Understanding Fiduciary Duty In Law

What is Fiduciary Duty?

Discuss about the Purpose Of A Fiduciary Relationship.

When there is a situation of ethical or legal relationship, the probability of fiduciary duty arises that is based on the trust. Fiduciary duty exists when a management of money arises between two or more parties. Such kind of a relationship is created based on trust and confidence. The term fiduciary refers to a situation when one party acts on behalf of the other[1]. As per law, the theory of fiduciary monitors and examines the standard of care while executing in what he is associated. For instance, a fiduciary relationship defines a situation when the shareholders play the role of the principals. Therefore, shareholders are both the fiduciary as well as principals. Fiduciary relationship is a concept where one of the parties is not in a strong position and hence reposes in good faith, confidence, advice and trust when required. Generally, the fiduciary to act and carry out the duties is beneficial for the principal.

Fiduciary duties usually require stricter and higher code of behavior as per the duty of care as mentioned under the law of torts. The purpose of the fiduciary is to supervise the exclusive loyalty to the existing principal and not place him in a position where there is a kind of personal conflict of interest happens with the principal. A party needs to prove the fiduciary that must not expose the liability of his in the court of law[2]. It has been observed in the matter of Youyang Pty Ltd v Minter Ellison Morris Fletcher, the statement of the judge explained that a man being fiduciary is not enough to deduce the liability in case of fault. Instead, an individual has to prove all the existing obligations as a fiduciary to whom he is obligated and to the extent of facing the consequences for the failure. Every relationship does not give rise to the fiduciary duties. The most common kind of fiduciary relationship is that one which exists between a trustee and a beneficiary. In this kind of relationship, a legal relationship rests with the trustee of the property that is entrusted to him by the trustee[3]. In spite of such situations, the trustee is generally compelled under the equity to subordinate his own benefit to the trustees. The purpose is to monitor the entrusted estate to the basic advantage of the beneficiary. This theory makes sure that the beneficiary gets the share of returns for  the property in spite of not having a regular control over it. Fiduciary obligations of the shareholders are usually invested in the directors of a company. For instance, fiduciary duty vests on the directors of the bank for protecting the respective deposits of their clients. Fiduciary obligations are contractual and therefore it can be stated that fiduciary duties can be distinguished from the common law. However, there are other relationships that consists of the fiduciary duties. The company and the liquidators, lawyers and clients and heirs and administrators are few of the examples of this theory.

When does Fiduciary Duty Arise?

In case of a partnership business, the partners involved owe fiduciary duties to each other. Such a scenario is not usually observed in joint stock companies because fiduciary duties do not arise. However, in case of joint ventures are carried out as partnership, the courts have the authority and power to establish grounds based on fiduciary obligations amongst the partners of the joint venture. Arklow vs. MacLean Privy Council (1999), the judgment of this case stated that a partner of a joint venture generally has a few fiduciary duties for the purpose to withhold the private information and not to put it to use according to merits and demerits. However, a fiduciary is usually held liable if evidence have been provided stating that the person had a profit from the relationships formed. If there has been any conflict of the fiduciary duties and the personal interests. Secondly, if there is any kind of conflict of the fiduciary duty that is owed to two individuals by obtaining benefit from it. These are the three main provisions based on, which the fiduciary is obligated to ignore such situations between the personal interests and fiduciary duties[4]. When there is a situation of conflict of the two fiduciary duties and it does not make any sort of unfair profit. Therefore, in the occurrence of conflict between the duties when two contracts are formed, there might be conflict in the interests. For example, a lawyer cannot represent both the plaintiff and the defendant in one particular case. The reason behind this is that a lawyer cannot make his principles for both the parties. However, a fiduciary should not make any kind of benefit or profit from such position. If at all any kind of profit is made, he will be legally bound by  law and equity to inform the principal about such rate of profits.

When a conduct of fiduciary is based on the acts and omissions, it will provide him an unfair merit calls for redressing based on the grounds of the public policy. This sort of breach can arise when a party related to this makes use of the material and other information attained by virtue. Therefore, if the principal can provide evidence that a fiduciary duty was owed to him[5]. The purpose of it was breached by the violation of the mentioned rules based on which the Court can offer redress by returning the gain to the owner or the principal[6]. If the fiduciary proves that, the person has made full disclosure of gain and the principal consented to this kind of course of action. However, in case of breach of such fiduciary duties, there are available remedies. Firstly, constructive trusts are a remedy that is applicable where an unconscionable profit can be recognized easily. The court forms and imposes a duty upon the fiduciary to hold profits in order to keep it safe for transferring to the principal. Secondly, the remedy of account of profit is the situation where the breach is difficult to recognize. Therefore, in such cases, all the profits must be realized and taken to the principal as they get affected because of him. Such scenario must be distinguished from the constructive trust. It is difficult to separate the profits acquired by the virtue of the position. For example, if a company is ran by an employee without making profit that will not be made in such a position. It will treated to be difficult to divide the profits between the legitimately earned and it was unfairly achieved out of the breach of the fiduciary position[7]. Thirdly, when it is related to the accounts of profits, it is not possible to determine that the plaintiff can claim for the damages from the same legislation of common law. The extension of the damages varies on the amount and level of the breach depending on the situations related to this breach.

