Breach of Fiduciary Duty
A fiduciary duty is when someone must act in the best interest of another. A typical example is a corporate board member's duty to the company's shareholders. Suppose the party acts contrary to that duty. This is a breach of fiduciary duty and can give rise to legal action in civil court.
Many types of fiduciary relationships exist, including attorney/client, principal/agent, and trustee/beneficiary. This relationship creates a legal duty similar in principle to an innkeeper's legal duty to ensure the safety of their guests, for example.
Breach of fiduciary duty is a business tort. Business torts are a cause of action for a civil lawsuit discussed below, including elements of the tort and common remedies.
Fiduciary Relationships: Overview
A fiduciary relationship happens when one person trusts another, and they both know about it. A fiduciary is a person who owes a duty to the other party in such a relationship. For instance, attorneys are the fiduciaries of their clients. But for this duty to be legally enforceable, the law or case law must have created the relationship.
Fiduciary duties governed by statute include, for example, those owed by a business partner to their other partners or the duty of board members to represent the interests of the shareholders. Suppose the fiduciary relationship isn't implied through statute. In that case, a contract could create the relationship (along with the specific duties owed).
Small Business Fiduciary Duties
Since small-business owners typically do not have stockholders, the duties owed to the business are different. The two primary fiduciary duties of small businesses are the duty of loyalty and the duty of care.
The duty of loyalty is a legal and ethical obligation that individuals owe to an organization or entity for which they work or represent. It generally refers to acting in the organization's best interests. This means putting its interests above personal interests or the interests of others.
Employees owe the duty of loyalty. This requires employees to act honestly and faithfully. Employees should not engage in activities that could harm the organization or compete with the company's interests while employed. Employees should protect the organization's confidential information, avoid conflicts of interest, and not use their position or resources for personal gain.
The duty of care requires individuals to act like "reasonably prudent persons" in similar circumstances. This means taking reasonable steps to prevent harm or cut risks that could arise from one's actions or omissions.
Corporation Fiduciary Duties
Corporations owe a fiduciary responsibility toward their stakeholders, including shareholders, employees, and investors. This fiduciary duty is a commitment to act in good faith and prioritize the organization's interests above personal gain. Majority shareholders need to make fair decisions to improve the company and protect smaller owners.
One important rule is the corporate opportunity doctrine. This means that the bosses, like the board of directors and officers, can't use their jobs to benefit themselves by taking good business chances away from the company. Finding a middle ground between using these opportunities and following the essential duties that come with business decisions is significant. It helps keep companies honest and trustworthy.
What Does it Mean to Breach One's Fiduciary Duty?
There are several ways a fiduciary can breach their duty, but it comes down to the following:
- Whether a fiduciary relationship existed at the time of the dispute
- The scope of the relationship and duties of the fiduciary
- Whether the duties were breached within the scope of the relationship
For example, a company's CEO orchestrates a deal to purchase a struggling company owned by his best friend. Assuming the acquisition was not in the best interests of the acquirer. It hurt its bottom line (and share price), and the shareholders may pursue a breach of fiduciary duty lawsuit to recover losses.
Some examples of a breach in a small business context include:
- Misuse of company assets
- Non-disclosure of conflicts of interest
- Withholding pertinent information
- Negligence or incompetence
- Insider trading
- Misuse of confidential information
- Diversion of business opportunities
Elements of a Breach of Fiduciary Duty Claim
To prevail in a claim for this tort, you must be able to prove the following elements:
- Duty: The defendant had a duty or duties to you. This may be the duty of good faith and fair dealing, the duty of full disclosure, or the duty of loyalty. Which duty applies depends on the facts of your case.
- Breach: The defendant breached this duty in some way. This may be failing to disclose certain information, misappropriation of funds, misuse of influential positions, neglect of responsibilities, or misrepresenting a statement of fact.
- Damages: You must have suffered damages because of the breach. A breach without damages is not actionable.
Breach of Fiduciary Duty vs. Breach of Contract
Breach of fiduciary duty and breach of contract are two distinct legal concepts. A breach of fiduciary duty occurs when someone fails to act in the best interests of another, often for personal gain. On the other hand, a breach of contract happens when one party fails to fulfill the promises of a legally binding agreement. This could involve:
- Not delivering goods or services as agreed
- Missing payment deadlines
- Violating any contract terms
The critical difference is in the duty owed. Fiduciary duties rely on trust and loyalty. Contract breaches stem from failing to uphold the terms of an agreement.
Breach of Fiduciary Duty: Remedies
In business law, remedies for breach of fiduciary duty are essential in resolving business disputes. Courts may order remedies like monetary damages, requiring the wrongdoer to pay for the losses incurred due to their breach. Courts can also grant injunctions to stop harmful actions and protect the business's interests.
These remedies pay for the damages suffered but also serve as a deterrent emphasizing the seriousness of fiduciary duties and underscoring the importance of maintaining trust and ethical conduct in business relationships.
Contact an Attorney if You Suspect a Breach
Suppose a trusted business partner, corporate officer, or director has betrayed your trust, and you suspect a breach of fiduciary duty. In that case, you should seek legal advice from a business attorney. Such breaches can have disastrous consequences on your finances and your reputation. Find a business and commercial attorney near you for a consultation.
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