18 results for: fiduciary

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Fiduciary

Columbia Electronic Encyclopedia - Cite This Source

fiduciary, in law, a person who is obliged to discharge faithfully a responsibility of trust toward another. Among the common fiduciary relationships are guardian to ward, parent to child, lawyer to client, corporate director to corporation, trustee to trust, and business partner to business partner. In discharging a trust, the fiduciary must be absolutely open and fair. Certain business methods that would be acceptable between independent parties dealing with one another "at arm's length" may expose a fiduciary to liability for having abused a position of trust. Thus, in an ordinary business transaction the prospective purchaser of land need not inform the seller of an imminent rise in realty values, but one buying land from a partner must disclose such information. In many cases courts will treat an unexplained profit derived from a fiduciary relationship as an instance of constructive fraud.

The Columbia Electronic Encyclopedia Copyright © 2004, Columbia University Press.
Licensed from Columbia University Press

Fiduciary Duty

Encyclopedia of Small Business - Cite This Source

Fiduciary duty is a legal requirement of loyalty and care that applies to any person or organization that has a fiduciary relationship with another person or organization. A fiduciary is a person, committee, or organization that has agreed to accept legal ownership or control and management of an asset or group of assets belonging to someone else. Some examples of fiduciary relationships might include an investment manager to participants in a pension plan, a majority stockholder in a corporation to minority investors, the members of a partnership to one another, a banker to customers, an attorney to a client, or even a parent to a child.

A fiduciary duty is one of complete trust and utmost good faith. While fiduciaries take legal title to assets, the assets do not belong to them. Rather, legal title allows fiduciaries to administer and manage the assets for a temporary period and for a specific purpose. In taking control of another's assets, fiduciaries also agree to manage those assets in accordance with the wishes of the individual who established the fiduciary relationship. The powers and duties of fiduciaries are often established in a document that formally establishes the fiduciary relationship. The conduct of fiduciaries is governed by common law as well as by specific federal and state laws. The Uniform Fiduciary Act and the Uniform Trustees' Powers Act serve as models for state legislation.

Fiduciaries owe two main duties to their clients: a duty of loyalty and a duty of care. The duty of loyalty requires that fiduciaries act solely in the interest of their clients, rather than in their own interest. Thus fiduciaries must not derive any direct or indirect profit from their position, and must avoid potential conflicts of interest. The duty of care requires that fiduciaries perform their functions with a high level of competence and thoroughness, in accordance with industry standards.

Corporate directors have a special fiduciary duty to their shareholders. They are accountable not only for the safekeeping of assets but also for their efficient and effective use. Directors may not profit personally at the expense of, or contrary to, the corporation's shareholders. In other words, corporate directors must place the interests of shareholders above their own interests. The concept of fiduciary duty has a wide variety of other applications in the business world. But a particular area of concern for small businesses is the expanded definition of fiduciary duty that applies to employers that offer certain types of benefit plans to their employees.

EMPLOYEE BENEFIT PLANS

Employers that offer employee benefit plans—such as 401(k) plans or other types of pension plans—are bound by the definition of fiduciary duty set forth in the Employee Retirement Income Security Act of 1974 (ERISA). ERISA, in regulating employee benefit plans, established higher standards of fiduciary duty for individuals who have control over a plan's assets than had existed for other types of fiduciaries under common law.

In spelling out fiduciary duties with regard to employee benefit plans, ERISA covers the duty of loyalty, the duty to use prudence, and the duty to comply with the plan. The duty of loyalty means that fiduciaries must act in the best interests of the plan and its participants. If fiduciaries are also plan participants, they must subordinate their own interests to those of the plan. In cases where plan participants form a diverse group with different interests, it may be difficult to balance the interests of all concerned.

ERISA expands the concept of care beyond that found in common law. Section 404(a)(1) of ERISA states that a fiduciary shall discharge his duties with respect to a plan "with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims." Thus, fiduciaries of employee benefit plans must discharge their duties with adequate expertise. The courts have found that fiduciary duties were breached when nonexpert laypersons failed to seek independent qualified counsel when making decisions affecting plan assets. Plan fiduciaries are under an obligation not only to use their special skills and expertise, but also to engage qualified advisers and managers if they lack the expertise themselves.

The prudent person standard, as expressed in ERISA, also requires that fiduciaries "diversify the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so." ERISA also makes note of prohibited transactions. Additional specific duties of plan fiduciaries may be set forth in the plan document, and fiduciaries have a duty to administer the plan "in accordance with the documents and instruments governing the plan." Fiduciary duties outlined in the plan document must be consistent with ERISA.

