What Is Fiduciary Duty?

Under the U.S. legal system, a fiduciary duty is the legal term describing the relationship between two parties that obligates one to act solely in the interest of the other. The party designated as the fiduciary owes the legal duty to a principal, and strict care is taken to ensure no conflict of interest arises between the fiduciary and his principal.

A fiduciary obligation exists whenever the relationship with the client involves a special trust, confidence, and reliance on the fiduciary to exercise his discretion or expertise in acting for the client. The fiduciary must knowingly accept that trust and confidence to exercise his expertise and discretion to act on the client's behalf. In most cases, no profit is to be made from the relationship unless explicit consent is granted when the relationship begins.

Breaches in Fiduciary Duty

Case law indicates that breaches of fiduciary duty typically happen during the time when a binding fiduciary relationship is in effect and actions are taken which violate or are counterproductive to the interests of a specific client. Typically, the actions are often somehow taken to benefit the fiduciary's interests or the interests of a third party instead of a client’s interests.

A breach can also stem from a failure to provide important information to a client that may lead to misunderstandings, misinterpretations, or misguided advice. Identification and/or disclosure of any potential conflicts of interest is usually important in fiduciary relationships because all types of conflicts can be a source for undesired intentions.

Elements of a Breach of Fiduciary Duty Claim

As is expected with most all case law, certain precedents and elements have been established in the legal industry to help govern against fiduciary breaches and to protect those who have been harmed by unlawful actions. Each jurisdiction may have differing elements but in general, the following four elements are essential in helping a plaintiff to prevail in a breach of fiduciary duty claim.

  • Duty: The plaintiff must show that a fiduciary duty existed. Fiduciary duty can be required in multiple situations so identifying the legality of the fiduciary duty is of utmost importance.
  • Breach: The plaintiff must show that breach of the fiduciary duty occurred. The type of breach can vary in each case depending on the actions taken by a defending fiduciary. Examples of a breach may include failed disclosure of important information causing misinterpretation, negligence, or unlawful use of funds.
  • Damages: The plaintiff must show that damages occurred from the breach. Without damages there is typically no basis for a breach of fiduciary duty case.
  • Causation: Causation is usually also an element associated with breach of fiduciary duty cases. Causation shows that any damages incurred by the plaintiff were in direct association with the breach of fiduciary duty actions taken by the defendant.

Consequences of a Breach in Fiduciary Duty

There can be a variety of repercussions, outcomes, and consequences incurred from a breach of fiduciary duty. Not all breaches may be discussed in a court of law. Accusations of a breach of fiduciary duty can simply hurt the reputation of a professional. Clients can choose to leave a professional relationship because they do not trust in a professional’s care of the required fiduciary duty. Clients may also leave a professional relationship if there are accusations of a breach or any potential breach of duty damages.

If a breach of duty case does proceed to the courts, steeper consequences can exist. Successful breach of fiduciary duty lawsuits for a plaintiff can result in monetary penalties for direct damages, indirect damages, and coverage of legal fees. Court rulings can also lead to industry disaccreditation, loss of licensing, or removal from service. 

Example of Breach of Fiduciary Duty Case

From Virginia, one example of a breach in fiduciary duty case is 2007 Banks v. Mario Indus., 274 Va. 438, 650 S.E.2d 687. In this case, the defendant was an employee of Mario and admitted that he owed Mario a duty of loyalty. Those admissions, combined with the fact that the employee’s job was to faithfully represent Mario’s interest support the claim for breach of fiduciary duty.

Examples of Fiduciary Duty-Defined Relationships

  • Trustee/Beneficiary: Estate arrangements and implemented trusts involve a trustee and beneficiary fiduciary duty. An individual named as a trust or estate trustee is the fiduciary, and the beneficiary is the principal. Under a trustee/beneficiary duty, the fiduciary has legal ownership of the property and holds the power necessary to handle assets held in the name of the trust. However, the trustee must make decisions that are in the best interest of the beneficiary as the latter holds equitable title to the property. The trustee/beneficiary relationship is an important aspect of comprehensive estate planning, and special care should be taken to determine who is designated as trustee.
  • Guardian/Ward: Under a guardian/ward relationship, legal guardianship of a minor is transferred to an appointed adult. The guardian, as the fiduciary, is tasked with ensuring the minor child or ward has appropriate care, which can include deciding where the minor attends school, that he has suitable medical care, that he is disciplined in a reasonable manner, and that his daily welfare remains intact. A guardian is appointed by the state court when the natural guardian of a minor is not able to care for the child any longer. In most states, a guardian/ward relationship remains intact until the minor child reaches the age of majority.
  • Principal/Agent: A more generic example of fiduciary duty lies in the principal/agent relationship. Any individual person, corporation, partnership, or government agency can act as a principal or agent as long as the person or business has the legal capacity to do so. Under a principal/agent duty, an agent is legally appointed to act on behalf of the principal without conflict of interest. A common example of a principal/agent relationship that implies fiduciary duty is a group of shareholders as principals electing management or C-suite individuals to act as agents. Similarly, investors act as principals when selecting investment fund managers as agents to manage their assets.
  • Attorney/Client: The attorney/client fiduciary relationship is arguably one of the most stringent. The U.S. Supreme Court states that the highest level of trust and confidence must exist between an attorney and his client and that an attorney, as fiduciary, must act in complete fairness, loyalty, and fidelity in each representation of and dealing with clients. Attorneys are held liable for breaches of their fiduciary duties by the client and are accountable to the court in which that client is represented when a breach occurs.
  • Controlling Stockholder/Company: In certain circumstances, fiduciary duties may also apply to controlling stockholders who possess a majority interest in or exercise control over corporate business activities. A breach of a fiduciary duty may result in personal legal liability for the director, officer, or controlling shareholder.