Fiduciary
Encyclopedia
Law
Law is a system of rules and guidelines which are enforced through social institutions to govern behavior, wherever possible. It shapes politics, economics and society in numerous ways and serves as a social mediator of relations between people. Contract law regulates everything from buying a bus...
or ethical relationship of confidence or trust between two or more parties
Party
A party is a gathering of people who have been invited by a host for the purposes of socializing, conversation, or recreation. A party will typically feature food and beverages, and often music and dancing as well....
. One party, for example a corporate trust company or the trust department of a bank, acts in a fiduciary capacity to one, who for example has funds entrusted to it for investment. In a fiduciary relationship, one person, in a position of vulnerability, justifiably vests confidence, good faith
Good faith
In philosophy, the concept of Good faith—Latin bona fides “good faith”, bona fide “in good faith”—denotes sincere, honest intention or belief, regardless of the outcome of an action; the opposed concepts are bad faith, mala fides and perfidy...
, 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.
A fiduciary duty is the highest standard of care
Standard of care
In tort law, the standard of care is the 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 breached is determined by the trier of fact, and is usually...
at either equity or law. A fiduciary (abbreviation fid) is expected to be extremely loyal to the person to whom he owes the duty (the "principal
Principal (law)
In commercial law, a principal is a person, legal or natural, who authorizes an agent to act to create one or more legal relationships with a third party...
"): he must not put his personal interests before the duty, and must not profit from his position as a fiduciary, unless the principal consents.
In English
England
England is a country that is part of the United Kingdom. It shares land borders with Scotland to the north and Wales to the west; the Irish Sea is to the north west, the Celtic Sea to the south west, with the North Sea to the east and the English Channel to the south separating it from continental...
common law
Common law
Common law is law developed by judges through decisions of courts and similar tribunals rather than through legislative statutes or executive branch action...
the fiduciary relation is arguably the most important concept within the portion of the legal system known as equity. In the United Kingdom, the Judicature Acts
Judicature Acts
The Judicature Acts are a series of Acts of Parliament, beginning in the 1870s, which aimed to fuse the hitherto split system of courts in England and Wales. The first two Acts were the Supreme Court of Judicature Act 1873 and the Supreme Court of Judicature Act 1875 The Judicature Acts are a...
merged the courts of equity
Court of equity
A chancery court, equity court or court of equity is a court that is authorized to apply principles of equity, as opposed to law, to cases brought before it.These courts began with petitions to the Lord Chancellor of England...
(historically based in England's Court of Chancery
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 the slow pace of change and possible harshness of the common law. The Chancery had jurisdiction over all matters of equity, including trusts, land law, the administration of the estates of...
) with the courts of common law, and as a result the concept of fiduciary duty also became available in common law
Common law
Common law is law developed by judges through decisions of courts and similar tribunals rather than through legislative statutes or executive branch action...
courts.
When a fiduciary duty is imposed, equity requires a different, arguably stricter, standard of behavior than the comparable tortious duty of care
Duty of care
In tort law, a duty of care is a legal obligation imposed on an individual requiring that they adhere to a standard of reasonable care while performing any acts that could foreseeably harm others. It is the first element that must be established to proceed with an action in negligence. The claimant...
at common law. 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 a duty not to profit from his fiduciary position without knowledge and consent. A fiduciary ideally would not have a conflict of interest
Conflict of interest
A conflict of interest occurs when an individual or organization is involved in multiple interests, one of which could possibly corrupt the motivation for an act in the other....
. It has been said that fiduciaries must conduct themselves "at a level higher than that trodden by the crowd" and that "[t]he distinguishing or overriding duty of a fiduciary is the obligation of undivided loyalty."
Duty in different jurisdictions
Different jurisdictions regard fiduciary duties in different lights. Canadian law, for example, has developed a more expansive view of fiduciary obligation, more so than American law, while Australian law and British law have developed more conservative approaches than either the USA or Canada. 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 a fiduciary has obligations to the employer even after the employment relationship is terminated, whereas in the U.S. the employment and fiduciary relationships terminate together.
In SEC v. Chenery Corporation 318 U.S. 80 (1943), Frankfurter J said,
Relationships
The most common circumstance where a fiduciary duty will arise is between a trusteeTrustee
Trustee is a legal term which, in its broadest sense, can refer to any person who holds property, authority, or a position of trust or responsibility for the benefit of another...
