Explanation of Fiduciary Relationionships in Businesses

Fiduciary duties are owed by fiduciaries. A person is a fiduciary if the law imposes on that person a duty of good faith, trust, confidence, candor, loyalty, or care upon the person for the benefit of another person.

A fiduciary only owes those duties to the other person within the fiduciary relationship.

Examples of fiduciaries and fiduciary relationships are:

  • Trustee/beneficiary (the trustee owes fiduciary duties to the beneficiary)
  • Guardian/ward (the guardian owes fiduciary duties to the ward)
  • Agent/principal (the agent owes fiduciary duties to the principal)
  • Attorney/client (the attorney owes fiduciary duties to the client)

There are many other fiduciary relationships imposed by law not listed above.

Consequences of Violating a Fiduciary Obligation or Duty

The law attempts to protect the people and entities that are owed fiduciary duties by another. Usually this is because the relationship requires some level of trust.

Why This Works

Imposing remedies for breaches of fiduciary duties may both deter fiduciaries from breaching duties owed in the first place, and compensate the harmed person or people in the event a fiduciary is not deterred and fails to follow through with his or her fiduciary obligations.

Damages and Equitable Remedies

The law imposes consequences on a fiduciary for violating his or her duties to the person or entity to whom the duties are owed. When a fiduciary violates, or does not comply with the duties he or she owes to another, he or she will be liable for the damages he or she caused. Equitable remedies may also be available.

Monetary damages compensate for a calculable amount. Equitable remedies compensate for an amount that is difficult to calculate or a loss that cannot be compensated by money. Equitable remedies include injunctions and specific performance.

The damages or equitable remedy will be determined by a court in light of each particular case and the conduct and relationships involved. Courts will have to consider whether monetary damages will be sufficient to compensate for the loss caused.

Officers and Directors of Businesses are Fiduciaries Owing Fiduciary Duties to the Business Entity

If property rightfully belongs to the business entity but an officer or director takes it for his or her own benefit, the officer or director is liable to the business entity.

The officer or director will be required to compensate the business entity for the monetary value of the harm he or she caused to the business entity, the value of the property he or she took from the business.

Alternatively, a court may find that an officer or director who takes business assets for himself or herself was essentially holding the asset for the business entity and therefore all the profits from that asset rightfully belong to the business. Under those circumstances the court will say the director or officer was merely holding the asset in trust for the business.

Majority Shareholders of Businesses are Fiduciaries Owing Fiduciary Duties to the Minority Shareholders

When a majority shareholder breaches his or her fiduciary duty to a minority shareholder, the minority shareholder is entitled to the difference between the fair value of the minority shareholder’s shares and the amount offered to buy those shares.

Partners in Business Together are Fiduciaries Owing Fiduciary Duties to the Partnership

A constructive trust is established when there is a breach of a fiduciary relationship in a partnership based on notions of equity and good conscience.

A constructive trust means that the property, assets, or profit is deemed to belong to the partnership even though it is being held by the partner who violated a duty. That partner is simply considered to be holding that property, asset, or profit for the partnership.

For example, where one partner purchases real estate with partnership funds and takes the title in his own name, he will be deemed a trustee holding such title for the benefit of the partnership.

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