominations, constituting a division within a diocese. A parish is under the pastoral care and clerical jurisdiction of a priest, often termed a parish priest, who might be assisted by one o ...
ioner seeking
counseling;
In Australia, the categories of fiduciary relationships are not closed.
Roman and civil law recognized a type of contract called ''fiducia'' (also ''contractus fiduciae'' or fiduciary contract),
involving essentially a sale to a person coupled with an agreement that the purchaser should sell the property back upon the fulfillment of certain conditions. Such contracts were used in the emancipation of children, in connection with testamentary gifts and in pledges. Under Roman law a woman could arrange a fictitious sale called a ''fiduciary coemption'' in order to change her guardian or gain legal capacity to make a will.
In
Roman Dutch law
Roman-Dutch law ( Dutch: ''Rooms-Hollands recht'', Afrikaans: ''Romeins-Hollandse reg'') is an uncodified, scholarship-driven, and judge-made legal system based on Roman law as applied in the Netherlands in the 17th and 18th centuries. As suc ...
, a ''fiduciary heir'' may receive property subject to passing it to another on fulfilment of certain conditions; the gift is called a ''fideicommissum''. The fiduciary of a fideicommissum is a ''fideicommissioner'' and one that receives property from a fiduciary heir is a ''fideicommissary heir''.
Fiduciary principles may be applied in a variety of legal contexts.
Possible relationships
Joint ventures
A joint venture (JV) is a business entity created by two or more parties, generally characterized by shared ownership, shared returns and risks, and shared governance. Companies typically pursue joint ventures for one of four reasons: to access ...
, as opposed to business
partnerships
A partnership is an arrangement where parties, known as business partners, agree to cooperate to advance their mutual interests. The partners in a partnership may be individuals, business entity, businesses, interest-based organizations, schoo ...
,
are not ''presumed'' to carry a fiduciary duty; however, this is a matter of degree.
If a joint venture is conducted at commercial arm's length and both parties are on an equal footing then the
courts
A court is any person or institution, often as a government institution, with the authority to adjudicate legal disputes between parties and carry out the administration of justice in civil, criminal, and administrative matters in accorda ...
will be reluctant to find a fiduciary duty, but if the joint venture is carried out more in the manner of a partnership then fiduciary relationships can and often will arise.
[.]
Husbands and wives are not ''presumed'' to be in a fiduciary relationship; however, this may be easily established. Similarly, ordinary commercial transactions in themselves are not ''presumed'' to but can give rise to fiduciary duties, should the appropriate circumstances arise. These are usually circumstances where the contract specifies a degree of trust and loyalty or it can be inferred by the court.
Australian courts also do not recognise parents and their children to be in fiduciary relationships.
In contrast, the Supreme Court of Canada allowed a child to sue her father for damages for breach of his fiduciary duties, opening the door in Canada for allowing fiduciary obligations between parent and child to be recognised.
Australian courts have also not accepted doctor-patient relationships as fiduciary in nature. In ''Breen v Williams'',
the High Court viewed the doctor's responsibilities over their patients as lacking the representative capacity of the trustee in fiduciary relationships. Moreover, the existence of remedies in contract and tort made the Court reluctant in recognising the fiduciary relationship.
In 2011, in an insider trading case, the U.S. Securities and Exchange Commission brought charges against a boyfriend of a Disney intern, alleging he had a fiduciary duty to his girlfriend and breached it. The boyfriend, Toby Scammell, allegedly received and used insider information on Disney's takeover of Marvel Comics.
Generally, the employment relationship is not regarded as fiduciary, but may be so if
... within a particular contractual relationship there are specific contractual obligations which the employee has undertaken which have placed him in a situation where equity imposes these rigorous duties in addition to the contractual obligations. Although terminologies like duty of good faith, or loyalty, or the mutual duty of trust and confidence are frequently used to describe employment relationships, such concepts usually denote situations where "a party merely has to take into consideration the interests of another, but does not have to act in the interests of that other.
If fiduciary relationships are to arise between employers and employees, it is necessary to ascertain that the employee has placed himself in a position where he must act solely in the interests of his employer.
