Fiduciary Duty

Fiduciary Duty

This article is about the legal term. For optical field-of-view markers, see Fiduciary marker.

A fiduciary is a legal or ethical relationship of trust between two or more parties. Typically, a fiduciary prudently takes care of money for another person. One party, for example a corporate trust company or the trust department of a bank, acts in a fiduciary capacity to the other one, who for example has entrusted funds to the fiduciary for safekeeping or investment. Likewise, asset managers--including managers of pension plans, endowments and other tax-exempt assets--are considered fiduciaries under applicable statutes and laws.[1] In a fiduciary relationship, one person, in a position of vulnerability, justifiably vests confidence, good faith, reliance and trust in another whose aid, advice or protection is sought in some matter. In such a relation good conscience requires the fiduciary to act at all times for the sole benefit and interest of the one who trusts. .

A fiduciary is someone who has undertaken to act for and on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence.

A fiduciary duty[3] is the highest standard of care at either equity or law. A fiduciary (abbreviation fid) is expected to be extremely loyal to the person to whom he owes the duty (the "principal"): he must not put his personal interests before the duty, and must not profit from his position as a fiduciary, unless the principal consents.

In English common law the fiduciary relation is arguably the most important concept within the portion of the legal system known as equity. In the United Kingdom, the Judicature Acts merged the courts of equity (historically based in England's Court of Chancery) with the courts of common law, and as a result the concept of fiduciary duty also became available in common law courts.

When a fiduciary duty is imposed, equity requires a different, arguably stricter, standard of behavior than the comparable tortious duty of care at common law. It is said the fiduciary has a duty not to be in a situation where personal interests and fiduciary duty conflict, a duty not to be in a situation where his fiduciary duty conflicts with another fiduciary duty, and a duty not to profit from his fiduciary position without knowledge and consent. A fiduciary ideally would not have a conflict of interest. It has been said that fiduciaries must conduct themselves "at a level higher than that trodden by the crowd"[4] and that "[t]he distinguishing or overriding duty of a fiduciary is the obligation of undivided loyalty."[5]

Duty in different jurisdictions


Different jurisdictions regard fiduciary duties in different lights. Canadian law, for example, has developed a more expansive view of fiduciary obligation than American law, while Australian law and British law have developed more conservative approaches than either the USA or Canada. The law expressed here follows the general body of elementary fiduciary law found in most common law jurisdictions; for in-depth analysis of particular jurisdictional idiosyncrasies please consult primary authorities within the relevant jurisdiction.

This is especially true in the area of Labor and Employment law. In Canada a fiduciary has obligations to the employer even after the employment relationship is terminated, whereas in the U.S. the employment and fiduciary relationships terminate together.

In SEC v. Chenery Corporation,[6] Frankfurter J said,



The most common circumstance where a fiduciary duty will arise is between a trustee, whether real or juristic, and a beneficiary. The trustee to whom property is legally committed is the legal—i.e., common law—owner of all such property. The beneficiary, at law, has no legal title to the trust; however, the trustee is bound by equity to suppress his own interests and administer the property only for the benefit of the beneficiary. In this way, the beneficiary obtains the use of property without being its technical owner.

Others, such as corporate directors, may be held to a fiduciary duty similar in some respects to that of a trustee. This happens when, for example, the directors of a bank are trustees for the depositors, the directors of a corporation are trustees for the stockholders or a guardian is trustee of his ward's property. A person in a sensitive position sometimes protects himself from possible conflict of interest charges by setting up a blind trust, placing his financial affairs in the hands of a fiduciary and giving up all right to know about or intervene in their handling.

The fiduciary functions of trusts and agencies are commonly performed by a trust company, such as a commercial bank, organized for that purpose. In the United States, the Office of the Comptroller of the Currency (OCC), an agency of the United States Department of the Treasury, is the primary regulator of the fiduciary activities of federal savings associations.

When a court desires to hold the offending party to a transaction responsible so as to prevent unjust enrichment, the judge can declare that a fiduciary relation exists between the parties, as though the offender were in fact a trustee for the partner.