, whether real or juristic, and a beneficiary
Beneficiary
A beneficiary 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 person who receives the payment of the amount of insurance after the death of the insured...
. 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; however, the trustee is bound by equity to suppress his own interests and administer the property only for the benefit of the beneficiary. In this way, the beneficiary obtains the use
Use (law)
Use, as a term in real property law of common law countries, amounts to a recognition of the duty of a person, to whom property has been conveyed for certain purposes, to carry out those purposes....
of property without being its technical owner.
Others, such as corporate directors
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...
, 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 his ward's property. A person in a sensitive position sometimes protects himself from possible conflict of interest charges by setting up a blind trust
Blind trust
A blind trust is a trust in which the fiduciaries, namely the trustees or those who have been given power of attorney, have full discretion over the assets, and the trust beneficiaries have no knowledge of the holdings of the trust and no right to intervene in their handling...
, placing his 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
Trust company
A trust company is a corporation, especially a commercial bank, organized to perform the fiduciary of trusts and agencies. It is normally owned by one of three types of structures: an independent partnership, a bank, or a law firm, each of which specializes in being a trustee of various kinds of...
, such as a commercial bank
Commercial bank
After the implementation of the Glass–Steagall Act, the U.S. Congress required that banks engage only in banking activities, whereas investment banks were limited to capital market activities. As the two no longer have to be under separate ownership under U.S...
, organized for that purpose. In the United States, the Office of Thrift Supervision
Office of Thrift Supervision
The Office of Thrift Supervision was a United States federal agency under the Department of the Treasury that charters, supervises, and regulates all federally- and state-chartered savings banks and savings and loans associations. It was created in 1989 as a renamed version of another federal agency...
(OTS), an agency of the United States Department of the Treasury
United States Department of the Treasury
The Department of the Treasury is an executive department and the treasury of the United States federal government. It was established by an Act of Congress in 1789 to manage government revenue...
, is the primary regulator of the fiduciary activities of federal savings associations
Federal savings associations
Federal savings associations , in the United States, are institutions chartered by the Office of Thrift Supervision pursuant to the provisions of the Home Owners' Loan Act, a U.S. federal statute...
.
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:
- TrusteeTrusteeTrustee is a legal term which, in its broadest sense, can refer to any person who holds property, authority, or a position of trust or responsibility for the benefit of another...
/beneficiaryBeneficiary (trust)In trust law, a beneficiary or cestui que use, a.k.a. cestui que trust, is the person or persons who are entitled to the benefit of any trust arrangement. A beneficiary will normally be a natural person, but it is perfectly possible to have a company as the beneficiary of a trust, and this often...
: Keech v Sandford - ConservatorConservatorshipConservatorship is a legal concept in the United States of America, where an entity or organization is subjected to the legal control of an external entity or organization, known as a conservator. Conservatorship is established either by court order or via a statutory or regulatory authority...
s and legal guardianLegal guardianA legal guardian is a person who has the legal authority to care for the personal and property interests of another person, called a ward. Usually, a person has the status of guardian because the ward is incapable of caring for his or her own interests due to infancy, incapacity, or disability...
s / wardWard (law)In law, a ward is someone placed under the protection of a legal guardian. A court may take responsibility for the legal protection of an individual, usually either a child or incapacitated person, in which case the ward is known as a ward of the court, or a ward of the state, in the United States,...
s - Agents, brokerBrokerA broker is a party that arranges transactions between a buyer and a seller, and gets 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...
s and factorFactor (agent)A factor, from the Latin "he who does" , is a person who professionally acts as the representative of another individual or other legal entity, historically with his seat at a factory , notably in the following contexts:-Mercantile factor:In a relatively large company, there could be a hierarchy,...
s / principals: McKenzie v McDonald - Buyer agentBuyer agency agreementBuyer Agency Agreements are where a Realtor represents the buyer of real estate.- Creation :With the advent of "Buyer Agency" in the early 1990s as opposed to seller agency, a real estate Agent/Broker agrees and contracts to represent the Buyer in her purchase of a home/property...