A much-discussed aspect of ERISA is that it established personal liability for breaches of fiduciary duty. That is, fiduciaries of employee benefit plans can be held personally liable for any breaches of their duties as spelled out in ERISA. ERISA expanded the concept of fiduciary duty to cover named fiduciaries as well as anyone else who has the power to manage, acquire, or dispose of any assets of a plan. Thus, even if they are not named specifically as fiduciaries, small business owners, chief financial officers, controllers, and management accountants can be held to ERISA's standards of fiduciary duty if they have the power to manage, acquire, or dispose of the plan's assets. As a result, small businesses that offer employee pension plans must be careful to manage plan assets in accordance with ERISA.

Fiduciary

Wikipedia, the free encyclopedia - Cite This Source

This page is about fiduciary in the legal sense. For optical field of view markers, see fiduciary marker.

The fiduciary duty is a legal relationship between two or more parties (most commonly a "fiduciary" or "trustee" and a "principal" or "beneficiary") that in English common law is arguably the most important concept within the portion of the legal system known as equity. In the United Kingdom, the Judicature Acts merged the courts of Equity (historically based in England's Court of Chancery) with the courts of common law, and as a result the concept of fiduciary duty also became usable in common law courts.

A fiduciary duty is the highest standard of care at either equity or law. A fiduciary is expected to be extremely loyal to the person to whom they owe the duty (the "principal"): they must not put their personal interests before the duty, and must not profit from their position as a fiduciary, unless the principal consents. The fiduciary relationship is highlighted by good faith, loyalty and trust, and the word itself originally comes from the Latin fides, meaning faith, and fiducia.

When a fiduciary duty is imposed, equity requires a stricter standard of behavior than the comparable tortious duty of care at common law. It is said the fiduciary has a duty not to be in a situation where personal interests and fiduciary duty conflict, a duty not to be in a situation where their fiduciary duty conflicts with another fiduciary duty, and a duty not to profit from their fiduciary position without express knowledge and consent. A fiduciary cannot have a conflict of interest. It has been said that fiduciaries must conduct themselves "at a level higher than that trodden by the crowd" and that "[t]he distinguishing or overriding duty of a fiduciary is the obligation of undivided loyalty."

Fiduciary duty in different jurisdictions

Different jurisdictions regard fiduciary duties in different lights. Canadian law, for example, has developed a more expansive view of fiduciary obligation, more so than American law, whilst Australian law and British law have developed more conservative approaches than either the USA or Canada. The law expressed here follows the general body of elementary fiduciary law found in most common law jurisdictions; for in-depth analysis of particular jurisdictional idiosyncrasies please consult primary authorities within the relevant jurisdiction.

Elements of the fiduciary duty

The person the duty is imposed on is called the fiduciary. A fiduciary will be liable to account if it is proved that the profit, benefit, or gain was acquired by one of three means:

In circumstances of conflict of duty and interest

By taking advantage of the fiduciary position.

Therefore, it is said the fiduciary has a duty not to be in a situation where personal interests and fiduciary duty conflict, a duty not to be in a situation where their fiduciary duty conflicts with another fiduciary duty, and not to profit from their fiduciary position without express knowledge and consent. A fiduciary cannot have a conflict of interest.

Conflict of interest and duty

A fiduciary must not put themselves in a position where their interest and duty conflict. In other words, they must always serve the principal's interests, subjugating their own preference for those of the principal. The fiduciary's state of mind is irrelevant; that is, it does not matter whether the fiduciary had any ill-intent or dishonesty in mind.

Although one area of growing concern is lawyers wanting to earn a good fee with the client's wishing to keep costs down. Australian High Court Chief Justice Murray Gleeson said; "Delay, like inflation, is sometimes convenient for those who are part of the system.", and " A basic problem of access to civil justice is the remorseless mercantilisation of legal practice." He added that time-based costing was part of the problem. "

Conflict of duty and duty

A fiduciary's duty must not conflict with another fiduciary duty. Conflicts between one fiduciary duty and another fiduciary duty arise most often when a lawyer or an agent, such as a real estate agent, represent more than one client, and the interests of those clients conflict. This usually occurs when a lawyer attempts to represent both the plaintiff and the defendant in the same matter, for example. The rule comes from the logical conclusion that a fiduciary cannot make the principal's interests a top priority if he has two principals and their interests are diametrically opposed; he must balance the interests, which is not acceptable to equity. Therefore, the conflict of duty and duty rule is really an extension of the conflict of interest and duty rules.

