You may have heard the term ‘fiduciary relationship’ thrown around in conversation. But what does it actually mean? These relationships are of utmost importance in law, particularly in the areas of equity and contract. A fiduciary relationship arises between two parties, in which one party places special trust and reliance on another. So you might be wondering what exactly does this mean, and what are the implications if the duty is breached? Read our guide which describes the nature of fiduciary relationships and consequences for breach.
What is a Fiduciary Relationship?
Fiduciary relationships are based on the principles of trust and confidence. There are two parties in these relationships; the fiduciary and the beneficiary. This imposes a duty on the fiduciary to put the beneficiaries interests before their own. It also forbids the fiduciary from acting in ways that conflict with their obligations to the beneficiary.
So why are these kinds of relationships important? They are often characterised as relationships of ‘undivided loyalty’ and good faith. The obligations imposed on the fiduciary are ‘strict’. They are particularly significant as they govern unbalanced relationships. These duties aim to protect the beneficiary from an unlawful use of the fiduciaries position to their benefit.
How Do Fiduciary Relationships Arise?
Generally speaking, fiduciary relationships arise out of contracts. Here, one person usually agrees to act in the interests of another person. For example, in a lawyer-client relationship, the retainer will outline a description of the lawyer’s obligations. This will often include a duty to not make unauthorised profits. It may also state not to act in ways that put their own interests in conflict with their clients interests.
On the other hand, the nature of the relationship can create a presumption of a duty. For example, the Corporations Act 2001 (Cth) states a director owes a duty to act in the company’s best interests. It also requires a director to properly exercise their power and act with care and diligence.
Types of Relationships Creating Duties
So you might be wondering if you are in a fiduciary relationship? You could be. Here are some examples where fiduciary duties are generally recognised:
- Trustee to beneficiary
- Director to company
- Doctor to patient
- Lawyer to client
- Agent to principal
- Guardian to ward
- Employer to employee
- Partner to partner
What Happens When a Duty is Breached?
As we have discussed, a fiduciary has a strict obligation to not use their position for personal gain. Similarly, they cannot be in a position where their interests conflict with those interests of the beneficiary. A fiduciary can breach their duty unintentionally. In this case, a fiduciary may be deemed negligent in the operation of their duties.
So what happens if this duty is breached? There can be significant ramifications. A beneficiary can sue a fiduciary. There can also be hefty fines and prison sentences for significant breaches. For more information, read our guide ‘What is a Breach of Fiduciary Duty?‘.
Examples of Breaches
To better understand, here are a few examples of what constitutes a breach of fiduciary duty:
- Obtaining an unauthorised financial benefit
- Derives a profit that should have gone to the beneficiary
- A fiduciary has conflicting duties
Given the complex nature of these relationships, we would recommend consulting a business lawyer for advice.
To conclude, fiduciary relationships are based on trust and confidence. It requires one person (the fiduciary) to put another person’s (the beneficiary) interests before their own. There are many circumstances where these relationships can arise. The consequences of a breach are serious. This is why it is important to be aware of your obligations and the scope of your duties.