(real estate brokerReal estate brokerA real estate broker, real estate agent or realtor is a party who acts as an intermediary between sellers and buyers of real estate/real property and attempts to find sellers who wish to sell and buyers who wish to buy...
) / buyer client - Confidential advisor including financial adviserFinancial adviserA financial adviser, is a professional who renders financial services to individuals, businesses and governments. This can involve investment advice, which may include pension planning, and/or advice on life insurance and other insurances such as income protection insurance, critical illness...
and investment advisorInvestment AdvisorThe term Investment Advisor is an individual or firm who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities...
/ advisee or client - LawyerLawyerA lawyer, according to Black's Law Dictionary, is "a person learned in the law; as an attorney, counsel or solicitor; a person who is practicing law." Law is the system of rules of conduct established by the sovereign government of a society to correct wrongs, maintain the stability of political...
/client: Sims v Craig Bell & Bond - ExecutorExecutorAn executor, in the broadest sense, is one who carries something out .-Overview:...
s and administratorAdministrator (law)In law an administrator can be:* a person appointed by the court to handle the estate of someone who died without a will ....
s / legateeLegateeA 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 and "devisees" took land under will. Brooker v....
s and heirInheritanceInheritance is the practice of passing on property, titles, debts, rights and obligations upon the death of an individual. It has long played an important role in human societies...
s - Corporate partnerPartnershipA partnership is an arrangement where parties agree to cooperate to advance their mutual interests.Since humans are social beings, partnerships between individuals, businesses, interest-based organizations, schools, governments, and varied combinations thereof, have always been and remain commonplace...
s, joint ventureJoint ventureA joint venture is a business agreement in which parties agree to develop, for a finite time, a new entity and new assets by contributing equity. They exercise control over the enterprise and consequently share revenues, expenses and assets...
rs, directorsBoard of directorsA board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. Other names include board of governors, board of managers, board of regents, board of trustees, and board of visitors...
and officers / company and stockholderShareholderA shareholder or stockholder is an individual or institution that legally owns one or more shares of stock in a public or private corporation. Shareholders own the stock, but not the corporation itself ....
s: Guth v. Loft Inc.Guth v. Loft Inc.Guth v. Loft, Inc., 5 A. 2d 503 is a Delaware corporation law case on corporate opportunities and the duty of loyalty. It deviated from the 200 year old rule laid down in Keech v. Sandford that a fiduciary should leave open no possibility of conflict of interest between his private dealings and...
, In Plus Group Ltd v. PykeIn Plus Group Ltd v. PykeIn Plus Group Ltd v. Pyke [2002] EWCA Civ 370 is a UK company law case concerning the fiduciary duties of directors, and in particular the doctrine concerning corporate opportunities. In the course of his judgment, Sedley LJ cast serious doubt on the correctness of the contract law case, Bell v....
, Peoples Department Stores Inc. (Trustee of) v. WisePeoples Department Stores Inc. (Trustee of) v. WisePeoples Department Stores Inc. v. Wise, [2004] 3 S.C.R. 461, 2004 SCC 68, is a major Supreme Court of Canada decision on the scope of the fiduciary duty upon directors and officers of a corporation...
, Regal (Hastings) v GulliverRegal (Hastings) v GulliverRegal Ltd v Gulliver [1942] , is a leading case in UK company law regarding the rule against directors and officers from taking corporate opportunities in violation of their duty of loyalty. The Court held that a director is in breach of his duties if he takes advantage of an opportunity that the... - Board of directorsBoard of directorsA board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. Other names include board of governors, board of managers, board of regents, board of trustees, and board of visitors...
/ company: Re Saul D Harrison & Sons plcRe Saul D Harrison & Sons plcRe Saul D Harrison & Sons plc [1995] 1 BCLC 14, [1994] BCC 475, is a UK company law case on an action for unfair prejudice under s.459 Companies Act 1985 . It was decided in the Court of Appeal and deals with the concept of members of a business having their "legitimate expectations" disappointed...
