What Is Breach Of Fiduciary Duty, And Its Common Examples
As a business owner, you put a lot of trust in your managers, employees, partners, and shareholders.
You trust them to help you grow the company, make decisions in your best interest, and uphold the standards of the business. But what happens when they break that trust?
When they break that trust and someone in a position of power within your company acts against your best interests, you could lose money, your business, or both. This is called a breach of fiduciary duty.
This article will show you some examples of fiduciary duty breaches common in most businesses.
If you believe you have suffered any of these examples, consider contacting a commercial litigation attorney to discuss your options.
What Is A Fiduciary Duty?
A fiduciary duty is the highest standard of care. It’s a legal duty to act in another person’s best interests. It involves being honest and transparent, avoiding conflicts of interest, and fully disclosing potential conflicts.
A fiduciary duty arises when one person or entity is entrusted with the power to act on behalf of another. The relationship between a fiduciary and the person they represent is one of trust. The fiduciary must always act in good faith and in the best interests of the person they represent.
For a fiduciary duty to be legally binding, there must be a special relationship between the parties. This relationship can be created by contract, law, or a fiduciary’s position within a company.
The most common type of fiduciary duty is the one that exists between a company and its shareholders.
Under state law, directors and officers of a corporation have a fiduciary duty to the corporation and its shareholders. This duty includes a duty of loyalty and a duty of care.
Examples Of Fiduciary Relationships
There are many fiduciary relationships, from simple to complex. Some fiduciary relationships are created by law, while others are created by contract.
- The following are some common examples of fiduciary relationships:
- An accountant has a fiduciary duty to the client they are auditing
- A real estate agent has a fiduciary duty to the seller of a property
- An investment adviser has a fiduciary duty to their clients
- A corporate officer or director has a fiduciary duty to the corporation and its shareholders
- A trustee has a fiduciary duty to the beneficiaries of the trust
- A guardian has a fiduciary duty to their ward
- A lawyer has a fiduciary duty to their client
- A trustee has a fiduciary duty to the beneficiary
- An executor has a fiduciary duty to the heir
- A principal has a fiduciary duty to the agent
- A receiver has a fiduciary duty to the court
What Is A Breach Of Fiduciary Duty?
A breach of fiduciary duty is when a fiduciary violates their responsibility to act in good faith and in the best interests of the person they represent. A breach can occur when a fiduciary:
- Takes action that isn’t in the best interest of the person they represent: This can happen when a fiduciary takes action that isn’t authorized by the person they represent. For example, if an investment adviser makes investments without their client’s approval, this would breach fiduciary duty.
- Fails to disclose a conflict of interest: A fiduciary must avoid conflicts of interest and fully disclose any potential conflicts. For example, suppose a real estate agent represents both the buyer and the seller in a transaction. In that case, they must disclose this conflict of interest to both parties.
- Fraud: A fiduciary who commits fraud against the person they represent has breached their fiduciary duty. For example, if an accountant falsified financial records to benefit their client, this would breach fiduciary duty.
- Fails to take action when it’s in the best interest of the person they represent: This can happen when a fiduciary fails to take action necessary to protect their client’s interests. For example, if a corporate officer fails to take action against another officer engaged in illegal activity, this would breach fiduciary duty.
What Constitutes A Breach Of Fiduciary Duty?
Three elements must be present for a breach of fiduciary duty to occur:
- Duty: The defendant must have owed a fiduciary duty to the plaintiff, such as the duty of loyalty or the duty of care.
- Breach: The defendant must have breached their fiduciary duty by taking action that is not in the plaintiff’s best interest or failing to take action when necessary.
- Causation: The plaintiff must have suffered damages due to the defendant’s breach of fiduciary duty.
The Best Ways To Avoid It
One of the best ways to avoid fiduciary duty is to make sure Board Resolutions, Employment Contracts, and other binding agreements have fiduciary duty language included.
You can also avoid a breach of fiduciary duty by setting up clear communication channels between all parties involved in a fiduciary relationship. For example, an investment adviser should update their clients on all investment activity and get their approval before making any changes.
Finally, it’s crucial to understand the basics of fiduciary duty so that you can identify potential breaches and take action to avoid them. Understanding and avoiding fiduciary duty can help protect your interests and avoid costly litigation.
How Can An Attorney Help You Win?
To win a breach of fiduciary duty complaint, you’ll have to prove that the other party acted inappropriately and caused you some harm.
If you’re considering filing a breach of fiduciary duty claim, you must speak with an experienced attorney. They can help you understand your legal options and pursue the compensation you deserve.
An attorney can also help if you’ve been accused of breaching your fiduciary duties.
No matter what side of a breach of fiduciary duty claim you’re on, Birzon & Associates can help.
Our experienced legal team understands fiduciary duty law, and we’re prepared to fight for you. Contact us today to schedule a free consultation with one of our attorneys!