Relationships which routinely attract by law a fiduciary duty between certain classes of persons include these:

Roman and civil law recognized a type of contract called fiducia (also contractus fiduciae or fiduciary contract), involving essentially a sale to a person coupled with an agreement that the purchaser should sell the property back upon the fulfillment of certain conditions.[31] Such contracts were used in the emancipation of children, in connection with testamentary gifts and in pledges. Under Roman law a woman could arrange a fictitious sale called a fiduciary coemption in order to change her guardian or gain legal capacity to make a will.[32]

In Roman Dutch law, a fiduciary heir may receive property subject to passing it to another on fulfillment of certain conditions; the gift is called a fideicommissum. The fiduciary of a fideicommissum is a fideicommissioner and one that receives property from a fiduciary heir is a fideicommissary heir.[33]

Fiduciary principles may be applied in a variety of legal contexts.[34]

Possible relationships

Joint ventures, as opposed to business partnerships, are not presumed to carry a fiduciary duty; however, this is a matter of degree.[35] If a joint venture is conducted at commercial arm's length and both parties are on an equal footing then the courts will be reluctant to find a fiduciary duty, but if the joint venture is carried out more in the manner of a partnership then fiduciary relationships can and often will arise.[36]

Husbands and wives are not presumed to be in a fiduciary relationship; however, this may be easily established. Similarly, ordinary commercial transactions in themselves are not presumed to but can give rise to fiduciary duties, should the appropriate circumstances arise. These are usually circumstances where the contract specifies a degree of trust and loyalty or it can be inferred by the court.[37]

Recently, in an insider trading case, the U.S. Securities and Exchange Commission brought charges against a boyfriend of a Disney intern, alleging he had a fiduciary duty to his girlfriend and breached it. The boyfriend, Toby Scammell, allegedly received and used insider information on Disney's takeover of Marvel Comic.[38][39]

Generally, the employment relationship is not regarded as fiduciary, but may be so if

... within a particular contractual relationship there are specific contractual obligations which the employee has undertaken which have placed him in a situation where equity imposes these rigorous duties in addition to the contractual obligations. Although terminologies like duty of good faith, or loyalty, or the mutual duty of trust and confidence are frequently used to describe employment relationships, such concepts usually denote situations where "a party merely has to take into consideration the interests of another, but does not have to act in the interests of that other.

If fiduciary relationships are to arise between employers and employees, it is necessary to ascertain that the employee has placed himself in a position where he must act solely in the interests of his employer.[40] In the Canadian case of Canadian Aero Service Ltd v O'Malley,[41] it was held that a senior employee is much more likely to be found to owe fiduciary duties towards his employer.

A protector of a trust may owe fiduciary duties to the beneficiaries, although there is no case law establishing this to be the case.


For example, two members of a band currently under contract with one another (or with some other tangible, existing relationship that creates a legal duty), X and Y, record songs together. Let us imagine it is a serious, successful band and that a court would declare that the two members are equal partners in a business. One day, X takes some demos made cooperatively by the duo to a recording label, where an executive expresses interest. X pretends it is all his work and receives an exclusive contract and $50,000. Y is unaware of the encounter until reading it in the paper the next week.

This situation represents a conflict of interest and duty. Both X and Y hold fiduciary duties to each other, which means they must subdue their own interests in favor of the duo's collective interest. By signing an individual contract and taking all the money, X has put personal interest above the fiduciary duty. Therefore, a court will find that X has breached his fiduciary duty. The judicial remedy here will be that X holds both the contract and the money in a constructive trust for the duo. Note, X will not be punished or totally denied of the benefit; both X and Y will receive a half share in the contract and the money.

Elements of duty

A fiduciary, such as the administrator, executor or guardian of an estate, may be legally required to file with a probate court or judge a surety bond, called a fiduciary bond or probate bond, to guarantee faithful performance of his duties.[42] One of those duties may be to prepare, generally under oath, an inventory of the tangible or intangible property of the estate, describing the items or classes of property and usually placing a valuation on them.[43]

A bank or other fiduciary having legal title to a mortgage may sell fractional shares to investors, thereby creating a participating mortgage.