, Woolworths Ltd v Kelly - Partner/partner: Chan v Zacharia, Fraser Edmiston Pty Ltd v AGT (Qld) Pty Ltd, Meinhard v Salmon
- Stockbroker/client: Hodgkinson v Simms
- Senior employee / company: Green & Clara Pty Ltd v Bestobell Industries Pty Ltd
- RetirementRetirementRetirement is the point where a person stops employment completely. A person may also semi-retire by reducing work hours.Many people choose to retire when they are eligible for private or public pension benefits, although some are forced to retire when physical conditions don't allow the person to...
plan administrators (including 401(k)401(k)A 401 is a type of retirement savings account in the United States, which takes its name from subsection of the Internal Revenue Code . A contributor can begin to withdraw funds after reaching the age of 59 1/2 years...
plans) / retirees and workers: Vivien v. WorldcomVivien v. WorldcomVivien v. WorldCom, Inc., No. 02-01329 WHA established a new legal theory permitting workers to recover for losses in their 401 retirement plans caused by investment in their employers’ stock.-Facts:... - PromoterCorporate promoterA corporate promoter is a person who solicits people to invest money into a corporation, usually when it is being formed. An investment banker, an underwriter, or a stock promoter may, wholly or in part, perform the role of a promoter...
s / stockStockThe capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
subscribers - LiquidatorLiquidator (law)In law, a liquidator is the officer appointed when a company goes into winding-up or liquidation who has responsibility for collecting in all of the assets of the company and settling all claims against the company before putting the company into dissolution....
/company: Re Pantmaenog - Mutual savings bankMutual savings bankA mutual savings bank is a financial institution chartered by a central or regional government, without capital stock, that is owned by its members who subscribe to a common fund. From this fund claims, loans, etc., are paid. Profits after deductions are shared between the members...
s and investment corporationInvestment companyAn investment company is a company whose main business is holding securities of other companies purely for investment purposes. The investment company invests money on behalf of its shareholders who in turn share in the profits and losses....
s / their depositors and investorInvestorAn investor is a party that makes an investment into one or more categories of assets --- equity, debt securities, real estate, currency, commodity, derivatives such as put and call options, etc...
s - Receivers, trustees in bankruptcy and assigneeAssignment (law)An assignment is a term used with similar meanings in the law of contracts and in the law of real estate. In both instances, it encompasses the transfer of rights held by one party—the assignor—to another party—the assignee...
s in insolvencyInsolvencyInsolvency means the inability to pay one's debts as they fall due. Usually used to refer to a business, insolvency refers to the inability of a company to pay off its debts.Business insolvency is defined in two different ways:...
/ creditorCreditorA creditor is a party that has a claim to 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 or service to the second party under the assumption that the second party will return an equivalent property or...
s - Governments / indigenous peoplesIndigenous peoplesIndigenous peoples are ethnic groups that are defined as indigenous according to one of the various definitions of the term, there is no universally accepted definition but most of which carry connotations of being the "original inhabitants" of a territory....
: R. v. SparrowR. v. SparrowR. v. Sparrow, [1990] 1 S.C.R. 1075 was an important decision of the Supreme Court of Canada concerning the application of Aboriginal rights under section 35 of the Constitution Act, 1982...
, Seminole Nation v. United StatesSeminole Nation v. United StatesArgued: April 1, 2, 1942.Decided: May 11, 1942.Citations: 316 U.S. 286, 62 S. Ct. 1049Deciding Justices:Justice Murphy wrote for the majority.Chief Justice Jackson dissented.Justice Reed took no part in the decision.... - DoctorPhysicianA physician is a health care provider who practices the profession of medicine, which is concerned with promoting, maintaining or restoring human health through the study, diagnosis, and treatment of disease, injury and other physical and mental impairments...
/patientPatientA patient is any recipient of healthcare services. The patient is most often ill or injured and in need of treatment by a physician, advanced practice registered nurse, veterinarian, or other health care provider....
(Canada: McInerney v. MacDonald, Norberg v. WynribNorberg v. WynribNorberg v. Wynrib, [1992] 2 S.C.R. 226 is a leading Supreme Court of Canada decision on the fiduciary duty between doctors and patients, and on the limits of consent as a defense in sexual assault....
) - GuardianLegal guardianA legal guardian is a person who has the legal authority to care for the personal and property interests of another person, called a ward. Usually, a person has the status of guardian because the ward is incapable of caring for his or her own interests due to infancy, incapacity, or disability...
