What Is A Fiduciary?
A fiduciary is someone who owes legally binding obligations to someone else. Once a fiduciary relationship forms, the fiduciary is bound by a certain set of rules called ‘fiduciary duties’. The concept of a fiduciary was introduced into the law to protect people in specific relationships where they are particularly vulnerable. It is a way to keep those in powerful positions accountable and trustworthy.
It is important to know if you owe fiduciary duties in your business and what these duties are, because these obligations are strictly enforced by law and the penalties for breach are often severe.
For reference, below the person who owes the fiduciary obligation will be called the fiduciary and the person who is owed the obligation will be called the principal.
What Are Fiduciary Duties?
Put simply, they are obligations owed by the fiduciary (e.g. accountant) to the principal (e.g. client).
The first thing to know about fiduciary duties is they are purely proscriptive. This means that the duties you hold as a fiduciary tell you what not to do. They do impose an obligation to do something, they impose an obligation not to do something.
There are two duties that a fiduciary will owe to a principal. These are the rules of no-profit and no-conflict.
The no-profit rule means that the fiduciary cannot make a benefit or gain something from their relationship with the principle. For example, a doctor can be paid by their patient but cannot benefit from a confidential conversation with the patient. (We’ve written more information to guide health service providers here). This includes benefiting from the relationship itself, knowledge gained from the relationship or opportunities available because of the relationship.
Alice is on the board of directors for a company. This company is looking to buy a cinema to extend their business. Alice engages in negotiations with the cinema and is looking to buy a majority share of the cinema.
The owners of the cinema demand that if Alice’s company wants the cinema it must buy the cinema in full. Alice knows that the company does not have the funds to buy the cinema outright. The company can only afford half.
Being personally very wealthy, in order to secure the cinema for the company, Alice buys one half of the cinema and gets the company to buy the remaining half.
Alice is in breach of her obligation of no-profit. Even though Alice was acting honestly and was well intentioned she profited from an opportunity that she came across in her capacity as a director of a company, which we know is a pre-established fiduciary relationship.
This is strictly not allowed in a fiduciary relationship and Alice would be held in breach.
The no-conflict rule dictates that the fiduciary cannot make a benefit or gain if when pursuing this benefit or gain they would be forced to choose between (or there is a significant chance they would be forced to choose between) their fiduciary obligations and the pursuit of the opportunity.
Paul is the director of a company – this means he owes fiduciary obligations to the shareholders of the company (see examples of fiduciary relationships below).
One day, Paul finds out about a business opportunity. Paul proceeds to try to secure this business opportunity for himself personally, rather than as a director of the company.
In the course of doing so, he deliberately conceals all information of this opportunity and the ongoing negotiations from the company which he directs. Paul gained this as a result of his power and influence as a director of this company, and he will likely be held in breach of his duty or no-conflict.
There were two competing interests, Paul’s personal interest in financial gain and the interests of the stakeholders which he had promised to undertake.
How Does A Fiduciary Relationship Occur?
Obligations can come about because of a contract or deed, or exist because of a certain role. For example, a director would have fiduciary obligations towards their company and their shareholders.
Am I In A Fiduciary Relationship?
There are two ways a fiduciary relationship can be determined to exist. The first is if your relationship is one of the presumed fiduciary relationships. These are a list of relationships which the court will assume is a fiduciary relationship unless the presumed fiduciary can prove that it is not.
The courts will also determine a relationship to be a fiduciary relationship if it is shown that a party agreed to act in the interests of another party. These are called ‘ad hoc’ fiduciary relationships.
Presumed Fiduciary Relationships
The below examples are relationships that will be presumed to owe a fiduciary duty. If you are in one of these relationships you need to be aware of the duties you owe or are owed.
- Trustee (fiduciary) and beneficiary (principle)
- Agent (fiduciary) and principal (principle)
- Solicitor (fiduciary) and client (principle)
- Director (fiduciary) and shareholders (principle)
- Partners (reciprocal)
‘Ad hoc’ Fiduciary Relationships
Determining if there is an ‘ad hoc’ fiduciary relationship is decided by the courts. Therefore, it really depends from situation to situation. However, there are some key indicators which are helpful to know.
The question that a court will ask is: has the proposed fiduciary undertaken or agreed to act for the interests of the proposed principal?
If the answer is yes, there is most likely a fiduciary relationship. In addition, the following have previously been relied upon to determine whether a fiduciary relationship exists:
- The relationship involves trust and confidence.
- The proposed principal is at a disadvantage.
- The proposed principle is vulnerable.
- There is an imbalance of bargaining power weighted towards the fiduciary.
There are also some relationships which have been determined to be ad-hoc fiduciary relationships. It is important to note that these are not presumed to be fiduciary relationships, they will still be examined on a case by case basis by the court.
- Parent (fiduciary) and child (principal).
- Priest (fiduciary) and parishioner (principal).
- Doctor (fiduciary) and patient (principal).
- Bank (fiduciary) and patient (principal).
- Financial advisor (fiduciary) and client (principal).
- Partners in a joint venture.
- Crown (fiduciary) and indigenous Australians (principal).
How Might I Breach My Fiduciary Obligations?
To determine if a fiduciary has breached their obligation of no-profit or no-conflict the court will look at the nature of the relationship and what the fiduciary has been entrusted to do in each case.
First, it is important to remember there has to be a fiduciary relationship in the first place. Second, remember the two duties of the fiduciary – no profit, no conflict. Only if a fiduciary cannot follow these two duties will there be a breach of the fiduciary relationship.
After determining the nature of the relationship the court will determine if there was a breach of fiduciary obligations within a relationship.
What If I Have Breached My Fiduciary Duty?
There are three options:
- Successfully claiming one of the full defences against a breach of Fiduciary Duty
- Successfully claiming a mitigating defence against a breach of fiduciary duty or;
- Being subject to the full penalty to the breach of fiduciary duty.
Absolute Defences Against A Breach of Fiduciary Duties
The only absolute defence to a breach of fiduciary duty is when the fiduciary gains the fully informed consent of the principle to breach a duty of no-profit or no-conflict.
To gain fully informed consent the fiduciary must have provided the principle with all of the facts. Then the principle must give assent to breach without any factors inhibiting their decision making.
A fiduciary who has gained a profit from a breach of no-profit or no-conflict will have claim to a less strict penalty if a specific skill set was required to gain this profit.
For example, there has been a breach by a fiduciary because they invested principal money into a business venture. But to get a profit from this business venture a high level of skill was required by the fiduciary. In this case, all the profit will be paid into trust for the principal. But, the court may allow for remuneration of the fiduciaries skill in gaining this profit.
Full Penalties For Breach
When deciding a penalty, the courts try to ensure that the result of the breach becomes unprofitable. The kind of remedies that will be awarded will therefore depend on the extent of the breach, the nature of the relationship and any advantage or gain made as a result of the breach.
Fiduciary relationships are a complicated area of law. Determining if you’re in a fiduciary relationship, determining what kind of obligations you owe, determining if you have already breached a fiduciary relationship and how to defend against one is difficult and confusing. The Lawyers at Sprintlaw have the expertise and the experience to assist and advise you through this space.
If you need further information or help give us a call on 1800 730 617 or shoot us an email at email@example.com for a free, no-obligations chat.
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