When one party has an obligation to act in the best interest of another party, such as a corporate board member's duty to the company's shareholders, it is referred to as a fiduciary duty. If the party acts contrary to that duty, it is called a breach of fiduciary duty and can give rise to legal action in civil court. Other examples of relationships involving a fiduciary duty include attorney/client, principal/agent, and trustee/beneficiary. This relationship creates a legal duty similar in principle to that of an innkeeper's legal duty to ensure the safety of his or her guests, for example.
Breach of fiduciary duty as a business tort (a cause of action for a civil lawsuit) is discussed below, including elements of the tort and common remedies.
Fiduciary Relationships: Overview
At its most basic level, a fiduciary relationship may exist when a party places confidence and trust in another party with that party's full knowledge. The party who owes a duty to the other party in such a relationship is called a fiduciary. For instance, attorneys are the fiduciaries of their clients. But in order for this duty to be legally enforceable, the relationship must have been created either under the law (statutes, legal proceedings, or contracts) or through the factual circumstances of the relationship (often based on established case law).
Fiduciary duties governed by statute include, for example, those owed by a business partner to his or her other partners or the duty of board members to represent the interests of the shareholders. If the fiduciary relationship isn't implied through statute, then it may be stated explicitly through a contract (along with the specific duties owed).
What Does it Mean to Breach One's Fiduciary Duty?
There are several ways a fiduciary can breach his or her duty, but it basically comes down to (1) whether a fiduciary relationship existed at the time of the dispute; (2) the scope of the relationship and duties of the fiduciary; and (3) whether any of these duties were breached within the scope of the relationship. A breach could be actions that are contrary to the interests of a client, actions done out of the fiduciary's own self interest, or failure to disclose pertinent information (such as a conflict of interest).
For example, a company's CEO orchestrates a deal to acquire a struggling company owned by his best friend. Assuming the acquisition was not in the best interests of the acquirer and actually hurts its bottom line (and share price), the shareholders may pursue a breach of fiduciary duty lawsuit to recover losses.
Elements of a Breach of Fiduciary Duty Claim
In order to prevail in a claim for this tort, you must be able to prove the following elements:
Breach of Fiduciary Duty: Remedies
A plaintiff who prevails in a breach of fiduciary duty lawsuit typically will recover for actual damages incurred, but also may recover punitive damages if the breach can be proven to have been committed out of malice or fraud. But calculating the exact amount of damages caused by the breach -- or even proving that a poorly executed business action was in fact a breach -- is quite difficult.
Contact an Attorney if You Suspect a Breach
If a trusted business partner, officer, or director has betrayed your trust and you suspect a breach of fiduciary duty, you may want to meet with an attorney. Such breaches can have disastrous consequences on your finances and your reputation. Find a business and commercial attorney near you for a consultation.