What is Breach of Fiduciary Duty?

Fiduciary duty requires that the principal's best interest be placed above that of the fiduciary. Fiduciary duty exists in many formal or professional relationships that involve trust regarding the management of property or money, such as banker-client or lawyer-client, where the party providing the services is considered the fiduciary and the client is considered the principal. In some cases, the fiduciary duty is established by law, and in others it's spelled out in the documents establishing the relationship. A breach of fiduciary duty occurs whenever the principal's interests are not given highest priority, regardless of whether the principal experienced any financial loss.

Breach of fiduciary duty may occur in any of a number of ways, all related to the requirements of a fiduciary. For example, a fiduciary may not profit from the relationship or the fact that the relationship exists without the express knowledge and consent of the principal. For instance, if a real estate agent is an approved IRA custodian for a client who wants to purchase a piece of real estate for the IRA, the real estate agent may not participate in the sale or otherwise profit from it; he may only take custody of the real estate for the benefit of the IRA owner. This does not preclude the fiduciary from charging for services rendered.

Fiduciaries must frequently deal with potential conflicts of interest. These can arise when a fiduciary has clients whose interests are at odds with one another. When such causes arise, the fiduciary must make a choice between or among clients, but cannot attempt to provide services to clients with conflicting needs, so that fulfilling the duty to one would harm the interest of another, thus breaching fiduciary duty. Attempting to maintain the fiduciary relationship with clients whose conflicts are in conflict is a breach of fiduciary duty.

Placing anyone's interests above those of a principal is also a breach of fiduciary duty. A financial adviser with a fiduciary duty to clients, for instance, might invest a client's funds in a security because it will generate a commission for a friend. Whether the investment proves to be beneficial to the principal is immaterial; the fact is that the fiduciary duty was breached because the principal's interest was made subordinate to some other interest.

An interesting fact of which investors should be aware is that in the United States, fiduciary duty usually doesn't apply to the relationship between stockbroker and client. US stockbrokers are required to alert their clients that their interests may not always be consistent. Countless cases exist in American law upholding the statute that exempts stockbrokers from this responsibility.

When there is a breach of fiduciary duty that results in profit to the fiduciary, it's considered unconscionable to let the profit remain with the fiduciary, even if no specific law was broken, and the common remedy is called a constructive trust. In this example, the constructive trust would consist of the safeguarding of the profits until they can be transferred to the principal.

Fiduciary duty relationships can be more complex. Business partners are considered to have a fiduciary duty to each other, for example. If either partner earns money outside the partnership by virtue of being a member of the partnership, that's considered a breach of fiduciary duty, but the remedy in this case would consist of using the constructive trust to share the profits equitably within the partnership. High-ranking senior executives and corporate officers can also be considered to have a fiduciary responsibility to each other and to the company.

The laws and legal standards governing fiduciary duty and breach of fiduciary duty vary from country to country. The concept of fiduciary duty is one of the most important in British common law, and it's given high priority in Australia as well. The United States gives fiduciaries more leeway in interpreting their duty, and of course exempts stockbrokers from the duty. Canada's standard falls somewhere between those established by the US and Australia. Despite the differences, though, the concept of fiduciary duty is an essential standard of the law worldwide, and the differences extend more to the strength of sanctions imposed when breached.