What is a Breach of Fiduciary Duty?

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One of the most common causes of action as to business litigation claims is for a breach of fiduciary duty claims. This can take some business owners by surprise. Owning a business often creates fiduciary duties to various parties, even if you are not an individual whose sole business purpose involves creating fiduciary relationships.

When you have a fiduciary duty to someone you have created a relationship which obligates you to act in that person’s best interests. It is a relationship of trust or confidence, and often constitutes a relationship where one party will exercise expertise in favor of the other.

When does a breach occur?

A breach occurs when all three of the following are true:

  • A fiduciary relationship existed.
  • The fiduciary committed some form of misconduct.
  • The misconduct has caused some form of damage.

When is the relationship created?

Some businesses create fiduciary duties to their clients by the very nature of their business relationship(s).  The attorney-client relationship is a fiduciary relationship, for example.

This relationship may also be created between business partners. When the business is a corporation, the controlling shareholders will owe a fiduciary duty to the company and to the investors in that company.

The nature of that relationship is changing. In the past, for example, corporate directors have been shielded by the “business judgement rule.” This protects them from liability as long as they’ve acted in the corporation’s best interest. This rule is still true, but recently 181 executive directors signed agreements committing them to several more principles:

  • That they would deliver value to customers.
  • That they would invest in employees.
  • That they would deal fairly and ethically with suppliers.
  • That they would support their communities.
  • That they would generate long-term value for their stockholders.

For the moment these additional duties aren’t a matter of law for anyone other than the people who signed them. It will be interesting to see if, as these executives predict, the law will in fact move in the direction of demanding additional duties from corporations and their executives.

Types of Duties

The fiduciary relationship creates a list of sub-duties that are important  to be aware of.

These begin with the duty of care. This means that anyone who is in a position to make decisions for a company must use all material information reasonably available to them to make their decisions.   In other words, you can’t just “go with your gut.” You need to be able to demonstrate that you did your homework.

Next, you owe a duty of loyalty. You can’t use your position of trust to serve your own needs and interests.

A duty of good faith comes next. You’re required to advance the interests of your company without violating any laws.

The next is a duty of confidentiality and prudence. You cannot disclose corporate secrets, nor engage in any kind of gross negligence which could harm your company.

Finally you have a duty to disclose any conflicts of interest which could keep you from performing your duties to the best of your ability.

Consult with a NYC Business Lawyer 

You do not have to enter into any kind of an express fiduciary agreement to create a fiduciary relationship. As a result, it’s a good idea to sit down with a business attorney before entering into any kind of major business relationship. This will give you the chance to understand exactly what kinds of obligations you’ll be held to after entering the relationship, as well as what steps you can take to shield yourself from accusations of a breach.

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SCOTT B. RICHMAN, ESQ.

Mr. Richman is the Managing Member and Founder of Richman Law Firm PLLC. In his role as Managing Member, Mr. Richman oversees the day-to-day operations of the firm and handles the litigation of the most complex legal matters across a vast array of practice areas and disciplines. ​

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