Law of Fiduciary Obligation

What is Fiduciary Obligation?

The legal system recognizes many special relationships in which one party is required to look after the best interests of the other in the best possible way. These relationships are called fiduciary relationships. They include solicitor/client, physician/patient, priest/parishioner, parent/child, partner/partner, director/corporation and principal/agent relationships. Fiduciary relationships involve trust and confidence. They require that the fiduciary (i.e., the party entrusted with taking care of another party) acts honestly, in good faith, and strictly in the best interests of the other party (i.e., the beneficiary).

Fiduciary relationships emerge from the reasonable expectations of the parties, often in circumstances where one person relies on the other, to protect his or her interests. They frequently involve explicit or implicit commitments 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.

Breaches of Fiduciary Obligation

Breach of fiduciary duty is a serious violation. Stringent remedial rules are used to put beneficiaries in the position they would have been in had there not been a breach of fiduciary duty. The beneficiary will be compensated for any losses flowing from the breach, such as a loss of an investment, or physical and mental suffering flowing from sexual or other abuse. Any profit that was improperly obtained by the fiduciary will be given to the beneficiary. Fiduciaries in breach of duty are more likely to have punitive damages (a type of punishment) awarded against them than are ordinary defendants. Fiduciary obligations can continue even after any contractual relationship between the fiduciary and the beneficiary has ended.

Ordinarily, fiduciaries cannot take advantage of opportunities that will profit them in some way because of their role in the relationship. There are demanding rules that prohibit both profit making and any conflict of interest that goes beyond what is necessary to the relationship. Secret benefits in the form of undisclosed kickbacks, commissions and profits, conflicts of interest, and discounts are strictly prohibited. An improper benefit is usually financial, but can include virtually any form of improper personal gain.

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. Fiduciaries like physicians cannot conduct research without disclosing to their patients that they are doing research. Fiduciaries who in any way physically or sexually abuse their beneficiaries are guilty of a particularly grievous form of breach of fiduciary duty.

Indigenous Peoples

The Crown has a fiduciary obligation toward Indigenous peoples. The Royal Proclamation of 1763 established the relationship between the Crown and Indigenous people, and outlines that the Crown must act only in the interests of Indigenous people. In other words, the Crown must behave in accordance with fiduciary duty. After the Guerin case, fiduciary duty became central to Section 35 of the Constitution Act, 1982, which enshrines protections for Indigenous rights. (See also Aboriginal Title.)

The Crown also owes Indigenous peoples the duty to consult. This is a legal obligation that must be fulfilled by the Crown prior to taking actions or making decisions that may have consequences for the rights of Indigenous peoples in Canada.