Law of Fiduciary Obligation

Fiduciary Obligation, Law of
The legal system recognizes a multitude of special relationships in which one party is required to look after the best interests of the other in an exemplary manner. These relationships, which include solicitor/client, physician/patient, priest/parishioner, parent/child, partner/partner, director/corporation and principle/agent, are called fiduciary relationships. Fiduciary relationships entail trust and confidence and require that fiduciaries act honestly, in good faith, and strictly in the best interests of the beneficiaries of such relationships. The courts have developed a basic test for determining whether fiduciary obligations arise from a relationship: first, the fiduciary has the ability to exercise some discretion or power; second, the fiduciary can unilaterally exercise that power so as to affect the interests of the beneficiary; third, the beneficiary is in a position of vulnerability at the hands of the fiduciary.

Ordinarily, fiduciaries cannot for personal gain avail themselves of opportunities arising from the discharge of their duties. There are demanding rules that prohibit both profit making and any conflict of interest that goes beyond that which is intrinsic to the relationship. Strictly prohibited are secret benefits in the form of undisclosed kickbacks, commissions, profits and discounts, as well as conflicts of interest that involve business and other personal advantages which may enure to the fiduciary. An improper benefit is usually financial, but can include virtually any form of improper personal gain.

Grievous Breaches
Physicians and parents who abuse or obtain sexual gratification from their patients and children are guilty of a particularly grievous form of breach of fiduciary duty. Physicians cannot conduct research without disclosing to their patients that they are doing research. A fiduciary cannot ordinarily buy from or sell anything to a beneficiary, cannot ordinarily refer the beneficiary to a business in which the fiduciary has an interest, and, in many cases, cannot without suspicion be the recipient of a gift from a beneficiary.

Remedial Rules
Breach of fiduciary duty is regarded as an extremely serious violation by the law, and this is reflected in the stringent remedial rules that are utilized in this area. The various rules seek to put beneficiaries in the position they would have been in had there not been a breach of fiduciary duty. Accordingly, any losses flowing from the breach, such as a loss of an investment, or physical and mental suffering flowing from sexual or other abuse, will be compensated for. As well, with a view to deterring breach of fiduciary duty, any improperly obtained profit will be remitted to the beneficiary. In addition, breaching fiduciaries are more likely to have punitive damages awarded against them than are ordinary defendants. Fiduciary obligations can continue even after the formal termination of any contractual relationship between the fiduciary and the beneficiary.

Fiduciary relationships arise from the reasonable expectations of the parties, often in circumstances where one person reasonably relies on the other to protect his or her interests. They frequently involve explicit or implicit undertakings by one party to look after the interests of the other. Even relationships where the parties are expected to pursue their own self-interest can, in appropriate circumstances, be fiduciary. There are several cases where banks have been regarded as fiduciaries of their customers. Usually fiduciaries have power or influence over the economic, legal or practical interests of beneficiaries, who are somewhat vulnerable. There is a debate in the law about whether beneficiaries must be vulnerable, and if so the extent of vulnerability they must have in order to benefit from this area of law. Some federal and provincial corporate law statutes contain provisions that arguably make fiduciary obligations in the corporate world a matter of statute.

Author M.M. LITMAN