Businesses depend on relationships to thrive. These relationships take many forms and serve many purposes, but all are aimed at the same goal: success. This can be seen in relationships between shareholders, investors, employees, and executives. In many cases, an individual will have a legal obligation to one or more parties that requires the individual to act in the best interest of others and not themself. In some instances, these business relationships formalize and rise to the level of a fiduciary duty.
In fiduciary relationships, the fiduciary owes the beneficiary legal duties called fiduciary duties. These duties generally prohibit a fiduciary from using the relationship in a self-serving manner and require the fiduciary keep the other party fully aware of all information related to the fiduciary’s benefit. When a beneficiary does not consent and/or is not made fully aware of all information regarding a potential benefit to the fiduciary and damages result, this could constitute a breach of fiduciary duty.
A fiduciary duty, generally, is one in which an individual or party has a legal obligation to act in the best interest of others. In fiduciary relationships, the individual with the duty or obligation is the called the fiduciary, and the other parties involved are called principals or beneficiaries. The fiduciary may be tasked with managing and maintaining a principal’s business, property, or money; and, because of this, the beneficiaries place an immense amount of trust in the fiduciary.
The entire basis of a fiduciary relationship is the fiduciary being entrusted to act in the best interest of the principal, regardless of whether or not it benefits the fiduciary. The fiduciary is trusted due to their expertise and knowledge, and any benefit of the relationship is often outlined at the beginning of the agreement to serve the principal. A fiduciary may breach these duties by acting to benefit themself, a third party, or combination of the two.
There are multiple fiduciary duties, so a multitude of actions can give rise to a breach of fiduciary duty. Fiduciaries are obligated to act in good faith (duty of good faith), provide important information and remain transparent at all times regarding assets (duty of candor or full disclosure), as well as remain loyal to the beneficiaries (duty of loyalty). Instances in which a fiduciary would likely be in breach of their duty include:
In order for any of these actions to be compensable due to a breach of fiduciary duty, the principal must be able to prove the fiduciary’s actions either damaged the principal or benefited the fiduciary. The latter is important — unlike other causes of action, a fiduciary breach may be actionable even when the principal is not damaged if, instead, it benefited the fiduciary.
The current health and economic crisis resulting from COVID-19 does not relieve or lessen the duty of a fiduciary; if anything, the role, skills, and judgement a fiduciary’s expertise can provide may be depended upon heavily during such times.
Since a fiduciary must act in the best interests of the beneficiary, the fiduciary may require additional, specific information to aid in decision making during an economic downtown and/or financial crisis. The fiduciary must communicate efficiently and effectively due to time sensitivity. Communication with affected parties — such as shareholders, board members, executives, investors, and more — is especially critical during times of uncertainty and hardship as the decisions made can be more crucial and meaningful in impact.
While the first step in avoiding a breach of fiduciary duty is to simply remain true to one’s word, we are well aware that it is not always that simple. Human nature is complicated and managing the interests of someone else can prove tempting to a fiduciary who is not ready or responsible enough to handle the pressures of managing and maintaining assets. Principals can help protect their assets by documenting their communications with a fiduciary, as this information could be useful in proving a breach occurred.
Fiduciary duty is the highest form of duty under the law; and, because of this, cases involving fiduciary breaches can be complex. Successful commercial litigation requires the guidance of a seasoned attorney equipped to handle complex cases. If you believe you have been the victim of a breach of fiduciary duty or if you are being accused of breaching a fiduciary duty, contact the experienced civil litigation attorneys at Burford Perry.