No-profit rule

A fiduciary must not profit from the fiduciary position. This includes any benefits or profits which, although unrelated to the fiduciary position, came about because of an opportunity that the fiduciary position afforded. It is unnecessary that the principal would have been unable to make the profit; if the fiduciary makes a profit, by virtue of their role as fiduciary for the principal, then the fiduciary must report the profit to the principal. If the principal consents then the fiduciary may keep the benefit. If this requirement is not met then the property is deemed by the court to be held by the fiduciary on constructive trust for the principal.

Secret commissions, or bribes, also come under the no profit rule. The bribe shall be held in constructive trust for the principal. The person who made the bribe cannot recover it, since they have committed a crime. Similarly, the fiduciary, who received the bribe, has committed a crime. Fiduciary duties are an aspect of equity and, in accordance with the equitable principles, or maxims, equity serves those with clean hands. Therefore, the bribe is held on constructive trust for the principal, the only innocent party.

Bribes were initially considered not to be held on constructive trust, but were considered to be held as a debit by the fiduciary to the principal. This approach has been overruled; the bribe is now classified as a constructive trust. The change is due to pragmatic flaws, especially in regard to a bankrupt fiduciary. If a fiduciary takes a bribe and that bribe is considered a debt then if the fiduciary goes bankrupt the debt will be left in his pool of assets to be paid to creditors and the principal may miss out on recovery because other creditors were more secured. If the bribe is treated as a constructive trust then it will remain in the possession of the fiduciary, despite bankruptcy, until such time as the principal recovers it.

Fiduciary relationships

The most common circumstance where a fiduciary duty will arise is between a trustee and a beneficiary. A trustee is the legal, i.e., common law owner of all the trust's property. The beneficiary, at law, has no legal title to the trust; however, the trustee is bound by equity to suppress his own interests and serve only the beneficiary. In this way, the beneficiary obtains the use of property without being its technical owner.

Relationships which routinely attract a fiduciary duty are as follows:

Trustee/beneficiary: Keech v Sandford
Director/company: Woolworths Ltd v Kelly
Liquidator/company: Re Pantmaenog
Lawyer/client: Sims v Craig Bell & Bond
Partner/partner: Fraser Edmiston Pty Ltd v AGT (Qld) Pty Ltd; Chan v Zacharia
Agent/principal: McKenzie v McDonald
Stockbroker/client: Hodgkinson v Simms
Senior employee/company: Green & Clara Pty Ltd v Bestobell Industries Pty Ltd
Doctor/Patient (in Canada): McInerney v. MacDonald
Parent/Child: Paramasivam v Flynn
Teacher/Student: Glover v Porter-Gaud

Possibly fiduciary relationships

Joint ventures, as opposed to business partnerships, are not presumed to carry a fiduciary duty; however, this is a matter of degree. If a joint venture is conducted at commercial arm's length and both parties are on an equal footing then the courts will be reluctant to find a fiduciary duty, but if the joint venture is carried out more in the manner of a partnership then fiduciary relationships can and often will arise. Arklow vs. MacLean Privy Council 1999

Husbands and wives are not presumed to be in a fiduciary relationship; however, this may be easily established. Similarly, ordinary commercial transactions in themselves are not presumed to but can give rise to fiduciary duties, should the appropriate circumstances arise. These are usually circumstances where the contract specifies a degree of trust and loyalty or it can be inferred by the court.

A protector of a trust may owe fiduciary duties to the beneficiaries, although there is no case law establishing this to be the case.

Example: band members

For example, two members of a band currently under contract with one another (or with some other tangible, existing relationship that creates a legal duty), X and Y, record songs together. Let us imagine it is a serious, successful band and that a court would declare that the two members are equal partners in a business. One day, X takes a bunch of demos made cooperatively by the duo to a recording label, where an executive expresses interest. X pretends it is all his work and receives an exclusive contract and $50,000. Y is unaware of the encounter until reading it in the paper the next week.

This situation represents a conflict of interest and duty. Both X and Y hold fiduciary duties to each other, which means they must subdue their own interests in favour of the duo's collective interest. By signing an individual contract and taking all the money, X has put personal interest above the fiduciary duty. Therefore, a court will find that X has breached his fiduciary duty. The judicial remedy here will be that X holds both the contract and the money in a constructive trust for the duo. Note, X will not be punished or totally denied of the benefit; both X and Y will receive a half share in the contract and the money.

