iPleaders

Can fiduciary relationship be seen as a contractual obligation

January 21, 2021
2136 Views
fiduciary relationship

Image source: https://bit.ly/3jh0Ipo

This article has been written by Ramya Kiranmayi Bhamidipat, pursuing the Diploma Programme in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSIkho.

Introduction

The word fiduciary is derived from the Latin ‘Fiducia’ meaning “trust a person who has the power and obligation to act for another under circumstances which require total trust, good faith, and honesty.” 

The Dictionary meaning of the word ‘Fiduciary’ is the act of reposing trust or confidence in someone and such person shall uphold the benefit or interest of another party; legally, an obligation is imposed on such person. Such an obligation is called ‘Fiduciary Duty’ and the relationship between the parties is called ‘Fiduciary Relationship’. 

Legally, the duty of a fiduciary is not defined in any statute, however, judgments passed by various courts have delineated the fiduciary duty as an obligation of a person who possesses the trust or reliance of another person. In other words, where one party is responsible to take care of the other party’s benefits and act in the best interest of such party(s). Thereby the concept of Fiduciary works on the premise of ‘Trust’.

The beneficial interest of another party delineates the difference between the law of trust and the fiduciary relationship. 

Parties involved in Fiduciary relationship

In a Fiduciary relationship, there are two parties involved namely:

(i) Fiduciary: The party who holds the confidence or trust of another person.

(ii) Beneficiary/Principal: The party to whom the duty is owed. 

Invocation of Fiduciary duty

There is a common perception that the Fiduciary duties are expressly written in agreements or contracts, however, it can be implied or established by the statute or ascertained by the demeanor of parties. Following are a few examples of fiduciary relationships:

In all aforementioned cases, the former party has assumed the role of Fiduciary and he is under obligation to discharge his duties to the best interest of the latter. Thereby the responsibilities are two-fold in nature i.e. both legal and ethical. 

Nature of Fiduciary Relationship 

A Fiduciary Relationship is a confidential relationship, wherein the fiduciary has access or possesses the confidential information or entrusting of power. He shall not undertake any transaction which shall be a possible conflict of interest to the Beneficiary and to ensure the desired outcome is achieved. 

Status of an informal Fiduciary Relationship: Generally, a fiduciary relationship exists only where one party is accustomed to being guided by the judgment or advice of the other or is justified in placing confidence in the belief that such party will act in its interest. Mostly, the acceptance of the Fiduciary duties is also considered in the case of formal contracts or agreements. However, where a party has entrusted confidential information or property or knowledge with a peculiar reliance on another party irrespective of any agreement or contract executed and the latter is under the fiduciary obligations.

An example of informal fiduciary duty is Money deposited with the banker or his agent. 

Governing rule to establish a fiduciary relationship

There is no specific rule or principle laid down in any statute to determine the Fiduciary Relationship, however, the Supreme court of India in Jaya Singh v. Krishna held that wherever a person clothed with a fiduciary character obtains some personal advantage, by availing himself of his position, such person remains as fiduciary for all the profits which are to be held for the benefit of the person at whose expenses and in derogation of whose rights, the profit has been made or advantage has derived.” Hence, the fiduciary has to act with strict fidelity and diligence while discharging their duties and is personally liable if they do not.

Types of fiduciary duties

A fiduciary duty is one of the most valued & appreciated duties and they are remunerated for the work. They are also entrusted with being the eyes and ears of their client, working to ensure the client’s desired outcomes without any promise of additional compensation for doing so. Predominantly the duties if the fiduciary can be categorized as follows:

Example: the Escrow agent shall ensure all the necessary security and protection is in place for the client’s property deposited with him. 

Example: The Attorney must act with utmost loyalty and fairness in every submission of a client. He shall not use the Clients depositions against the interest of the Client. 

Example: The Board of Directors of the Company are under obligation to act in good faith and take decisions in the best interest of the Company and Stakeholders.

Caselaw: Needle Industries (India) Limited Vs. Needle Industries Newey (India) holding Limited where the court held that the directors of the company owe a fiduciary duty to its shareholders.

