What is a Fiduciary Duty?

Authors: Zeinab Farhat & Nikita Chikohwa, Progressive Legal

Fiduciary duties occur within a private relationship, where one person trusts another person (the beneficiary). These duties require the person in power to prioritise the beneficiary’s interests and refrain from exploiting their position for personal gain. Breaches of fiduciary duties occur when the responsible individual takes advantage of their role, even if it’s permitted by the law or a confidentiality clause in their employment contract. Such breaches can lead to legal claims against the directors or trustees individually.

This article will consider:  

1. Fiduciary duties in corporate law; 
2. Fiduciary duties in commercial Law; 
3. Fiduciary duties in intellectual property and trademarks Law; 
4. Fiduciary duties in workplace Law; 
5. The breach of fiduciary duty; and 
6. Key Takeaways. 

Fiduciary duties in corporate law

There are several relationships in the corporate sphere that give rise to fiduciary relationships and fiduciary duties. To name a few, these fiduciary duties are owed by:

• Partners of a firm; 
• Trustees of a trust; 
• Directors of a company; 
• Promoters of a company; 
• Legal professionals to their client; and 
• Agents. 

Generally, the fiduciary duties held in the above-mentioned roles are: 

• To act honestly; 
• Not to improperly use insider information or position; 
• To avoid a conflict of interest and to disclose material personal interests; 
• Not to abuse a corporate opportunity; 
• Of care and diligence; 
• Owed to third parties; 
• Not to engage in insolvent trading; and 
• To keep proper accounts and records. 

Fiduciary duties in commercial law

Fiduciary duties can also arise in various commercial contractual relationships. For instance, real estate agents owe fiduciary duties to their clients, and partners engaged in a joint venture also have fiduciary obligations towards each other. 

Agents

Certain professions hold a fiduciary position and are therefore bound by fiduciary duties under legislation and common law. The duties prescribed by legislation are dependant upon state and territory laws and oftentimes these laws prescribe conduct obligations. Furthermore, the terms of the contract of appointment authority between the agent and the client give rise to further fiduciary duties.

Agents in various industries are typically familiar with the following key fiduciary duties: 

• Acting in the best interest of the client; 
• Communicating and disclosing higher offers and conflicts to the client; and  
• Avoiding undisclosed commissions.

Joint venture agreements

Fiduciary duties can also exist in cases of joint venture agreements. A party’s fiduciary obligation to act in good faith in the context of a joint venture agreement influences the fiduciary duty owed to the other party in the agreement. The general stance regarding the existence of fiduciary duties in joint venture agreements is that the type of fiduciary duty and whether it is owed to the other party are determined from the wording of the joint venture agreement. Thus, where fiduciary obligations of good faith are not explicitly discussed in a joint venture agreement, a court can hold that implied fiduciary duties will exist between both parties.

The authority on this principle is found in Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41, where Mason J’s judgment describes the relationship between two parties as “the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power of discretion which will affect the interests of that other person in a legal or practical sense”.

For example, let’s say there’s a joint venture agreement where fiduciary duties are not explicitly expressed in the agreement, but the agreement grants management and payment powers that leaves some joint ventures vulnerable. In this case, fiduciary duties and implied obligations of good faith regulated the parties’ rights and liabilities to each other.

Unsure whether you owe a fiduciary duty?

If unsure that you owe a fiduciary duty, ask yourself: 

• Do any of the parties have management powers that leave the other party or parties vulnerable to exercises of discretion? 
• Are the parties obligated to make decisions co-operatively in respect of certain matters and decisions? 
• Are the parties expected to be in a fiduciary relationship where there is trust and confidence?

Understanding the objectives of the parties is imperative to drafting and entering into a joint venture agreement. If the parties wish to enter into the joint venture agreement whilst pursuing other commercial interests separate to the joint venture agreement due consideration needs to be given to the exclusion of fiduciary duties.

Fiduciary duties in intellectual property and trademarks law 

Directors play a crucial role in safeguarding a company’s intellectual property, and this applies to trade mark law as well. They have a duty to protect not only their own interests but also those of the shareholders. It’s important for directors to understand that they cannot exploit or use any information obtained through their employment to harm another party without obtaining proper permission. 

Part of their responsibilities involves assessing the value of intellectual property assets and implementing internal controls to prevent unauthorised use or misuse by external parties. 