Breaches of duty and remedies

Where a principal can establish both a fiduciary duty and a breach of that duty, through violation of the above rules, the court will find that the benefit gained by the fiduciary should be returned to the principal because it would be unconscionable to allow the fiduciary to retain the benefit by employing his strict common law legal rights. This will be the case, unless the fiduciary can show there was full disclosure of the conflict of interest or profit and that the principal fully accepted and freely consented to the fiduciary's course of action.

Remedies will differ according to the type of damage or benefit. They are usually distinguished between proprietary remedies, dealing with property, and personal remedies, dealing with pecuniary (monetary) compensation.

Constructive trusts

Where the unconscionable gain by the fiduciary is in an easily identifiable form, such as the recording contract discussed above, the usual remedy will be the already discussed constructive trust.

Constructive trusts pop up in many aspects of equity, not just in a remedial sense, but, in this sense, what is meant by a constructive trust is that the court has created and imposed a duty on the fiduciary to hold the money in safekeeping until it can be rightfully transferred to the principal.

Account of profits

An account of profits is another potential remedy. It is usually used where the breach of duty was ongoing or when the gain is hard to identify. The idea of an account of profits is that the fiduciary profited unconscionably by virtue of the fiduciary position, so any profit made should be transferred to the principal. It may sound like a constructive trust at first, but it is not.

An account for profits is the appropriate remedy when, for example, a senior employee has taken advantage of his fiduciary position by conducting his own company on the side and has run up quite a lot of profits over a period of time, profits which he wouldn't have been able to make without his fiduciary position in the original company. The calculation of profits in this sense can be extremely difficult, because profit due to fiduciary position must be separated from profit due to the fiduciary's own effort and ingenuity.

Compensatory damages

Compensatory damages are also available. Accounts of profits can be hard remedies to establish, therefore, a plaintiff will often seek compensation (damages) instead. Courts of equity initially had no power to award compensatory damages, which traditionally were a remedy at common law, but legislation and case law has changed the situation so compensatory damages may now be awarded for a purely equitable action.

References

Meinhard v. Salmon (1928) 164 NE 545 at 546
ASIC v. Citigroup [2007] 62 ACSR 427 at 289
Keech v Sanford [1558-1774] All ER Rep 230
(1991) 22 NSWLR 189
[1991] 3 NZLR 535
[1988] 2 Qd R 1
Kak Loui Chan v. John Zacharia (1984) 58 ALJR 353
[1927] VLR 134
[1994] 3 SCR 377
[1982] WAR 1
(1996) 186 CLR 71
[1998] 1711 FCA
United Dominions Corporation v Brian Pty Ltd (1985) 59 ALJR 676
United States Surgical Corporation v Hospital Products International Pty Ltd (1984) 58 ALJR 587
Note 6
Phipps v Boardman [1967] 2 AC 46
Stewart v Layton (1992) 111 ALR 687
Note that Canada is the only common law jurisdiction in the world that recognises the doctor/patient relationship as a fiduciary one.
McInerney v. MacDonald [1992] 2 SCR 138, (1992) 126 N.B.R. (2d) 271, (1992) 126 N.B.R. (2e) 271, (1992) 93 D.L.R. (4th) 415, 1992 CanLII 57 (S.C.C.)
Lister v Stubbs (1890) 45 Ch D 1
Attorney General (Hong Kong) v Reid [1993] 3 WLR 1143
Giumelli v Giumelli (1999) 73 ALJR 54
Muchinski v Dodds (1986) 60 ALJR 52
Dart Industries Inc v Decor Corporation Pty Ltd (1993) 179 CLR 101
Nocton v Lord Ashburton [1914] AC 932
Re Pantmaenog [2004] 1 AC 158
Glover v Porter-Gaud (2000) 98-CP-10-613
Although under the laws of Idaho it seems to be assumed that a protector is a fiduciary.

(October 2007) Speaking to the Judicial Conference of Australia's annual meeting in Sydney

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18 results for: fiduciary

Fiduciary

Fiduciary Duty

EMPLOYEE BENEFIT PLANS

FURTHER READING:

Fiduciary

Fiduciary duty in different jurisdictions

Elements of the fiduciary duty

Conflict of interest and duty

Conflict of duty and duty

No-profit rule

Fiduciary relationships

Possibly fiduciary relationships

Example: band members

Breaches of duty and remedies

Constructive trusts

Account of profits

Compensatory damages

References

See also

All 18 results for: fiduciary