In the case of ''
Canadian Aero Service Ltd v O'Malley'', it was held that a senior employee is much more likely to be found to owe fiduciary duties towards his employer.
A
protector
Protector(s) or The Protector(s) may refer to:
Roles and titles
* Protector (title), a title or part of various historical titles of heads of state and others in authority
** Lord Protector, a title that has been used in British constitutional l ...
of a
trust
Trust often refers to:
* Trust (social science), confidence in or dependence on a person or quality
It may also refer to:
Business and law
* Trust law, a body of law under which one person holds property for the benefit of another
* Trust (bus ...
may owe fiduciary duties to the
beneficiaries
A beneficiary (also, in trust law, '' cestui que use'') in the broadest sense is a natural person or other legal entity who receives money or other benefits from a benefactor. For example, the beneficiary of a life insurance policy is the perso ...
, although there is no
case law
Case law, also used interchangeably with common law, is law that is based on precedents, that is the judicial decisions from previous cases, rather than law based on constitutions, statutes, or regulations. Case law uses the detailed facts of a l ...
establishing this to be the case.
In 2015, the
United States Department of Labor
The United States Department of Labor (DOL) is one of the executive departments of the U.S. federal government. It is responsible for the administration of federal laws governing occupational safety and health, wage and hour standards, unemploy ...
issued a proposed rule that if finalized would extend the fiduciary duty relationship to investment advisors and some brokers including insurance brokers. In 2017, the
Trump Administration
Donald Trump's tenure as the 45th president of the United States began with his inauguration on January 20, 2017, and ended on January 20, 2021. Trump, a Republican from New York City, took office following his Electoral College victory ...
planned to order a 180-delay of implementation of the rule,
[ sometimes known as the 'fiduciary rule'. The rule would require "brokers offering retirement investment advice to put their clients' interest first".] The Trump Administration later rescinded the fiduciary rule on July 20, 2018. Prior to its repeal, the rule was also dealt blows by the US Fifth Circuit Court of Appeals in March and June 2018.
Example
For example, two members, ''X'' and ''Y'', of a band currently under contract with one another (or with some other tangible, existing relationship that creates a legal duty) record songs together. Let us imagine it is a serious, successful band and that a court would declare that the two members are equal partners in a business. One day, ''X'' takes some demos made cooperatively by the duo to a recording label, where an executive expresses interest. ''X'' pretends it is all his work and receives an exclusive contract
A contract is a legally enforceable agreement between two or more parties that creates, defines, and governs mutual rights and obligations between them. A contract typically involves the transfer of goods, services, money, or a promise to tr ...
and $50,000. ''Y'' is unaware of the encounter until reading it in the paper the next week.
This situation represents a conflict of interest and duty. Both ''X ''and ''Y'' hold fiduciary duties to each other, which means they must subdue their own interests in favor of the duo's collective interest. By signing an individual contract and taking all the money, ''X'' has put personal interest above the fiduciary duty. Therefore, a court will find that ''X'' has breached his fiduciary duty. The judicial remedy
A legal remedy, also referred to as judicial relief or a judicial remedy, is the means with which a court of law, usually in the exercise of civil law jurisdiction, enforces a right, imposes a penalty, or makes another court order to impose its w ...
here will be that ''X'' holds both the contract and the money in a constructive trust for the duo. Note, ''X'' will not be punished or totally denied of the benefit; both ''X'' and ''Y'' will receive a half share in the contract and the money.
Elements of duty
A fiduciary, such as the administrator, executor or guardian of an estate, may be legally required to file with a probate court or judge a surety bond, called a fiduciary bond or probate bond, to guarantee faithful performance of his duties. One of those duties may be to prepare, generally under oath, an ''inventory'' of the tangible or intangible property of the estate, describing the items or classes of property and usually placing a valuation on them.
A bank or other fiduciary having legal title to a mortgage may sell fractional shares to investors, thereby creating a '' participating mortgage''.
Accountability
A fiduciary will be liable to account if proven to have acquired a profit, benefit or gain from the relationship by one of three means:
* In circumstances of conflict of duty and interest;
* In circumstances of conflict of duty to one person and duty to another person;
* By taking advantage of the fiduciary position.
