Fiduciary Relationship

copyright@ digestable law

This article is written by Mr. Padmesh Joshi and Pratham Somwani, both are law students at the School of Law, University of Mumbai's Thane Sub-Campus

Introduction

A fiduciary relationship is where one person places some type of trust, confidence and reliance on another person. That means the other person has to perform as per the benefits and needs of the party who has trusted. Here the party to whom the duty is owed is called the principal and the party who owes a duty to the benefit of the other party is called fiduciary. The concept of a fiduciary relationship is widely used in many legal aspects such as contracts, wills, elections so on and so forth. The reason to create a fiduciary relationship between two parties is to make and maintain a trusted relation where one party can be sure that the other party is working for their benefit and the other party to trust them completely. There is no proper definition of fiduciary relationship. But it can be gathered from various judgments of high courts and supreme courts such as the case of Mrs. Nellie Wapshare v Pierce Leslie and Co Ltd (AIR 1960 MAD. 410) in which the term fiduciary relationship is defined as “A fiduciary relationship may arise in the context of a jural relationship. Where confidence is reposed by one another and that leads to a transaction in which there is a conflict of interest and duty in the person whom such confidence is reposted, fiduciary relationship immediately springs into existence.

Classification of fiduciary relationship: 

Classification of fiduciary relationship can be grouped in the following categories

1. Classification on the basis of human transactions

2. Classification of fiduciary relationship according to the confidential dimensions.

1. Classification on the basis of human transactions:

1. Fiduciary relationship in trusteeship: trustees have a fiduciary relationship with the trust’s beneficiaries which means they are liable to take care of all the property in the name of trust kept for the beneficiary. The relationship is not necessarily formal or legally established but a trustee can be made liable for breaching the trust.

2. Fiduciary relationship in commercial transactions

1. Directors of the company: Its similar to the fiduciary relationship in trusteeship. Here the director being the trustee are bound to act in the best interests of their beneficiary that is the company or its stakeholders.       

2. Partnership: the whole law of partnership and the duties of the partners are based on the principle of fiduciary relationship.

3. Agency: there is a fiduciary relationship between the agent and the person who has hired the agency.

3. Fiduciary relationship in domestic transaction: there are loads of domestic transactions which require fiduciary relationships, like (a) Manager/Karta of the Joint Hindu Family members. (b) Parent and child relationship.

4. Fiduciary relation in professional transaction.

5. Fiduciary relationship in jural transactions: it generally arises out of the jural relationship when on person responds confidence in the other, where a person acts on behalf of another is standing in a fiduciary relation. Whether the relationship between these two persons is fiduciary or not depends upon the fact and circumstances of the case.

6. Fiduciary relations in public transactions: This type of transaction can arise in different kinds of relations like master and servant, between government and its officials so on and so forth.

2. Classification according to confidential dimensions:

1. Induced by control over the property.

2. Induced by the commitment of job

3. Induced by undue influence

4. Induced by profit

5. Induced by the confidential influence

Principles of Fiduciary Relationship

Fiduciary relationship is based on trust among the parties. There are laws in place in India meant to protect the relation from any breach of it. To determine the existence of a fiduciary relationship there are certain principles. They are as follows:

1. Fiduciary relationship must exist in good faith – The fiduciary / person under confidential obligation has a duty of loyalty towards the other parties. When parties enter into a fiduciary relation it must be in good faith. If a contradiction arises, the fiduciary has a duty to prove that he is in confidence and acting in good faith.

2. Fiduciary must not make profit at the cost of beneficiary – The fiduciary is under obligation to protect the interests of the other party. The fiduciary must not obtain any gain at the behest of the person. In case, there arises any gain it should be rightfully conveyed to the person of interest.

3. Fiduciary relation is not a monetary transaction – A fiduciary must act voluntarily and not with the intention to gain money from the same unless a contract specifies.

Importance of Fiduciary Relationship

In Fiduciary Relationship, duties are imposed upon a person or an organisation who exercises some discretionary power in the interests of another person in circumstances that give rise to a relationship of trust and confidence.

Fiduciary Relationship also exists for material information to remain private. As in corporations or any companies, employees are a fiduciary to the company they are working so as to maintain business secrecy towards its competitors. Or between a lawyer and client, the lawyer acts as an important fiduciary and maintains the privacy of his clients. If such fiduciary relationship didn’t exist the lawyer could harm the client’s reputation by presenting it in court when the client would have confessed guilt which a lawyer cannot do as good faith of the client is one of the principles of fiduciary relationship.

Application of Fiduciary Relationship

In law, a fiduciary should observe the highest standard of care in executing what he is engaged to do. Fiduciary relationship is commonly the one between a beneficially and a trustee. Another example is of directors and the company (shareholders). The directors need to operate in the best interest of its shareholders. The fiduciary relationship also can be seen between lawyer/client, estate administrators/heirs, liquidators/companies, etc.

Breaches of fiduciary duty

Any conduct by a fiduciary based on omissions, acts or concealments that gives him undue advantage calls for redress on grounds of public policy. Such breach may occur if a fiduciary or a related party uses material and confidential information obtained by virtue of his position. If the principal can prove that a fiduciary duty was owed to him and was for that purpose breached through the violation of the aforementioned rules, the court offers redress by returning the unconscionable gain to its rightful owner-the principal. This is unless the fiduciary proves that s/he made full disclosure of gain and the principal consented to such course of action. The remedies for such breach of fiduciary duty include personal and proprietary remedies as follows;

Constructive trusts

This is applied where an unconscionable gain is easily identifiable. In this case, the court creates and imposes a duty upon the fiduciary to hold the gains in safekeeping for eventual transfer to the principal.

Account of profit

This is usually applied where the breach is either ongoing or hard to identify. In such a case, all the gains realized must be taken to the principal as they are in effect, due to him. This needs to be differentiated from constructive trust in that it is very hard to isolate the gains made by the fiduciary by virtue of his own effort from those unfairly acquired by virtue of his position. For instance, an employee who runs his own company besides employment makes profits that would not have been made were s/he not in such a position. It is difficult to split the profits amicably between those legitimately earned and those that unfairly accrued out of his breach of fiduciary position.

Compensatory damages

In case accounts of profits are impossible to establish, the plaintiff may seek damages both under common law and under legislation. The extent of the damages will depend on the level of breach and/or the amount of profit obtained as well as the circumstances surrounding such breach.

Conclusion

With the increasing complexities in the commercial world, the parties are recommended to execute a contract or MoU for demarcation of their roles & responsibilities. Also, the parties should define the scope and nature of the responsibilities entrusted. Where such a contract demands the role of a fiduciary by one party, then it is recommended to seek prior written consent. Being a fiduciary is a serious affair, parties must be aware of the effects of a breach of fiduciary duty and shall insert all the legal implications.  By being proactive, and understanding the scope of the duties, the parties can ensure and carry their obligations as a fiduciary responsibly and ethically.