Obligations of fiduciary

A fiduciary relationship is a commitment to act in the best interest of another person. Following the certain duties of Fiduciary while discharging his obligations:

  1. He must act in the Good Faith of the Party: Where confidential information or property is in the custody of a person, then such a person is deemed to be a Fiduciary. If there is a question on transactions that happened in good faith, as per Section 111 of the Indian Evidence Act, the burden of proof reposed on the Fiduciary.  
  2. Fiduciary must not make any profits: perse fiduciary should not make any profits, however, any profit or gain made by the fiduciary during the transaction then he is under obligation to disclose the same to the Beneficiary, although there is no harm caused to the Beneficiary.  
  3. Fiduciary shall not be the purchaser: usually, the fiduciary shall not be the purchaser of property in his possession or handed over by the beneficiary. 
  4. Discharge his duty with care: While taking decisions, the fiduciary shall do research, gather all information and consider all pros and cons of the decisions.

Breach of fiduciary duties

There are various scenarios where we have to repose our faith in another person to achieve an end and the court recognizes the fiduciary relationship in human transactions and enforces them. 

Following are a few instances when fiduciary breaches the duties imposed on him: 

  1. He doesn’t perform the duties of loyalty and diligence. 
  2. He has performed the duties against the interest of the Beneficiaries or indulged in transactions with a potential conflict of interest.
  3. He has made undisclosed profits.
  4. He has purchased the property of the client either directly or indirectly.
  5. Negligence of the Fiduciary.
  6. Concealment of material gains or profit.

Note: Any aforementioned action(s) performed by the Fiduciary with the prior approval/ consent of the Beneficiary or the Fiduciary is accustomed to act as per the directions of the Beneficiary, after educating the consequences, then such act does not amount to breach.

As the beneficiary was aware of the consequences or damages caused because of such action and thereby, he cannot hold the Fiduciary responsible for such breach.   

Consequences of non-compliance 

The Beneficiary can sue the Fiduciary for the breach, wherein the beneficiary may seek compensation or damages suffered by him. In the case of undisclosed profits, the beneficiary may claim such profit along with interest. If the breach is serious in nature, the court may order imprisonment as well.

Legal validity of fiduciary duty in India

Although the Indian laws have not defined the fiduciary relationship concisely, however, many statutes have recognized the obligations and entrusted the duties to the parties following are a few notable scenarios: 

Where one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other, the Fiduciary is recognized as an influential or dominating person.

The Trustee is merely fiduciary, shall assume all the obligations entrusted upon the fiduciary while discharging his duties, and shall act for the best interest of the Beneficiary(s) without any undue gain or profit.

The guardian shall hold a fiduciary relationship with his ward.

The director of the Company has executed an agreement acting in their interest than the interest of the Company & Stakeholders. The court ordered the director to rescind the contract. 

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.

References

  1. http://www.legalserviceindia.com/legal/article-1729-concepts-of-fiduciary-relationship-in-indian-laws.html
  2. https://corporatefinanceinstitute.com/resources/knowledge/other/fiduciary-duty/
  3. https://www.upcounsel.com/fiduciary-relationship-meaning
  4. https://www.investopedia.com/terms/f/fiduciary.asp#:~:text=A%20fiduciary%20is%20a%20person,in%20the%20other’s%20best%20interests
  5. https://www.legalzoom.com/articles/developing-and-maintaining-a-healthy-fiduciary-relationship
  6. https://www.masterclass.com/articles/how-to-understand-fiduciary-duty#what-is-fiduciary-duty
  7. https://www.mitchell-attorneys.com/informal-fiduciary-relationships
  8. https://lawdigitalcommons.bc.edu/cgi/viewcontent.cgi?referer=https://www.bing.com/&httpsredir=1&article=2072&context=bclr
  9. https://lawpath.com.au/blog/what-is-a-fiduciary-relationship
  10. https://www.unpri.org/fiduciary-duty/what-is-fiduciary-duty-and-why-is-it-important/247.article
  11. https://www.supremecourt.wa.gov.au/_files/UNSW%20Conference%20of%20Fiduciary%20Law%2022%20Mar%202013%20Edelman%20J.pdf
  12. https://www.mitchell-attorneys.com/informal-fiduciary-relationships

LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join:

https://t.me/joinchat/J_0YrBa4IBSHdpuTfQO_sA

Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.

Exit mobile version