Therefore, it is said the fiduciary has a duty not to be in a situation where personal interests and fiduciary duty conflict, a duty not to be in a situation where his fiduciary duty conflicts with another fiduciary duty, and not to profit from his fiduciary position without express knowledge and consent. A fiduciary cannot have a conflict of interest.
The state of Texas in the United States sets out the duties of a fiduciary in its Estates Code, chapter 751, as follows (the bracketed references to TPC refer to the Texas Probate Code superseded by the Estates Code, effective January 1, 2014):
;Sec. 751.101. Fiduciary Duties. PC §489B(a):An attorney in fact or agent is a fiduciary and has a duty to inform and to account for actions taken under the power of attorney.
;Sec. 751.102. Duty to Timely Inform Principal. PC §489B(b)
PC or pc may refer to:
Arts and entertainment
* Player character or playable character, a fictional character controlled by a human player, usually in role-playing games or computer games
* ''Port Charles'', an American daytime TV soap opera
* ...
:(a) The attorney in fact or agent shall timely inform the principal of each action taken under the power of attorney.
:(b) Failure of an attorney in fact or agent to timely inform, as to third parties, does not invalidate any action of the attorney in fact or agent.
;Sec. 751.103. Maintenance of Records. PC §489B(c), (f):(a) The attorney in fact or agent shall maintain records of each action taken or decision made by the attorney in fact or agent.
:(b) The attorney in fact or agent shall maintain all records until delivered to the principal, released by the principal, or discharged by a court.
;Sec. 751.104. Accounting. PC §489B(d), (e):(a) The principal may demand an accounting by the attorney in fact or agent.
:(b) Unless otherwise directed by the principal, an accounting under Subsection (a) must include:
::(1) the property belonging to the principal that has come to the attorney in fact’s or agent’s knowledge or into the attorney in fact’s or agent’s possession;
::(2) each action taken or decision made by the attorney in fact or agent;
::(3) a complete account of receipts, disbursements, and other actions of the attorney in fact or agent that includes the source and nature of each receipt, disbursement, or action, with receipts of principal and income shown separately;
::(4) a listing of all property over which the attorney in fact or agent has exercised control that includes:
:::(A) an adequate description of each asset; and
:::(B) the asset’s current value, if the value is known to the attorney in fact or agent;
::(5) the cash balance on hand and the name and location of the depository at which the cash balance
is kept;
::(6) each known liability; and
::(7) any other information and facts known to the attorney in fact or agent as necessary for a full and definite understanding of the exact condition of the property belonging to the principal.
:(c) Unless directed otherwise by the principal, the attorney in fact or agent shall also provide to the principal all documentation regarding the principal’s property.
Conflict of duties
A fiduciary's duty must not conflict with another fiduciary duty. Conflicts between one fiduciary duty and another fiduciary duty arise most often when a lawyer or an agent
Agent may refer to:
Espionage, investigation, and law
*, spies or intelligence officers
* Law of agency, laws involving a person authorized to act on behalf of another
** Agent of record, a person with a contractual agreement with an insuranc ...
, such as a real estate agent
A real estate agent or real estate broker is a person who represents sellers or buyers of real estate or real property. While a broker may work independently, an agent usually works under a licensed broker to represent clients. Brokers and age ...
, represent more than one client, and the interests of those clients conflict. This would occur when a lawyer attempts to represent both the plaintiff
A plaintiff ( Π in legal shorthand) is the party who initiates a lawsuit (also known as an ''action'') before a court. By doing so, the plaintiff seeks a legal remedy. If this search is successful, the court will issue judgment in favor of t ...
and the defendant in the same matter, for example. The rule comes from the logical
Logic is the study of correct reasoning. It includes both formal and informal logic. Formal logic is the science of deductively valid inferences or of logical truths. It is a formal science investigating how conclusions follow from premises ...
conclusion that a fiduciary cannot make the principal's interests a top priority if he has two principals and their interests are diametrically opposed; he must balance the interests, which is not acceptable to equity. Therefore, the conflict of duty and duty rule is really an extension of the conflict of interest and duty rules.