A fiduciary will be liable to account if proven to have acquired a profit, benefit or gain from the relationship by one of three means:[1]

  • In circumstances of conflict of duty and interest
  • In circumstances of conflict of duty to one person and duty to another person
  • By taking advantage of the fiduciary position.

Therefore, it is said the fiduciary has a duty not to be in a situation where personal interests and fiduciary duty conflict, a duty not to be in a situation where his fiduciary duty conflicts with another fiduciary duty, and not to profit from his fiduciary position without express knowledge and consent. A fiduciary cannot have a conflict of interest.

Conflict of duties

A fiduciary's duty must not conflict with another fiduciary duty.[44]' Conflicts between one fiduciary duty and another fiduciary duty arise most often when a lawyer or an agent, such as a real estate agent, represent more than one client, and the interests of those clients conflict. This would occur when a lawyer attempts to represent both the plaintiff and the defendant in the same matter, for example. The rule comes from the logical conclusion that a fiduciary cannot make the principal's interests a top priority if he has two principals and their interests are diametrically opposed; he must balance the interests, which is not acceptable to equity. Therefore, the conflict of duty and duty rule is really an extension of the conflict of interest and duty rules.

No-profit rule

A fiduciary must not profit from the fiduciary position.[2] This includes any benefits or profits which, although unrelated to the fiduciary position, came about because of an opportunity that the fiduciary position afforded. It is unnecessary that the principal would have been unable to make the profit; if the fiduciary makes a profit, by virtue of his role as fiduciary for the principal, then the fiduciary must report the profit to the principal. If the principal consents then the fiduciary may keep the benefit. If this requirement is not met then the property is deemed by the court to be held by the fiduciary on constructive trust for the principal.

Secret commissions, or bribes, also come under the no profit rule. The bribe shall be held in constructive trust for the principal. The person who made the bribe cannot recover it, since he has committed a crime. Similarly, the fiduciary, who received the bribe, has committed a crime. Fiduciary duties are an aspect of equity and, in accordance with the equitable principles, or maxims, equity serves those with clean hands. Therefore, the bribe is held on constructive trust for the principal, the only innocent party.

Bribes were initially considered not to be held on constructive trust, but were considered to be held as a debt by the fiduciary to the principal.[45] This approach has been overruled; the bribe is now classified as a constructive trust.[46] The change is due to pragmatic reasons, especially in regard to a bankrupt fiduciary. If a fiduciary takes a bribe and that bribe is considered a debt then if the fiduciary goes bankrupt the debt will be left in his pool of assets to be paid to creditors and the principal may miss out on recovery because other creditors were more secured. If the bribe is treated as held on a constructive trust then it will remain in the possession of the fiduciary, despite bankruptcy, until such time as the principal recovers it.

Breaches of duty and remedies

Conduct by a fiduciary may be deemed constructive fraud when it is based on acts, omissions or concealments considered fraudulent and that gives one an advantage against the other because such conduct—though not actually fraudulent, dishonest or deceitful—demands redress for reasons of public policy.[47] Breach of fiduciary duty may occur in insider trading, when an insider or a related party makes trades in a corporation's securities based on material non-public information obtained during the performance of the insider's duties at the corporation. Breach of fiduciary duty by a lawyer with regard to a client, if negligent, may be a form of legal malpractice; if intentional, it may be remedied in equity. Clark v Rowe, 428 Mass. 339, 345 (1998) (dicta).

Where a principal can establish both a fiduciary duty and a breach of that duty, through violation of the above rules, the court will find that the benefit gained by the fiduciary should be returned to the principal because it would be unconscionable to allow the fiduciary to retain the benefit by employing his strict common law legal rights. This will be the case, unless the fiduciary can show there was full disclosure of the conflict of interest or profit and that the principal fully accepted and freely consented to the fiduciary's course of action.

