The Golden Rule says, “Do to others what you would have them do to you.”
In other words, you should treat other people the way that you’d like to be treated. In business and law, there’s a similar rule that applies to certain relationships. It’s known as a fiduciary duty.
A fiduciary duty is an obligation to act in the best interest of another party. This means that as a fiduciary you are legally bound to put that other party’s best interests ahead of your own.
Where Do You Find Fiduciary Duties?
Fiduciary duties are found in a number of business relationships. This includes between:
- A trustee and a beneficiary;
- An employee to employer;
- An attorney to client;
- A real estate broker to the owner of the real estate;
- Corporate board members and shareholders;
- Business partners in partnerships and limited liability companies; and
- Executors and legatees.
A fiduciary has ethical and legal responsibilities and duties. When an individual (or entity, such as a bank) knowingly accepts a fiduciary duty on behalf of another, they must act in the best interest of the principal, which is the client or person whose assets they’re managing.
It’s called a “prudent person standard of care,” which dates back to the early 1800’s and is also found in state laws. New York’s prudent person standard of care is found in General Obligations Law § 5-1505:
“In dealing with property of the principal, an agent shall observe the standard of care that would be observed by a prudent person dealing with property of another.”
And courts in New York will describe a fiduciary relationship to juries as the following:
“A fiduciary relationship exists between an agent and principal, signifying a relationship of trust and confidence whereby the agent is bound to exercise the utmost good faith and undivided loyalty toward the principal throughout the relationship.”
Thus, the prudent-person rule requires a fiduciary to act primarily with the needs of beneficiaries in mind. Also, a fiduciary must be aware of conflicts of interest that arise between the fiduciary and the principal.
Are There Different Types of Fiduciary Duties?
Yes. Fiduciary duties may differ depending on the relationship and the kind of beneficiary that a fiduciary serves. Nonetheless, the legal and ethical obligations as to the protecting of the beneficiaries’ interests typically include these duties:
- Duty of Care. The responsibility of the fiduciary to be informed and educated as much as possible to exercise sound judgments that protect a beneficiary's interests. This can include thoughtful consideration of all the available options to an issue and wise decision-making based on a careful examination of available information.
- Duty of Loyalty. Acting in the best interest of the beneficiary at all times. It includes the duty of the fiduciary to excuse his- or herself from taking any actions when a conflict of interest exists as to the beneficiary's welfare.
- Duty of Good Faith. Always acting legally to further the beneficiary’s interests.
- Duty of Confidentiality. Maintaining the confidentiality of all information concerning the beneficiary.
- Duty of Prudence. Executing all dealings concerning the interests of beneficiary with the highest degree of professional skill, caution, and critical awareness of risk.
- Duty to Disclose. Engaging in completely forthright behavior, disclosing all relevant information that may affect their ability to carry out their duties as fiduciaries and/or on the well-being of their beneficiary's interests.
What if a Fiduciary Breaches Their Duties?
If a fiduciary breaches his or her duties, a plaintiff may bring an action against him or her to recovery for their injuries. To be successful, a plaintiff must prove the following:
- The existence of a fiduciary relationship;
- Misconduct by the fiduciary; and
- Damages directly caused by the fiduciary’s misconduct.
Takeaway
Being a fiduciary is an important role, one that requires thoughtfulness and attention. While some fiduciary obligations are obvious (e.g., a trustee, an attorney, a bank managing assets), some are less intuitive (e.g., employees owing a fiduciary obligation to their employer).
If you have questions about your own obligations, or if you believe someone has breached their obligations to you, reach out to us at LOVE LAW FIRM PLLC. We help businesses and individuals every day.
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Francine E. Love is the Founder & Managing Attorney at LOVE LAW FIRM, PLLC which dedicates its practice to serving entrepreneurs, start-ups and small businesses. The opinions expressed are those of the author. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