No-profit rule
A fiduciary must not profit from the fiduciary position. This includes any benefits or profits which, although unrelated to the fiduciary position, came about because of an opportunity that the fiduciary position afforded. It is unnecessary that the principal would have been unable to make the profit; if the fiduciary makes a profit, by virtue of his role as fiduciary for the principal, then the fiduciary must report the profit to the principal. If the principal provides fully informed consent, then the fiduciary may keep the benefit and be absolved of any liability for what would be a breach of fiduciary duty. If this requirement is not met then the property is deemed by the court to be held by the fiduciary on constructive trust for the principal.
Secret commissions, or bribes, also come under the no profit rule. The bribe shall be held in constructive trust for the principal. The person who made the bribe cannot recover it, since he has committed a crime
In ordinary language, a crime is an unlawful act punishable by a state or other authority. The term ''crime'' does not, in modern criminal law, have any simple and universally accepted definition,Farmer, Lindsay: "Crime, definitions of", in Ca ...
. Similarly, the fiduciary, who received the bribe, has committed a crime. Fiduciary duties are an aspect of equity and, in accordance with the equitable principles, or maxims, equity serves those with clean hands. Therefore, the bribe is held on constructive trust for the principal, the only innocent party.
Bribes were initially considered not to be held on constructive trust, but were considered to be held as a debt
Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The ...
by the fiduciary to the principal. This approach has been overruled; the bribe is now classified as a constructive trust. The change is due to pragmatic reasons, especially in regard to a bankrupt
Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debtor ...
fiduciary. If a fiduciary takes a bribe and that bribe is considered a debt then if the fiduciary goes bankrupt the debt will be left in his pool of assets to be paid to creditors
A creditor or lender is a party (e.g., person, organization, company, or government) that has a claim on the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some property ...
and the principal may miss out on recovery because other creditors were more secured. If the bribe is treated as held on a constructive trust then it will remain in the possession of the fiduciary, despite bankruptcy, until such time as the principal recovers it.
Avoiding these accountabilities
The landmark Australian decision ''ASIC v Citigroup'' noted that the "informed consent" on behalf of the beneficiary to breaches of either the no-profit and no-conflict rule will allow the fiduciary to get around these rules. Furthermore, it highlighted that a contract may include a clause that allows individuals to avoid all fiduciary obligations within the course of dealings, and thereby continue to make a personal profit or deal with other parties- tasks that may otherwise have been in conflict with what would have been a fiduciary duty had it not been for this clause. In the Australian case of ''Farah Constructions Pty Ltd v Say-Dee Pty Ltd'', however, Gleeson CJ, Gummow, Callinan, Heydon and Crennan JJ observed that the sufficiency of disclosure may depend on the sophistication and intelligence of the persons to whom the disclosure must be made.
However, in the English case of ''Armitage v Nurse'' an exception was noted to be the fiduciary's obligation of good faith; liability for breach of fiduciary duty by way of fraud or dishonesty cannot be avoided through an exclusion clause in a contract. The decision in ''Armitage v Nurse'' has been applied in Australian .
Breaches of duty and remedies
Conduct by a fiduciary may be deemed ''constructive fraud Constructive fraud is a legal fiction describing a situation where a person or entity gained an unfair advantage over another by deceitful or unfair methods. Intent does not need to be shown as in the case of actual fraud. Some unfair methods may ...
'' when it is based on acts, omissions or concealments considered fraudulent and that gives one an advantage against the other because such conduct—though not actually fraudulent, dishonest or deceitful—demands redress for reasons of public policy. Breach of fiduciary duty may occur in insider trading, when an insider or a related party makes trades in a corporation's securities based on material non-public information obtained during the performance of the insider's duties at the corporation. Breach of fiduciary duty by a lawyer with regard to a client, if negligent, may be a form of legal malpractice
Legal malpractice is the term for negligence, breach of fiduciary duty, or breach of contract by a lawyer during the provision of legal services that causes harm to a client.
