21 June 2017

What is a fiduciary duty?

A fiduciary duty exists where a person or company is required to put another person's interests before their own. It arises from a relationship of trust and confidence, such as the relationship between doctors and their patients, directors and their companies, and agents and their principals.


How is a fiduciary duty different to other types of obligation?

Parties to a contract are not usually required to subordinate their interests to the interests of another person. They are required to comply with the terms of the contract, but are otherwise entitled to act in their own interests.

Similarly, a party who owes a duty of care to another person is required to meet the required standard. Usually this will be an obligation to take 'reasonable care'. Again, this does not necessarily mean that the person is required to put the interests of the other person first.

fiduciary obligation is of the highest standard. It is a duty of utmost good faith and the duty imposed upon a fiduciary is strict.

The only way a fiduciary can escape liability for conduct that amounts to a breach is where they have the fully informed consent of the other party - and even then, sometimes that won't be enough.

How do fiduciary duties arise?

Fiduciary duties often arise out of contracts (or deeds), where one person assumes an express obligation to act in another person's interests. Sometimes the document might say that the relationship is fiduciary, but this is not necessary to establish  the existence of fiduciary obligations.

Fiduciary duties can also arise independently of contracts. For example, a fiduciary relationship can arise:

  • on the reasonable expectations of either party, based on the circumstances;
  • where a party is not free to pursue its own interests because its powers exist for the exclusive purpose of promoting the interests of another; or
  • where the exercise of power or discretion by one party affects the interests of the other in a legal or practical sense.

What are some examples of fiduciary duties?

There are a number of recognised categories of relationships where fiduciary obligations will arise. Below are some examples, keeping in mind that these are not the only cirumstances where fiduciary obligations can exist:

  • Company director to their company
  • Company director to shareholders
  • Partners to others in a formal partnership
  • Someone exercising a power of attorney
  • Agent to their principal
  • Trustee to a beneficiary
  • Lawyer to client
  • Doctor to patient
  • Employer to employee

What is the nature of the obligation?

A fiduciary has a strict duty not to do two things:

  1. use their position for profit or personal gain; and
  2. place themselves in a position of conflict in relation to their duties and the interests of the beneficiary.

If a fiduciary breaches either obligation, it may be held to account to the beneficiary for any benefit or gain. This can apply even where the benefeciary has not suffered any loss, or where the beneficiary would not have been able to avail itself of the opportunity. Such is the strict nature of the obligation.

Examples of breach

Below are some examples of where a court has found a breach of a fiduciary duty.

  • A director facilitated a company's acquisition of a family member’s business, despite the acquisition not being in the best financial interests of the company.
  • A person bought shares for personal gain based on confidential information they had received in a fiduciary capacity.
  • A director caused a company to sell shares to another company controlled by the director at a significant undervalue and with no independent valuation.
  • A director approved something carelessly and without the required level of diligence. (Part of a director's fiduciary obligation involves the exercise of reasonable diligence.)
  • A fiduciary took advantage of a business opportunity that the beneficiary was unable to take.

Remedies for breach

As fiduciary relationships arise in equity, there is a wide range of remedies potentially available. The most common remedies are:

  • Injunction – an order restraining the fiduciary from committing a breach.
  • Rescission –  an order setting aside an impugned transaction.
  • Account of profits – an order stripping the relevant gain or profits from the fiduciary. (A beneficiary is not required to demonstrate any loss as a condition to receiving an account of profits.)
  • Equitable compensation – an order for compensation for a loss suffered by the beneficiary, with the aim of restoring the beneficiary to the position they would have been in if there had not been a breach.
  • Imposition of a constructive trust – an order that the fiduciary hold property on trust for the benefit of another party. This remedy typically arises where a fiduciary has stolen or misappropriated property, or obtains a business opportunity intended for the beneficiary.

Practical Tips

There are two key takeaways.

First, if there is any potential doubt, make sure the relevant agreement (or deed) expressly identifies whether fiduciary obligations are intended to apply. If they are, the document should explain the nature and extent of those obligations. If they are not, the document should say so. Joint venture agreements are a good example of where confusion (and therefore disputes) can arise if the document is unclear.

Second, if you are a fiduciary, make sure you understand the scope of your duties and that you observe them. As explained above, it is an obligation of utmost honesty and good faith. You can be held to account even where the other person(s) has not suffered a loss or may not have been able to take advantage of the relevant opportunity.

New Call-to-action

About the Author

Stephanie Scott | Lawyer

Stephanie worked as a junior commercial lawyer with Turtons between 2016 and 2017. She is no longer with the firm.

stephanie.scott@turtons.com | +61 2 9229 2922

About Turtons

Turtons is a commercial law firm in Sydney with specialist expertise in privately owned construction and technology businesses.

Stephanie Scott | Lawyer

Author

Stephanie Scott | Lawyer

stephanie.scott@turtons.com

Stephanie worked as a junior commercial lawyer with Turtons between 2016 and 2017. She is no longer with the firm.

stephanie.scott@turtons.com | +61 2 9229 2922

New call-to-action

Join our free construction law newsletter.

Monthly insights and practical tips delivered straight to your inbox.

Resources
Careers