To understand what it means to have a fiduciary duty in a business relationship, you must first understand who a fiduciary is. A fiduciary is simply a person responsible for taking care of money or other assets for another person or entity.
The relationship between the fiduciary and the principal, or the person who benefits from the work done by the fiduciary, creates a legal duty in the fiduciary. For example, corporate executives must act in the best interests of the company they work for and the shareholders that back the company if the company is publicly traded.
Fiduciary duty is one of the highest duties imposed by the United States legal system. The term fiduciary duty is used to describe the legal obligation of the fiduciary to act accordingly in the best interests of the principal. A fiduciary duty is composed primarily of two equal duties: the duty of loyalty and the duty of care.
In the business setting, a fiduciary owes the principal a duty of loyalty, meaning the fiduciary must act at all times in the business’s best interest. This means that the fiduciary must avoid any conflicts of interest that may arise between their interests and the interests of the principal. They also must avoid any conflicts that may arise between other clients of the fiduciary and not self-deal or profit from their relationship with the principal (unless they get the express and informed consent of the principal).
The duty of care refers to the legal responsibility that the fiduciary act accordingly to a standard of reasonable care. This typically means providing the best possible service or advice that they are capable of. To run a successful business, business partners and business investors must trust that the fiduciary is acting in the business’s best interests.
When the fiduciary does not act in the business’s best interests or otherwise violates their fiduciary duty, then a civil suit may be initiated by the injured party to recover for the breach of fiduciary duty that has occurred.
What Constitutes a Breach of Fiduciary Duty?
Suppose you believe that you may have a case for breach of fiduciary duty. In that case, it is important to make sure that you can prove every element of your case before filing a civil lawsuit, as civil lawsuits can often be very expensive.
The elements needed to prove that there was a breach of fiduciary duty include the following:
- It must be proved that a fiduciary relationship existed between the plaintiff and the defendant at the time of the dispute;
- The plaintiff must show the scope of the relationship and the duties of the fiduciary;
- That the defendant breached the duties as outlined within the scope of the relationship, and caused harm to the plaintiff; and
- That there is a remedy available for the harm that occurred due to the breach.
If you can prove the above elements, you may be able to initiate a suit against the fiduciary. However, sometimes when fiduciary relationships are outlined in an agreement, there are arbitration clauses that may prevent you from being able outright to sue a business for breach of fiduciary duty. This means that if you signed a contract agreeing to arbitrate such disputes, you would have to resolve the business dispute through arbitration instead of civil court.
How Can a Fiduciary Duty in a Business Relationship Be Breached?
As can be seen, there is some form of fiduciary duty between the executives, shareholders, or partners of the business in a business relationship. The most common place to look for a fiduciary duty is in the company’s organizational documents, which will outline the fiduciary duties present. The organization documents are like the company’s charter and basis for the company’s entire structure, purpose, and running.
Between business partners, the duty of loyalty is even stronger, meaning there should be full disclosure of everything that might affect the partnership and a full accounting of all profits and property relevant to the partnership. One example of breaching fiduciary duty in a business partnership is where one partner hides assets from the other partner or engages in self-dealing.
A breach of fiduciary duty in a business relationship is simply any actions taken that are contrary to a client’s interests or the business, failure to disclose pertinent information or actions taken for the fiduciary’s self-interest. Common breaches of fiduciary duty in a business relationship include:
- Acting in a way that is contrary to the best interests of a client or against the best interests of the business;
- Self-dealing, or otherwise acting in the fiduciary’s self-interest, rather than the best interests of the client or business;
- Misappropriating funds (also known as embezzlement);
- Misrepresenting important facts, such as lying to a company’s shareholders about the company’s financial data; or
- Otherwise neglecting one’s duties or responsibilities to the business.
Can You Go to Jail for Breaching Your Fiduciary Duty?
Each state dictates what remedies may be applied to breach fiduciary duty. Additionally, the available remedies depend on the severity of the breach and the breach itself. The most common remedies for a breach of fiduciary duty include paying fines such as reimbursing any lost profits and out-of-pocket losses.
For example, compensatory damages may be awarded to shareholders who filed a civil lawsuit against the CEO of a company for making a bad business decision that resulted in a big loss to company shares.
However, to win this case, the shareholders would first need to show that the CEO both breached their fiduciary duty and show a precise calculation of the money shareholders lost because of it. Often, this requires hiring an economist to prove the number of damages that resulted from the breach.
Although most cases for breaching fiduciary duty often only result in civil liability, such as having to pay fines, some breaches of fiduciary duty may result in criminal liability as well. For example, a Chief Executive Officer or Chief Financial Officer may be imprisoned for falsifying certain corporate financial reports or certifying misleading corporate financial statements under the Sarbanes-Oxley Act of 2002, enacted in response to financial scandals such as the Enron scandal.
Additionally, a fiduciary may be criminally liable for embezzling business or client funds. Other breaches of fiduciary duty that may result in criminal liability include other forms of self-dealing, committing securities and commodities fraud, or criminal insider trading. Consequences for committing the above-listed breaches of fiduciary duty may include lengthy prison sentences, heavy fines, or both.
What Fiduciary Duties Might Apply to My Business?
As noted above, your company’s organizational documents or partnership agreement will likely outline the fiduciary duties present and often the consequences that will result from a breach of fiduciary duty. For a small business, this often means that there is a duty to operate in good faith and fair dealing, meaning that one party cannot take any action that would prevent the purpose of the business from being achieved.
Fiduciary duties will vary according to the business structure of the business and the relationships outlined in the organizational documents. Thus, it is important to read through your business’s organizational documents or partnership agreement.
What Can be Done About a Breach of Fiduciary Duty?
As noted above, each state has its specific laws regarding fiduciary duties, relationships, and what remedies are available for fiduciary breaches. However, suppose you believe that a breach of fiduciary duty has occurred and that breach has resulted in measurable losses for you. In that case, you may be able to file a civil lawsuit to recover your damages.
First, you must be able to prove the elements as outlined above. If you can do so, you should initiate a civil lawsuit against the fiduciary or business according to the civil procedure rules outlined by your local jurisdiction. Often this means drafting a complaint, serving the business, conducting discovery, and possibly appearing in court.
Once again, however, arbitration may be the remedy that you have to follow if arbitration is mentioned in your business’s organization document or partnership agreement. In that case, you will have to proceed through the arbitration process, and you won’t be able to file a civil lawsuit. Since arbitration agreements are common, it’s important to check if you have an agreement before proceeding.
Do I Need an Attorney When Suing a Business Partner for Breach of Fiduciary Duty?
As can be seen, the laws and regulations involved in a breach of fiduciary duty claim are often complex and vary by jurisdiction. Thus, if you suspect that there has been a breach of fiduciary duties in your business relationship, it may be in your best interests to consult with a well-qualified and knowledgeable corporate attorney.
An experienced business attorney will help inform you of your local state’s laws, evaluate your claim, file a civil lawsuit on your behalf, and even represent you in court, if necessary.