Examples
A common example of legal malpractice involves the lawyer's m ...
; if intentional, it may be remedied in equity.
Where a principal can establish both a fiduciary duty and a breach of that duty, through violation of the above rules, the court will find that the benefit gained by the fiduciary should be returned to the principal because it would be unconscionable
Unconscionability (sometimes known as unconscionable dealing/conduct in Australia) is a doctrine in contract law that describes terms that are so extremely unjust, or overwhelmingly one-sided in favor of the party who has the superior bargaining ...
to allow the fiduciary to retain the benefit by employing his strict common law legal rights
Rights are legal, social, or ethical principles of freedom or entitlement; that is, rights are the fundamental normative rules about what is allowed of people or owed to people according to some legal system, social convention, or ethical the ...
. This will be the case, unless the fiduciary can show there was full disclosure of the conflict of interest or profit and that the principal fully accepted and freely consented to the fiduciary's course of action.
Remedies will differ according to the type of damage or benefit. They are usually distinguished between proprietary remedies, dealing with property, and personal remedies, dealing with pecuniary (monetary) compensation. Where concurrent contractual and fiduciary relationships exist, remedies available to the plaintiff beneficiary is dependent upon the duty of care owed by the defendant and the specific breach of duty allowing for remedy/damages. The courts will clearly distinguish the relationship and determine the nature in which the breach occurred.
Constructive trusts
Where the unconscionable gain by the fiduciary is in an easily identifiable form, such as the recording contract discussed above, the usual remedy will be the already discussed constructive trust.
Constructive trusts pop up in many aspects of equity, not just in a remedial sense, but, in this sense, what is meant by a constructive trust is that the court has created and imposed a duty on the fiduciary to hold the money in safekeeping until it can be rightfully transferred to the principal.
Account of profits
An account of profits
An account of profits (sometimes referred to as an ''accounting for profits'' or simply an ''accounting'') is a type of equitable remedy most commonly used in cases of breach of fiduciary duty. It is an action taken against a defendant to recover t ...
is another potential remedy. It is usually used where the breach of duty was ongoing or when the gain is hard to identify. The idea of an account of profits is that the fiduciary profited unconscionably by virtue of the fiduciary position, so any profit made should be transferred to the principal. It may sound like a constructive trust at first, but it is not.
An account of profits is the appropriate remedy when, for example, a senior employee has taken advantage of his fiduciary position by conducting his own company on the side and has run up quite a lot of profits over a period of time, profits which he wouldn't have been able to make otherwise. The fiduciary in breach may however receive an allowance for effort and ingenuity expended in making the profit.
Compensatory damages
Compensatory damages
At common law, damages are a remedy in the form of a monetary award to be paid to a claimant as compensation for loss or injury. To warrant the award, the claimant must show that a breach of duty has caused foreseeable loss. To be recognised at ...
are also available. Accounts of profits can be hard remedies to establish, therefore, a plaintiff will often seek compensation (damages) instead. Courts of equity initially had no power to award compensatory damages, which traditionally were a remedy at common law, but legislation and case law has changed the situation so compensatory damages may now be awarded for a purely equitable action.
Fiduciary duty and pension governance
Some experts have argued that, in the context of pension governance, trustee
Trustee (or the holding of a trusteeship) is a legal term which, in its broadest sense, is a synonym for anyone in a position of trust and so can refer to any individual who holds property, authority, or a position of trust or responsibility to ...
s have started to reassert their fiduciary prerogatives more strongly after 2008 – notably following the heavy losses or reduced returns incurred by many retirement schemes in the wake of the Great Recession
The Great Recession was a period of marked general decline, i.e. a recession, observed in national economies globally that occurred from late 2007 into 2009. The scale and timing of the recession varied from country to country (see map). At ...
and the progression of ESG and Responsible Investment ideas: "Clearly, there is a mounting demand for CEOs (equity issuers) and governments (sovereign bond issuers) to be more 'accountable' ... No longer ‘absentee landlord
In economics, an absentee landlord is a person who owns and rents out a profit-earning property, but does not live within the property's local economic region. The term "absentee ownership" was popularised by economist Thorstein Veblen's 1923 book ...
s', trustees have started to exercise more forcefully their governance prerogatives across the boardrooms of Britain, Benelux and America: coming together through the establishment of engaged pressure groups." However, in the United States, there are questions whether a pension's decision to consider factors such as how investments impact contributors' continued employment violate a fiduciary duty to maximize the retirement fund's returns.