/wardWard (law)In law, a ward is someone placed under the protection of a legal guardian. A court may take responsibility for the legal protection of an individual, usually either a child or incapacitated person, in which case the ward is known as a ward of the court, or a ward of the state, in the United States,...
: Paramasivam v Flynn - TeacherTeacherA teacher or schoolteacher is a person who provides education for pupils and students . The role of teacher is often formal and ongoing, carried out at a school or other place of formal education. In many countries, a person who wishes to become a teacher must first obtain specified professional...
/studentStudentA student is a learner, or someone who attends an educational institution. In some nations, the English term is reserved for those who attend university, while a schoolchild under the age of eighteen is called a pupil in English...
: Glover v Porter-Gaud - PriestPriestA priest is a person authorized to perform the sacred rites of a religion, especially as a mediatory agent between humans and deities. They also have the authority or power to administer religious rites; in particular, rites of sacrifice to, and propitiation of, a deity or deities...
/ parishParishA parish is a territorial unit historically under the pastoral care and clerical jurisdiction of one parish priest, who might be assisted in his pastoral duties by a curate or curates - also priests but not the parish priest - from a more or less central parish church with its associated organization...
ioner seeking counseling: Doe v Evans, 814 So.2d 370 (Fla. 2002)
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
Roman Dutch law is a legal system based on Roman law as applied in the Netherlands in the 17th and 18th centuries. As such, it is a variety of the European continental civil law or ius commune...
, a fiduciary heir may receive property subject to passing it to another on fulfillment 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, as opposed to business partnerships, 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 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.Arklow vs. MacLean Privy Council 1999
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.
Recently, 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 Comic.
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 Canadian 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 (trust)
In trust law, a protector is a person appointed under the trust instrument to direct or restrain the trustees in relation to their administration of the trust....
of a trust
Trust law
In common law legal systems, a trust is a relationship whereby property is held by one party for the benefit of another...
may owe fiduciary duties to the beneficiaries
Beneficiary (trust)
In trust law, a beneficiary or cestui que use, a.k.a. cestui que trust, is the person or persons who are entitled to the benefit of any trust arrangement. A beneficiary will normally be a natural person, but it is perfectly possible to have a company as the beneficiary of a trust, and this often...
, although there is no case law
Case law
In law, case law is the set of reported judicial decisions of selected appellate courts and other courts of first instance which make new interpretations of the law and, therefore, can be cited as precedents in a process known as stare decisis...
establishing this to be the case.
Example
For example, two members of a band currently under contract with one another (or with some other tangible, existing relationship that creates a legal duty), X and Y, 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 contractContract
A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...
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 here will be that X holds both the contract and the money in a constructive trust
Constructive trust
A constructive trust is an equitable remedy resembling a trust imposed by a court to benefit a party that has been wrongfully deprived of its rights due to either a person obtaining or holding legal right to property which they should not possess due to unjust enrichment or interference...
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, executorExecutor
An executor, in the broadest sense, is one who carries something out .-Overview:...
or guardian of an estate, may be legally required to file with a probate court or judge a surety bond
Surety bond
A surety bond is a promise to pay one party a certain amount if a second party fails to meet some obligation, such as fulfilling the terms of a contract...
, 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
Conflict of interest
A conflict of interest occurs when an individual or organization is involved in multiple interests, one of which could possibly corrupt the motivation for an act in the other....
.
Conflict of duties
A fiduciary's duty must not conflict with another fiduciary duty.Stewart v Layton (1992) 111 ALR 687 Conflicts between one fiduciary duty and another fiduciary duty arise most often when a lawyerLawyer
A lawyer, according to Black's Law Dictionary, is "a person learned in the law; as an attorney, counsel or solicitor; a person who is practicing law." Law is the system of rules of conduct established by the sovereign government of a society to correct wrongs, maintain the stability of political...
or an agent, such as a real estate agent, represent more than one client, and the interests of those clients conflict. This would occur when a lawyer attempts to represent both the plaintiff
Plaintiff
A plaintiff , also known as a claimant or complainant, is the term used in some jurisdictions for the party who initiates a lawsuit before a court...
and the defendant
Defendant
A defendant or defender is any party who is required to answer the complaint of a plaintiff or pursuer in a civil lawsuit before a court, or any party who has been formally charged or accused of violating a criminal statute...
in the same matter, for example. The rule comes from the logical 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 profitsProfit (accounting)
In accounting, profit can be considered to be the difference between the purchase price and the costs of bringing to market whatever it is that is accounted as an enterprise in terms of the component costs of delivered goods and/or services and any operating or other expenses.-Definition:There are...
