Fiduciary describes a relationship where one party has been entrusted to act on behalf of another party for business or personal reasons. The party acting as a fiduciary is legally required to act with the utmost integrity in all dealings and cannot do anything to jeopardize the interests of the party being represented.
Fiduciary relationships arise in a number of business contexts. When a business fiduciary fails to perform the duties imposed upon them by law, a breach of fiduciary duty has occurred, and the damaged party may bring a claim to recover compensation for their losses.
The following discussion explains what fiduciary duties are and when they arise, with three examples of how fiduciary duties in business relationships can be breached.
What are Fiduciary Duties?
A fiduciary has a legal duty to put the interests of the party being represented before their own when acting in a fiduciary capacity. When acting as a fiduciary in Texas, the following duties are owed to the person whose interests are being represented:
- Duty of care
- Duty of loyalty
- Duty of good faith
- Duty of confidentiality
- Duty of obedience
When a Fiduciary Duty Can Arise
Whether a fiduciary duty exists is determined by the relative positions of the parties in a particular type of relationship. Where one party is relying on the knowledge, skill, or experience of another for help, a fiduciary duty exists as to the vulnerable party’s needs.
Some fiduciary relationships arise as a matter of law, and others can be established from the facts of a particular relationship. Common business associations where a fiduciary relationship exists between professionals or between a professional and a client include:
- Business partners to each other in a partnership
- Agent to principal
- Corporate directors to shareholders
- Trustee to trust beneficiaries
- Lawyer to client
- Financial broker to client
- Executor to estate beneficiaries
- Employer to employee – only when a fiduciary relationship can be established
- Employee to employer – if the employee holds a key position or possesses critical business information
- Insurance company to the policyholder – this special relationship arises out of the unequal bargaining power between the parties.
Examples of Breaches of Fiduciary Duty in Business Relationships
For a breach of fiduciary duty to give rise to a claim for damages, the fiduciary’s conduct must either cause damage to the person being represented or must inappropriately benefit the fiduciary.
1. Partner’s Breach of Fiduciary Duty to Partnership
The Texas Business Organizations Code says a partner is liable to other partners and the partnership for harm caused by violating a duty imposed by the Code. Partners owe duties of care and loyalty to each other and the partnership. Partners are to discharge their duties in good faith and in the best interests of the partnership.
Partners must account to the partnership for benefits received by a partner on behalf of the partnership and may not engage in conduct adverse to the partnership. A partner does not violate a fiduciary duty merely by acting in the partner’s own interest, though such conduct will be carefully scrutinized.
Some of the ways partners can violate their fiduciary duties to the partnership and other partners are:
- Engaging in business transactions in which a partner has a personal financial interest
- Pursuing business opportunities individually that would have benefitted the partnership
- Using partnership funds to pay for personal expenditures
- Failing to provide an accurate financial accounting to all partners
- Not dividing partnership profits according to the partnership agreement
2. Corporate Executives Breach of Fiduciary Duty to Shareholders
The directors of a corporation are in charge of overseeing the control and direction of the business. Their decisions on behalf of the company’s shareholders and directors’ duties must be discharged in good faith, with ordinary care, and in a manner reasonably believed to be in the corporation’s best interests.
When the motive of a director’s actions is questioned, the inquiry focuses on whether the director acted with the intent to benefit the corporation. A corporate director does not have a duty to never make a mistake. Business decisions that otherwise comply with a director’s duties do not give rise to liability. An error in business judgment, if reasonable and well intended, is not a breach of fiduciary duty.
Directors can get into trouble when they or those they are related to benefit from dealings involving the corporation. Types of actions that can breach a director’s fiduciary duties include:
- Transacting business with another corporation the director has a business or financial affiliation with
- Personally profiting from any corporate transactions
- Taking a business opportunity that would benefit the corporation
- Engaging in business transactions benefiting family members
- Making decisions adverse to corporate interests
3. Financial Advisors Breach of Fiduciary Duty to Clients
As stated in the Texas Administrative Code, financial advisors in Texas owe quite a few fiduciary duties to their clients. Financial advisors are required to be competent and work toward improving their competency. They are not to advise clients about matters outside their particular areas of expertise and must obtain qualified assistance or refer a client elsewhere.
Financial advisors must perform their services with honesty, integrity, skill, and care. They are to remain objective and free of any interests that conflict with a client’s interests. There is no conflict of interest in situations where a financial advisor fully discloses the conflicting interest to the client, and the client expressly permits the relationship to continue.
The professional activities of a financial advisor specifically cannot involve:
- Deceit or misrepresentation
- Knowingly making a false or misleading statement to a client
How to Know if a Fiduciary Duty Has been Breached
Breaches of fiduciary duty are violations of trust in relationships where the law requires strict standards of integrity. When inappropriate conduct is suspected of a fiduciary in business relationships, it may be difficult to determine whether a fiduciary duty has been breached or a negative outcome is only the product of poor business judgment.