Pension funds and other large institutional investors are increasingly making their voices heard to call out irresponsible practices in the businesses in which they invest
The Fiduciary Duty in the 21st Century Programme, led by the United Nations Environment Programme Finance Initiative The United Nations Environment Programme Finance Initiative (UNEP FI) is a global partnership established between the United Nations Environment Program (UNEP) and the financial sector. UNEP FI catalyses action across the financial system to align e ...
, the Principles for Responsible Investment
Principles for Responsible Investment (UNPRI or PRI) is a United Nations-supported international network of financial institutions working together to implement its six aspirational principles, often referenced as "the Principles". Its goal is to u ...
, and the Generation Foundation, aims to end the debate on whether fiduciary duty is a legitimate barrier to the integration of environmental, social and governance (ESG) issues in investment practice and decision-making.[PRI, UNEP FI, & The Generation Foundation]
Fiduciary Duty in the 21st Century
2018 This followed the 2015 publication of "Fiduciary Duty in the 21st Century" which concluded that "failing to consider all long-term investment value drivers, including ESG issues, is a failure of fiduciary duty". Founded on the realization that there is a general lack of legal clarity globally about the relationship between sustainability and investors’ fiduciary duty, the programme engaged with and interviewed over 400 policymakers and investors to raise awareness of the importance of ESG issues to the fiduciary duties of investors. The programme also published roadmaps which set out recommendations to fully embed the consideration of ESG factors in the fiduciary duties of investors across more than eight capital markets. Drawing upon findings from Fiduciary Duty in the 21st Century, the European Commission High-Level Expert Group (HLEG) recommended in its 2018 final report that the EU Commission clarify investor duties to better embrace long-term horizon and sustainability preferences."Final Report 2018 by the High-Level Expert Group on Sustainable Finance"
(PDF). 31 January 2018.
See also
*
Trustee
Trustee (or the holding of a trusteeship) is a legal term which, in its broadest sense, is a synonym for anyone in a position of trust and so can refer to any individual who holds property, authority, or a position of trust or responsibility to ...
*
Directors' duties
Directors' duties are a series of statutory, common law and equitable obligations owed primarily by members of the board of directors to the corporation that employs them. It is a central part of corporate law and corporate governance. Directors' ...
*
Compensatory damages
At common law, damages are a remedy in the form of a monetary award to be paid to a claimant as compensation for loss or injury. To warrant the award, the claimant must show that a breach of duty has caused foreseeable loss. To be recognised at ...
*
Constructive trust
*
Corporate opportunity The ''corporate opportunity'' doctrine is the legal principle providing that directors, officers, and controlling shareholders of a corporation must not take for themselves any business opportunity that could benefit the corporation. The corporate ...
*
Court of equity
*
Equitable remedies Equitable remedies are judicial remedies developed by courts of equity from about the time of Henry VIII to provide more flexible responses to changing social conditions than was possible in precedent-based common law.
Equitable remedies were gr ...
*
Escrow
An escrow is a contractual arrangement in which a third party (the stakeholder or escrow agent) receives and disburses money or property for the primary transacting parties, with the disbursement dependent on conditions agreed to by the transacti ...
*
Revlon Moment
*
Self-dealing
Self-dealing is the conduct of a trustee, attorney, corporate officer, or other fiduciary that consists of taking advantage of their position in a transaction and acting in their own interests rather than in the interests of the beneficiaries of ...
*
Trust law
A trust is a legal relationship in which the holder of a right gives it to another person or entity who must keep and use it solely for another's benefit. In the Anglo-American common law, the party who entrusts the right is known as the " sett ...
