Fiduciary duty: It’s a matter of trust

While many have heard of the concept of “fiduciary duty,” it is not commonly understood that it can be a potential trap for the unwary — or a powerful arrow in your quiver. It depends, most of all, on whether you owe or are owed that important responsibility.

And contrary to common belief, fulfilling your fiduciary duty is not just an issue for big business.

“Fiduciary” comes from the Latin fiducia, meaning “trust” or “confidence.” Under the law, a fiduciary relationship is one where a person or entity places trust and confidence in another to act in the person’s best interests.

The key: A person or organization acting as a fiduciary must put the client’s best interests ahead of their own. An investment adviser, for example, cannot recommend purchase of a product simply because it will generate a high commission, ignoring the needs of the client.

Other common examples include: lawyers and their clients; directors of corporations and their shareholders; and trustees and trust beneficiaries.

But there is no easy test for who is and is not a fiduciary. Depending on your jurisdiction, court cases have established that insurance brokers, construction contractors, and even spouses may be considered fiduciaries under the right circumstances.

And employees generally owe fiduciary duties to their employers.

It is all a matter of putting the client first — even if the “client” is your employer.

Being a fiduciary makes a big legal difference. The esteemed judge Benjamin Cardozo once wrote (in the elegant language of his day) that a fiduciary “is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior.”

In other words, a fiduciary has the obligation to act not only with due care, but with loyalty to the person that is owed the duty — to act in that person’s best interests.

For employees, breach of fiduciary duty may involve misappropriating an employer’s trade secrets, acting on behalf of a competitor, improperly using employer funds, or profiting at the employer’s expense.

Failing to fulfill fiduciary duties can lead to a claim for breach, and such a claim can be powerful. In a lawsuit, a fiduciary may have the burden of proving they acted appropriately, rather than the plaintiff having the burden to prove that the fiduciary acted wrongly — the reverse of what you might expect.

Second, while in most U.S. litigation each party pays its own attorney’s fees, if a party

wins a breach of fiduciary duty claim, the court may award attorney's fees as punitive damages.

Moreover, some jurisdictions, such as New York, follow the “faithless servant” rule, under which an employee who is disloyal to his or her employer — such as by competing with the employer on the side, or stealing trade secrets — may be required to pay back all compensation earned during the period of disloyalty, even amounts that were earned honestly.

A couple of practical pointers: 1. Before entering a business relationship, try to clarify if a fiduciary duty is being created or not. For instance, some contracts will spell out that the transaction does not create a fiduciary relationship and is at “arm's length.” Others will say that a fiduciary relationship is intended.

2. Think about insurance. If you are a fiduciary (or potential fiduciary), find out whether your current insurance covers you for breach of fiduciary duty claims, or whether you should get insurance that does. Similarly, if your business deals with the risk of disloyalty by fiduciaries, find out if you are covered for losses incurred as a result.

3. If you think a fiduciary has breached a duty owed to you, or you're accused of such a breach, understand that there are legal deadlines for filing claims, responding to them and reporting them to insurers.

Leonard M. Braman is an attorney with Stamford-based Wofsey, Rosen, Kweskin&Kuransky LLP. He practices commercial and general litigation, as well as land-use law, on behalf of businesses large and small, municipalities and individuals. He can be reached at 203-327-2300.

Braman