Breach of Fiduciary Duty
Fiduciary duty plays a vital role in ensuring fairness and integrity in various relationships. Fiduciary relationships can arise between directors and their companies, trustees and beneficiaries, and professionals and their clients.
This principle demands that individuals in positions of trust act in the best interests of others. They are required to maintain a high standard of care, skill, and diligence.
The breach of such duties of care undermines trust and confidence. It can also lead to significant legal consequences.
What is a fiduciary duty?
Under English law, a fiduciary duty is an obligation to act in the best interests of another person.
This duty arises in situations where one party places confidence in another. There will be an expectation that the latter will act in their best interest.
Common law and statutory provisions delineate the circumstances under which fiduciary relationships are established.
They emphasise the necessity to act in good faith, exercise reasonable care, skill, and diligence, and represent the interests of those whom they are acting on behalf.
The Companies Act 2006 specifically addresses directors’ fiduciary duties. The act highlights the requirement to act in the company’s best interests, avoid conflicts of interest, and disclose any possibility of personal gain. This statutory framework reinforces the common law principles governing fiduciary duty, ensuring that directors uphold their responsibilities with the utmost care and loyalty.
A breach of fiduciary duty occurs when a fiduciary fails to meet their obligations, This failure results in a breach of trust.
This can include failing to disclose vital information, acting in a manner that is contrary to the interests of those they represent, or when a conflict of interest is not appropriately managed.
Establishing a breach of fiduciary duty
To establish a breach of fiduciary duty, several key elements must be proven.
This process includes showing that there was a duty, it was not met, and this caused harm.
Establishing the Existence of a Fiduciary Relationship
Find a situation where one person is representing another person, which could lead to a conflict of interest. This means that the person acting on behalf of someone else may have competing interests that could affect their decision-making. Common examples include relationships between directors and their companies, trustees and beneficiaries, and professionals (such as solicitors) and their clients.
Fiduciary relationships are characterised by trust and confidence. In these relationships, the fiduciary has a duty to act in the best interests of another person. It must be shown that the defendant was in a position of trust and was expected to exercise their powers in the interest of the claimant.
The relationship must fall under the categories recognised by common law or statutory provisions. This can include those outlined in the Companies Act 2006 for directors, to establish that a fiduciary duty existed.
Demonstrating the Breach of Fiduciary Duty
It must be proven that the fiduciary acted in a manner that was contrary to the interests of the beneficiary or failed to act in good faith.
This includes situations where the fiduciary benefits personally at the expense of the beneficiary, engages in self-dealing, exploits commercial or business opportunities, or fails to disclose conflicts of interest in proposed business dealings.
Evidence must be provided that the fiduciary failed to exercise the level of care, skill, and diligence that a reasonably prudent person would exercise in similar circumstances.
This includes negligent management of assets or affairs, misuse of information such as trade secrets, or making decisions without proper diligence.
Depending on the nature of the fiduciary relationship, various specific duties may apply, such as the duty to avoid conflicts of interest, the duty to act in the best interests of the company or beneficiary, and the duty to act with honesty and integrity. Violation of any specific duties established by law or contract must be demonstrated.
Proving Damages Resulting from the Breach
It must be shown that the breach of fiduciary duty directly caused the claimant loss or damage. This involves establishing a clear link between the breach and the harm suffered.
The claimant needs to quantify the damages resulting from the breach. This may include financial losses, loss of opportunity, or other measurable harm.
The claimant must outline the remedies sought, which can include compensatory damages, disgorgement of profits made by the fiduciary as a result of the breach, rescission of a transaction, or injunctive relief to prevent further breaches.
Remedies for breach of fiduciary duty
Legal Remedies
Compensatory Damages
One of the primary remedies for a breach of fiduciary duty is compensatory damages. These are designed to cover the loss actually incurred as a direct result of the breach. The objective is to financially restore the claimant to the position they would have been in had the breach not occurred. Calculating these damages involves assessing the direct financial impact of the fiduciary’s actions, including any lost profits or opportunities.
Account of Profits
An account of profits is another significant remedy. This compels the fiduciary to surrender any profits gained from their breach of duty. This remedy prevents the wrongdoer from benefiting from their misconduct. It ensures that any gains are rightfully returned to the party harmed by the breach.
Rescission
Rescission is a powerful remedy that allows contracts formed under the influence of a breach of fiduciary duty to be declared void.
This action retroactively terminates the contract. It reverts any transferred property or funds back to the original party, effectively undoing the effects of the breach.
Injunctions
Injunctions serve as a preventative measure. They can either stop the fiduciary from continuing their breach or compel them to take specific actions to rectify the breach. Injunctions can be temporary or permanent, depending on the nature of the breach and the harm it causes.
Equitable Remedies
Constructive Trust
In cases where the fiduciary has acquired property or assets through their breach, a court may impose a constructive trust.
This remedy effectively transfers the ownership of the property back to the beneficiary. This ensures that the fiduciary cannot profit from their breach.
Equitable Compensation
Equitable compensation is aimed at restoring the claimant to the position they would have been in had the breach not occurred. Similar to compensatory damages but applied in a broader sense. This remedy accounts for non-financial losses. Tailored to address the specific injustices caused by the breach.
Specific Performance
Specific performance is an order that requires the fiduciary to fulfil their obligations as per the original agreement. This remedy is particularly relevant in situations where monetary compensation is insufficient to address the harm caused by the breach.
The Companies Act 2006 outlines specific remedies applicable to directors who breach their fiduciary duties. These can include orders for the restoration of company property, compensation for losses incurred by the company, and in serious cases, disqualification from serving as a director. These statutory remedies highlight the importance of adherence to fiduciary duties within corporate governance, aiming to maintain integrity and accountability.
Defences to a breach
Defences to a claim for breach of fiduciary duty in the UK include:
Informed Consent:
If the principal gave informed consent to the actions of the fiduciary that would otherwise constitute a breach, this can be a valid defence. Informed consent means that the principal was fully aware of all relevant facts and potential consequences before giving their consent.
Ratification:
If the principal, after becoming fully aware of the fiduciary’s actions, ratifies those actions, it can be a defence. Ratification must be done with full knowledge of the breach and its implications.
Good Faith:
Demonstrating that the fiduciary acted in good faith, honestly, and in what they believed to be the best interests of the principal can sometimes be a defence.
Statutory Defences:
Certain statutory provisions may provide specific defences or limitations on liability for fiduciaries. For instance, under the Companies Act 2006, directors may be able to rely on statutory provisions that protect them from liability if they acted within the boundaries of the law and the company’s constitution.
How can Expert Commercial Law assist?
Expert Commercial Law maintain a panel of solicitors who can assist on your breach of fiduciary duty case. Each solicitor is vetted before being allowed onto our panel and we only select the best in the business. All of our solicitor firms are authorised and regulated by the Solicitors Regulation Authority (SRA).
Our solicitors also help with commercial claims, such as breach of contract and CCJ removal
Please note, we are not a firm of solicitors; however, we maintain a panel of trusted and regulated legal experts. If you contact us in relation to a commercial law case, we will pass your case onto a panel firm in return for a fee from our panel firms. We will never charge you for passing on your case to a panel firm.
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Please note, we are not a firm of solicitors; however, we maintain a panel of trusted and regulated legal experts. If you contact us in relation to a commercial law case, we will pass your case onto a panel firm in return for a fee from our panel firms. We will never charge you for passing on your case to a panel firm.