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 consents then the fiduciary may keep the benefit. 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
Crime
Crime is the breach of rules or laws for which some governing authority can ultimately prescribe a conviction...
. 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
A debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...
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 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 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.
Breaches of duty and remedies
Conduct by a fiduciary may be deemed constructive fraudConstructive fraud
Constructive fraud is a legal fiction used in the law to describe 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...
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
Insider trading
Insider trading is the trading of a corporation's stock or other securities by individuals with potential access to non-public information about the company...
, 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
Legal malpractice is the term for negligence, breach of fiduciary duty, or breach of contract by an attorney that causes harm to his or her client...
; if intentional, it may be remedied in equity. Clark v Rowe, 428 Mass. 339, 345 (1998) (dicta).
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 to allow the fiduciary to retain the benefit by employing his strict common law legal rights
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 theory...
. 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.
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 profitsAccount of profits
An account of profits is a type of equitable remedy most commonly used in cases of breach of fiduciary duty...
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 for profits is the appropriate remedy when, for example, a senior employee has taken advantage of his fiduciary position by conducting his own company
Company
A company is a form of business organization. It is an association or collection of individual real persons and/or other companies, who each provide some form of capital. This group has a common purpose or focus and an aim of gaining profits. This collection, group or association of persons can be...
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 without his fiduciary position in the original company. The calculation of profits in this sense can be extremely difficult, because profit due to fiduciary position must be separated from profit due to the fiduciary's own effort and ingenuity.
Compensatory damages
Compensatory damages 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.See also
- UK company law
- Directors' dutiesDirectors' dutiesDirectors' 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...
- Compensatory damages
- Constructive trustConstructive trustA constructive trust is an equitable remedy resembling a trust imposed by a court to benefit a party that has been wrongfully deprived of its rights due to either a person obtaining or holding legal right to property which they should not possess due to unjust enrichment or interference...
- Corporate opportunityCorporate opportunityThe 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...
- Court of equityCourt of equityA chancery court, equity court or court of equity is a court that is authorized to apply principles of equity, as opposed to law, to cases brought before it.These courts began with petitions to the Lord Chancellor of England...
- Equitable remedies
- Equity (law)
- EscrowEscrowAn escrow is:* an arrangement made under contractual provisions between transacting parties, whereby an independent trusted third party receives and disburses money and/or documents for the transacting parties, with the timing of such disbursement by the third party dependent on the fulfillment of...
- Revlon Moment
- Self-dealingSelf-dealingSelf-dealing is the conduct of a trustee, an attorney, a corporate officer, or other fiduciary that consists of taking advantage of his position in a transaction and acting for his own interests rather than for the interests of the beneficiaries of the trust, corporate shareholders, or his clients...
- Trust lawTrust lawIn common law legal systems, a trust is a relationship whereby property is held by one party for the benefit of another...
- Attorney General v BlakeAttorney General v BlakeAttorney General v Blake [2000] 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:...
[2000] UKHL 45, concerning the extension of fiduciary like remedies to a breach of contract context - Meinhard v Salmon, 164 NE 545 (NY 1928)
External links
- Fiduciary and Non-Fiduciary Responsibilities
- Dictionary.com/Word of the Day Archive/fiduciary.
- "Fiduciary / F. Duty" Defined & Explained. The 'Lectric Law Library - legal resources and definitions.
- Fiduciary Law & Legal Definition. Legal Definitions Legal Terms Dictionary.
- law.com Law Dictionary: Fiduciary.
- 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.
- Meeting Your Fiduciary Responsibilities. The U.S. Department of Labor: Employee Benefits Security Administration.
- Jerry Sais Jr. & Melissa W. Sais, Meeting Your Fiduciary Responsibility. Investopedia.com - Your Source For Investing Education.
- Excerpts from texts on fiduciary duties. 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.
- Swiss Fiduciary