A fiduciary relationship is where one person places some type of trust, confidence, and reliance on another person. The person who is delegated trust and confidence would then have a fiduciary duty to act for the benefit and interest of the other party. The party who owes a duty to act for the best interest of the other party is called the fiduciary. The party to whom the duty is owed are called principal.
Fiduciary relationships are created in many legal assignments such as contracts, wills, trusts, elections, corporate settings, The main purpose for fiduciary relationships is to establish an honest and trusted relationship between two parties where one party can rely and be confident that the other person is working for their interest and are not using their power for their own interest or the interest of a third party.
How Is a Fiduciary Relationship Created?
A fiduciary relationship cab be created by a contract for hire, an express agreement made in writing between two parties, or it may be implied by law because of the conduct of each party. Some typical parties that have fiduciary relationship with one another include:
- Attorney and client
- Doctors and patients
- Agents and principals
- Trustee and beneficiaries
- Directors and stockholders
- Officers and stockholders
- Guardians and wards
What Are the Duties Owed in a Fiduciary Relationship?
There are three major duties that all fiduciaries owe their principal:
- Duty of Care: All fiduciaries owe a duty of care which requires them to act with the care that an ordinary prudent person in a similar position would exercise under similar circumstances and in a manner that a reasonable person would believe would be the best interest of the principal.
- Duty of Loyalty: The fiduciary must conduct their duties in good faith and avoid from any self-dealing transaction or personal benefit at the expense of the principal.
- Full Disclosure: Fiduciaries are required to disclose all information related to the fiduciary relationship to the principal. This involves all business opportunities, contracts entered, and any other types of action that relates to the fiduciary relationship.
What Must Be Avoided in a Fiduciary Relationship?
The main purpose of a fiduciary relationship is for the fiduciary who is entrusted with power, confidence, and reliance is to act solely in the principal’s best interest. The actions that the fiduciary must avoid include:
- Any act of self-dealing
- Situations where the fiduciary’s own interest will conflict with those of the principal
- Using fiduciary power to receive a profit or benefit at the expenses of the principal
- Any type of fraud, misappropriation, or abuse of trust
- Accepting any secret commission
The fiduciary may be in breach of duty even if there was no criminal and/or fraudulent intent. Making any type of personal profit or gain is prohibited regardless of whether it harmed the principal or benefited the principal.
All actions conducted by the fiduciary requires full and frank disclosure to the principal.
What Are the Consequence of a Breach in a Fiduciary Relationship?
If the fiduciary breaches the duty of care, duty to act in good faith, or the duty of loyalty, the fiduciary would breach the fiduciary duty owned to the principal. The principal does not have to prove any criminal or fraudulent intent to bring a breach of fiduciary duty. To prove a breach of fiduciary duty, the principal must prove two things:
- Proof that the defendant held a position of trust, confidence, and reliance that established the fiduciary relationship between the two parties.
- The defendant breached that duty to benefit personally and at the expense of the principal
A breach of fiduciary duty is a civil claim and the penalties and consequences of a breach would include:
- Account of Profits: any personal profits or gains made by the fiduciary must be turned over to the principal.
- Equitable Remedies: compensation for any losses that were suffered by the principal.
- Constructive Trust: court order that creates a trust on any property or asset gained by the fiduciary at the expense of the principal to restore the losses that the plaintiff may have incurred.
- Recession: recession of any contract entered into by the fiduciary without the principal’s consent.
Should I Consult an Attorney?
If you believe that a fiduciary has been abusing his/her position, you should strongly consider hiring an estate lawyer who can help you pursue a claim for breach of fiduciary duty. Your attorney can help you gather evidence and take the necessary action against the fiduciary to ensure that the fiduciary does not further damage the assets of the estate.