The fiduciary relationship is one of the oldest and most important in law and business. From the responsibility of the corporate executive to act in the best interest of the shareholders, to the attorney holding escrow funds in a trust account, fiduciary duty is the customary standard of appropriate professional ethics.
History
The word "fiduciary" comes from the Latin "fides" (faith, trust, or loyalty). The fiduciary is entrusted with certain authority to act on behalf of a principal and is expected to be a trustworthy agent. Under Roman law, certain transactions based on an expectation of future performance, such as would occur through a contract today, were considered to be arranged on faith. The modern notion of fiduciary duty was forged by the British Court of Chancery, the high court of equity. In the United States, equity and common law were combined into a single court system, but Delaware still maintains a separate Chancery Court with particular jurisdiction over corporate law issues.
Features
There are three main elements to fiduciary duty. The first is the duty of care. A fiduciary has the obligation to exercise a reasonable standard of professional competence when he acts on behalf of another. The other is the no-profit rule. This basically reflects the understanding that the fiduciary is not to act in her own interest but in the interest of the principal as a loyal and obedient agent. Usually, a fiduciary cannot profit from his official capacity unless expressly authorized by the principal. Finally, the fiduciary must be accountable to the principal, disclosing detailed financial statements and other relevant information upon request.
Significance
A corollary to the duty of care is the concept of conflicting interests. A fiduciary cannot be expected to meet the duty of care if it would conflict with another fiduciary duty, and therefore is not able to accept the new fiduciary duty. Other breaches of the duty of care result in professional malpractice or negligence. Breach of fiduciary usually results in a civil law suit and a claim for damages. Professional sanctions can also be a consequence of breach.
Function
Fiduciary duty is such a powerful and pervasive concept because it is amorphous. The precise requirements change to suit the situation. Thus, the fiduciary duties of a trustee differ from those of a corporate executive, which differs again from those of an attorney. With the exception of the trust, however, the fiduciary duty is defined within these professions by administrative codes and case law precedents. The result is a sort of social contract that forms the core of professional and business relationships. Trusts are highly flexible, so the fiduciary duties of the trustee to the beneficiaries can be customized by the settlor. Even trustees, however, are subject to the three essential elements of fiduciary duty.
Considerations
A fiduciary usually has expertise, knowledge or skills that compel the principal to empower them with certain rights and responsibilities. Fiduciary duties frequently rise from a formal agreement between the fiduciary and the principal, but courts have construed certain relationships to contain an inherent fiduciary relationship without an explicit statement of such. For example, real estate agents, union officers, physicians, and clergy members can be bound by fiduciary duties and obligations.
