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Breach of Fiduciary Duty Must-Knows and How to Avoid It - Werner Law Firm

Breach of Fiduciary Duty Must-Knows and How to Avoid It

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Written by Troy Werner

Troy Werner has been an indispensable asset to The Werner Law Firm since joining in 2009, providing exceptional legal service to its clients.

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POSTED ON: February 12, 2020

The law is a rather precise thing – especially contract law. There is a reason lawyers stress the importance of pouring over the bylaws and the fine print. When sitting down to pen an agreement between two parties, every little detail counts. Conduct needs to be discussed twice and thrice over, conditions need to be […]

The law is a rather precise thing – especially contract law. There is a reason lawyers stress the importance of pouring over the bylaws and the fine print. When sitting down to pen an agreement between two parties, every little detail counts. Conduct needs to be discussed twice and thrice over, conditions need to be deliberated, and decisions need to be agreed upon.

Yet the law is not always precise. There are certain aspects of the law that are deliberately vague and open. With the simple argument that these things must be defined on a case-by-case basis and by analogy. Rather than by a strict textbook definition that might strain to apply to each and every potential example. Enter the concept of the fiduciary relationship.

What Is a Fiduciary Duty?

‘Fiduciary’, usually in its form as an adjective, describes a duty or relationship in which one party acts in the other party’s interest, insofar as their (professional) relationship is considered. A fiduciary relationship is, as the word implies, in good faith (bona fide), built on trust and confidence. One’s fiduciary responsibility to another person is part of the job description for several different positions. Such as a lawyer, financial investment advisor, and trustee.

By analogy: if a trustee takes on the job of handling a grantor’s trust, they have a fiduciary duty to uphold the interests of the trustee only. Anything that could translate into a personal profit, or would otherwise be seen as self-dealing, is taboo. Similarly, anything done to purposefully sabotage the grantor or act against their best interest is similarly a breach.

Don't Break the Trust

However, there are certain limitations to consider, even within that example. It's important to understand that the trustee’s loyalty to the grantor of this trust cannot override the grantor’s best interests. In the sense that the trustee is not entitled to take any action that might benefit the grantor at the expense of the beneficiary of the trust. This is a conflict of interest. This means the person holding fiduciary duty cannot act in the interest of the grantor if it means doing so at the expense of the beneficiary.

Similarly, the person holding fiduciary duty is wholly responsible for those under them. As well as who contributes to the principal’s business or interests. This means if a trustee hires a valuator or an accountant to help manage the numbers of the estate, they are responsible for hiring competent, trustworthy professionals. Finding and paying an incompetent hire can be a breach of fiduciary duty as well.

In short, fiduciary duty is ‘trust’. It is difficult to pinpoint it any further than that. But anything that breaks a client’s trust can count as a breach.

Do Not Assume Fiduciary Duty Exists in Any Given Situation

A fiduciary duty often exists wherever one person holds something in trust for another, from money to information. Examples of fiduciary positions include:

      • Member of a board of directors
      • Investment advisor
      • Attorney
      • Executor of an estate
      • Trustee
      • Certified public accountant
      • A guardian/proxy with power of attorney
      • And more

However, it is dangerous to assume that a person holding something in trust for you automatically has a fiduciary duty. When entering into any kind of agreement or contract with another person wherein you would stand to lose significantly if they decided to act solely in their own interest with the information or access given to them, it is important to clarify that they have a fiduciary duty.

For example, while an investment advisor has a fiduciary duty towards their client, there are other kinds of financial professionals who, as per securities law, do not owe a fiduciary duty.

The Investment Advisers Act of 1940 holds investment advisers accountable for any breach of fiduciary duty but exempts brokers from this definition. Instead, investment brokers only need to adhere to a duty of ‘suitability’, or a ‘suitability obligation’, which basically means that they must give you the best recommendation they can; a weaker obligation.

If you are not sure of the duties of a professional working with you or for you, clarify. Read through the contract, if you have got one. See if the profession they are hiring for needs to act in their client’s best interest.

Defining a Breach of Fiduciary Duty 

It is not particularly difficult to breach fiduciary duty. Any action that can see as either: a.) going squarely against a client’s or principal’s interests, or b.) as a form of self-serving, i.e. solely in the interest of the fiduciary, can be a breach of fiduciary duty.

A breach of fiduciary duty is covered under tort law. This means it is not a crime, but the offended party can seek damages. If they can prove that the breach was done with malicious intent, then the offended party may seek punitive damages as well. In that vein, it’s important to mention that examples of fraud can include breaches of fiduciary duty, and thus make the case criminal (see Bernie Madoff’s investment scandal).

The scope and severity of the breach, and the appropriate remedy, must be discussed on a case-by-case basis with a legal professional. It is impossible to suggest a general course of legal action.

How to Avoid a Breach of Fiduciary Duty

Act in the best interest of the party to whom you are beholden. It might sound overly vague, but that’s because there are so many ways to breach this particular duty. That is why communication is important. Do not do anything that can misconstrue as a potential breach of fiduciary duty. That means avoiding surprises, and generally always consulting the other party.

Most importantly, document everything. Capture and keep the minutes of every meeting, put decisions and deliberations on paper, and ensure that if any potential decision comes back to haunt you, you have the means to prove that you did not act against the interests of your fiduciary.

If you worry about a potential breach of fiduciary duty, or if you believe that you are experiencing a breach by someone else, seek the opinion of a legal professional.

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