Types of Fiduciary Relationships

There are a few differences between fiduciary duties from the common law duty of care and the necessary contractual obligations. The fiduciary duties of a director are different as compared to the duty of care. The fiduciary duties lie with the directors of the company whereas the common law duty of care must be associated with all the members of the corporation. The obligation is however, imposed upon the circumstances where there is a conflict between the duty and the interest. There are relevant examples of breach of fiduciary duty by the directors. The object of the directors is to monitor and control the companies for the advantage of the shareholders. Hence, the law can impose strict rules while carrying out such duties. The rules can be applied on every director depending on the capacity and the powers will be applicable to all the directors collectively[8]. A conflict of interest arises when the director makes any kind of transaction while acting as the member of the board. This is when the transaction is intended to make profit to him. This kind of conflict occurs during that time when the interest makes profits from all the transactions at the time of his duty in the company. In such circumstances, the director should return all kinds of gain that occur where a case of conflict of interest has been proven even if this conflict is hypothetical. Generally the agents are obligated to monitor the rules of their fiduciary status with the organization to which they thoroughly serve. These rules are applicable across the world that no one with such fiduciary responsibilities and duties. They have a interest in conflict with the ones who are bound to protect.

The fiduciary relationship has been relevant in the commercial law as it can be proved with the help of Breen v Williams. As mentioned in the Corporations Act, 2001, it involves a number of commercial and professional relationships. Such relationships included the relationships of the director-company, agent-principal and the trustee-beneficiary. However, the courts of equity have been hesitant to delimit the relationships that arises fiduciary duties. There have been plenty of situations, where it has been argued that such kind of  situations occur where the duties arise and have a stable need to shield the interests of the beneficiaries[9]. The Courts of Australia, have confidence on the process of expansion in the series of situations where fiduciaries duties can arise. The concept of joint venture has been used all across Australia and it will be continued therefore. There are a few categories of fiduciary relationship[10]. These methods are used for establishing whether a fiduciary relationship exists between two parties. Firstly, presumed categories refer to a situation or scenario where there are determined circumstances in which the obligations of fiduciary are deemed to be owed[11]. Secondly, factual fiduciaries define those circumstances where a fiduciary relationship arises because of an undertaking by the fiduciary. It means there is an expression of confidence and vulnerability of a party or a reasonable expectation related to it. As per the jurisdictional basis it consists of available remedies and flexibility and discretion. In case of available remedies, equity has exclusive jurisdiction to issue for the remedies for the breach of these fiduciary duty. This refers to a situation where the remedies of common law do not provide awards to the plaintiff who has alleged the breach of duty. Equitable remedies can only be made available[12]. On the other hand, equitable remedies are known to be relatively flexible but can only be exercised on a basis of discretion. Due to this the flexibility of remedy and judicial discretion is frequently between sympathizing with the defendants.

Fiduciary Duty in Business

In case of the Regal Limited V Gulliver, Regal was a cinema that was situated at Hastings. It had formed a company with the help of obtaining leases of more than two cinemas. Therefore, a good package of sale was created. In the process of ruling, the judge stated that the directors must not use the assets of the company[13]. The opportunities and information were used for their own benefit without the permission of the shareholders. The House of Commons also stated that the directors of the company carried out the activities and while applying the special knowledge as per the capacity of the directors[14]. Directors must always act in utmost good faith while dealing with the affairs of the company. The directors of the company should know about what skills can be applied in certain circumstances. A director should have only those skills that can be found reasonably in such a person of knowledge and experience.

In the case, Dorechester Finance the scenario that occurred against the non-executive directors and the accountants for providing assent to the blank checks that renders the company to be insolvent. On the grounds of this suit was founded showing the signatories were non-executive directors and did not know the daily activities of the company. The court thereafter stated that there was no such difference in the relationship of a non-director and the director. The director of the company must have provided proper care, as that would have done it on his own behalf. Therefore, as all other directors, he was also held liable. It can be concluded stating that once the existence of a fiduciary duty is upon the participants of the joint ventures, the duties cannot be breached[15]. The decision of the High Court of Australia stated the approach and confirmed that the existence of fiduciary duties should be established determined as per the rules.

References:

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