Remedies will differ according to the type of damage or benefit. They are usually distinguished between proprietary remedies, dealing with property, and personal remedies, dealing with pecuniary (monetary) compensation.

Constructive trusts

Where the unconscionable gain by the fiduciary is in an easily identifiable form, such as the recording contract discussed above, the usual remedy will be the already discussed constructive trust.[48]

Constructive trusts pop up in many aspects of equity, not just in a remedial sense,[49] but, in this sense, what is meant by a constructive trust is that the court has created and imposed a duty on the fiduciary to hold the money in safekeeping until it can be rightfully transferred to the principal.

Account of profits

An account of profits is another potential remedy.[50] It is usually used where the breach of duty was ongoing or when the gain is hard to identify. The idea of an account of profits is that the fiduciary profited unconscionably by virtue of the fiduciary position, so any profit made should be transferred to the principal. It may sound like a constructive trust at first, but it is not.

An account for profits is the appropriate remedy when, for example, a senior employee has taken advantage of his fiduciary position by conducting his own company on the side and has run up quite a lot of profits over a period of time, profits which he wouldn't have been able to make otherwise. The fiduciary in breach may however receive an allowance for effort and ingenuity expended in making the profit.

Compensatory damages

Compensatory damages are also available.[51] Accounts of profits can be hard remedies to establish, therefore, a plaintiff will often seek compensation (damages) instead. Courts of equity initially had no power to award compensatory damages, which traditionally were a remedy at common law, but legislation and case law has changed the situation so compensatory damages may now be awarded for a purely equitable action.

See also


Further reading

  • P Birks, ‘The Content of Fiduciary Obligation’ (2000) 34 Israel Law Journal 3; (2002) 16 Trust Law International 34
  • M Conaglen, ‘The Nature and Function of Fiduciary Loyalty’ (2005) 121 Law Quarterly Review 452 - 480.
  • JH Langbein ‘Questioning the Trust Law Duty of Loyalty’ (2005) 114 Yale Law Journal 929 - 990.
  • A Hicks, ‘The Trustee Act 2000 and the Modern Meaning of 'Investment’ (2001) 15 (4) Trust Law International 203
  • DR Paling ‘Trustees Duties of Skill and Care’ (1973) 37 Conveyancer 48 - 59
  • EJ Weinrib, ‘The Fiduciary Obligation’ (1975) 25(1) University of Toronto Law Journal 1 - 22

External links

  • Fiduciary and Non-Fiduciary Responsibilities
  • of the Day Archive/fiduciary.
  • "Fiduciary / F. Duty" Defined & Explained. The 'Lectric Law Library - legal resources and definitions.
  • Fiduciary Law & Legal Definition. Legal Definitions Legal Terms Dictionary.
  • Law Dictionary: Fiduciary.
  • Iman Anabtawi and "Fiduciary Duties for Activist Shareholders". UCLA School of Law, Law-Econ Research Paper No. 08-02. Social Science Research Network (SSRN) Electronic Library.
  • Meeting Your Fiduciary Responsibilities. The U.S. Department of Labor: Employee Benefits Security Administration.
  • Jerry Sais Jr. & Melissa W. Sais, Meeting Your Fiduciary Responsibility. - Your Source For Investing Education.
  • Excerpts from texts on fiduciary duties. The New Palgrave Dictionary of Economics and the Law, Definition of "fiduciary duties", by Tamar Frankel; "Fiduciary Law", by Tamar Frankel, California Law Review, May, 1983, 71 Ca. L. Rev. 795; "Fiduciary Duties as Default Rules", by Tamar Frankel, Oregon Law Review, Winter 1995, 74 Or. L. Rev. 1209; "Contract and Fiduciary Duty", by Frank H. Easterbrook and Daniel R. Fischel, The Journal of Law and Economics, 1993, 36 J.L. & Econ. 425; etc. Berkman Center, Harvard Law School: Trust and Non-Trust in Law, Business, and Behavioral Science.
  • Swiss Fiduciary