*
Uniform Prudent Investor Act ''The Uniform Prudent Investor Act'' (UPIA), which was adopted in 1992 by the American Law Institute's Third Restatement of the Law of Trusts ("Restatement of Trust 3d"), reflects a "modern portfolio theory" and " total return" approach to the exe ...
*''
Attorney General v Blake
is a leading English contract law case on damages for breach of contract. It established that in some circumstances, where ordinary remedies are inadequate, restitutionary damages may be awarded.
Facts
George Blake was a member of the Secre ...
'' [2000
UKHL 45 concerning the extension of fiduciary like remedies to a breach of contract context
References
Further reading
*P Birks, ‘The Content of Fiduciary Obligation’ (2000) 34 Israel Law Journal 3; (2002) 16 Trust Law International 34
*M Conaglen, ‘The Nature and Function of Fiduciary Loyalty’ (2005) 121 Law Quarterly Review 452–480.
*
JH Langbein ‘Questioning the Trust Law Duty of Loyalty’ (2005) 114 Yale Law Journal 929–990.
*A Hicks, ‘The Trustee Act 2000 and the Modern Meaning of 'Investment''’ (2001) 15 (4) Trust Law International 203
*DA De Mott, 'Beyond Metaphor: An Analysis of Fiduciary Obligation' (1988) 5 Duke Law Journal 879.
*PD Finn, 'The Fiduciary Principle' in TG Youdan (ed) 'Equity, Fiduciaries and Trusts' (1989) Carswell.
*MN Firzli, ‘Beyond SDGs: Can Fiduciary Capitalism and Bolder, Better Boards Jumpstart Economic Growth?’ (2016) 61 Revue Analyse Financière 65–67.
*T Frankel, 'Fiduciary Law' (1983) California Law Review 795.
*DR Paling ‘Trustees Duties of Skill and Care’ (1973) 37 Conveyancer 48–59
*EJ Weinrib, ‘The Fiduciary Obligation’ (1975) 25(1) University of Toronto Law Journal 1–22
*LI Rotman "Fiduciary Law's 'Holy Grail': Reconciling Theory and Practice in Fiduciary Jurisprudence" (2011) 91 Boston University Law Review 921–971.
*LI Rotman "Fiduciary Doctrine: A Concept in Need of Understanding" (1996) 34 Alberta Law Review 821–852.
*Bryan, M.W and V.J Vann ''Equity & Trusts in Australia'' (Cambridge University Press, 2nd ed, 2013)ch 10.
The following books cover the field in detail:
*Chodos, Rafael, 'The Law of Fiduciary Duties' (2001) Blackthorne Legal Press
*Finn, P.D., 'Fiduciary Obligations' (1977) The Law Book Co
*Frankel, Tamar, 'Fiduciary Law' (2008) Fathom Publishing Company
*Frankel, Tamar, 'Legal Duries of Fiduciaries' (2012) Fathom Publishing Company
*Frankel, Tamar, 'Fiduciary Law' (2010) Oxford University Press .
*Rotman, Leonard I., 'Fiduciary Law' (2005) Thomson/Carswell .
External links
*Iman Anabtawi and
Lynn A. Stout"Fiduciary Duties for Activist Shareholders". UCLA School of Law, Law-Econ Research Paper No. 08-02.Social Science Research Network (SSRN) Electronic Library.
The U.S. Department of Labor: Employee Benefits Security Administration.
''The New Palgrave Dictionary of Economics and the Law'', Definition of "fiduciary duties", by Tamar Frankel; "Fiduciary Law", by Tamar Frankel, ''California Law Review'', May 1983, 71 Ca. L. Rev. 795; "Fiduciary Duties as Default Rules", by Tamar Frankel, ''Oregon Law Review'', Winter 1995, 74 Or. L. Rev. 1209; "Contract and Fiduciary Duty", by Frank H. Easterbrook and Daniel R. Fischel, ''The Journal of Law and Economics'', 1993, 36 J.L. & Econ. 425; etc. Berkman Center, Harvard Law School: Trust and Non-Trust in Law, Business, and Behavioral Science.
*{{Cite EB1911, wstitle=Fiduciary
Common law
Equity (law)
Legal professions