Our lawyers recommend that directors keep a intellectual property asset register to record each type of intellectual property and who it is owned by (e.g trading entity or asset holding entity). To understand this more, take a look at our Intellectual Property Checklist. 

Confidentiality is another key aspect, especially when confidential information is shared with a receiving party. For example, a sole director who receives confidential information owes a fiduciary duty not to misuse it or benefit a third party without the consent of the disclosing party.

It’s worth noting that both contractual duties and fiduciary duties can coexist. In fact, a contractual relationship often gives rise to a fiduciary duty. The determination of whether a fiduciary duty arises from a contractual relationship depends on the specific circumstances involved. However, the level of supervision and control exercised by the owner of the confidential information over its use will be considered by the court when assessing the presence of a fiduciary relationship.

Understanding these aspects of trademark law and intellectual property rights is essential for directors in fulfilling their obligations and protecting valuable assets within the organisation.

Fiduciary duties in workplace law 

It is increasingly common to see employment contracts include a clause addressing intellectual property. Such clauses may state something to the effect that the intellectual property created by an employee in the course of employment will belong to the employer. For example, if you write an article for your employer on the company website, the company will retain the Intellectual Property (IP) rights to the article. The fiduciary duty in this case is to act in the best interest of the company and not to behave in a way that goes against the interests of your employer (e.g., creating articles for a competitor company while in the employment of your current employer).

However, whether there is a fiduciary duty that an employee owes to its employer depends on the nature of the employment contract. For example, if you’re conducting research for a post-secondary educational institution and create inventions in the course of this employment, this does not necessarily mean the inventions you create will be the IP of your employer.

This is why it’s critically important for employers to clearly outline the expectations and rights of all parties when constructing an employment contract or independent contractor’s agreement and continue monitoring the agreement in case the nature of the work changes, for example, which may require an updated contract or agreement.

What are some examples of a breach of fiduciary duty? 

The nature of a breach is highly fact specific and will depend on the nature of the fiduciary relationship (if it is found to exist).

Examples of breaches of fiduciary duty include:

1. Where a director facilitates a company’s acquisition of a family members business, even though it was not in the financial interests of the company;
2. Where a fiduciary takes advantage of a business opportunity that a beneficiary cannot take;
3. Where a director forces a company to sell shares to another company which is controlled by the director, at an undervalued cost; and
4. Where a director approves something carelessly without due diligence.

What do I do if I have breached my fiduciary duties?

A fiduciary may breach its obligations during the course of its relationship with the principal. If this is the case, you may have certain defences on which you can rely to avail yourself. Again, this depends on the factual circumstances underpinning the breach.

The most standard defence is the full defence of informed consent. Informed consent is the only absolute defence and requires that you provide the principal with all the facts surrounding the breach.

What are the remedies for breach of fiduciary duty?

If a fiduciary duty is found to have been breached, a plaintiff may have the following equitable remedies available to them:

1. Injunction: a court order which stops the fiduciary from further committing the breach;

2. Equitable compensation: a court order for compensation for the loss suffered by the beneficiary, which attempts to restore the beneficiary back to the position it would be in if a breach did not occur;

3. Recission: a court order which sets aside the transaction.

4. Account of profits: a court order which has the fiduciary disgorge the gain or profit it obtained; and

5. Constructive trust: a court order which has the fiduciary hold property on trust for the benefit of a party. Constructive trusts are likely to arise where a court finds that a fiduciary/ misappropriated property.

6. Damages: Where an asset is not able to be restored, equitable compensation is the alternative.

Key takeaways

Fiduciary relationships and the corresponding fiduciary duties in Australia can be established explicitly through a contract or agreement or impliedly based on the circumstances. 

When one party holds less power in the relationship, the duties owed generally include: 

• Acting honestly and in the best interests of the other party/parties; 
• Acting in good faith, considering the overall interests of the other parties; 
• Conducting actions solely for proper purposes; 
• Exercising due care and diligence; 
• Avoiding conflicts of interest while maintaining discretion; 
• Safeguarding confidential information and refraining from exploiting corporate opportunities; 

However, it’s important to note that the specific fiduciary duties may vary based on the wording of the contract or the nature of the situation at hand. Flexibility exists to tailor fiduciary obligations accordingly. 

If you need legal advice on fiduciary duties, get in touch with our team of experienced lawyers by making an enquiry below or call 1800 820 083.

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