Fiduciary Duty

A fiduciary duty is the highest standard of care.  The person who has a fiduciary duty is called the fiduciary, and the person to whom he owes the duty, is typically referred to as the principal or the beneficiary. If an individual breaches the fiduciary duties, he or she would need to account for the ill-gotten profit. His or her beneficiaries are entitled to damages, even if they suffered no harm. 

Fiduciary duties exist to encourage specialization and induce people to enter into a fiduciary relationship.  By imposing these duties, the law reduces the risk of abuse of a beneficiary by the fiduciary.  As a result, potential beneficiaries can have greater confidence in seeking out a fiduciary. 

Table of Contents

  1. Corporations and Fiduciary Duty
  2. Charities and Fiduciary Duty
  3. Fiduciary and Confidential Relations
  4. Menu of Sources

 1. Corporations and Fiduciary Duty

In discussing corporate fiduciary duties, it is very helpful to refer to the corporate law of Delaware. More than half of publicly traded companies are incorporated in Delaware.  Nonetheless, corporations incorporated in other states may be bound by different rules and obligations.  Consult Table of Statutes for statutes in specific jurisdictions.

Directors of corporations, in fulfilling their managerial responsibilities, are charged with certain fiduciary duties.  The primary duties are the duty of care and the duty of loyalty.

  • Duty of Care: This duty requires that directors inform themselves “prior to making a business decision, of all material information reasonably available to them.”  Whether the directors were informed of all material information depends on the quality of the information, the advice available, and whether the directors had “sufficient opportunity to acquire knowledge concerning the problem before action.”  Moreover, a director may not simply accept the information presented.  Rather, the director must assess the information with a “critical eye,” so as to protect the interests of the corporations and its stockholders. 
  • Duty of Loyalty: As the Delaware Supreme Court explained in Guth v. Loft, 5 A.2d 503, 510 (Del. 1939): “Corporate officers and directors are not permitted to use their position of trust and confidence to further their private interests. . . . A public policy, existing through the years, and derived from a profound knowledge of human characteristics and motives, has established a rule that demands of a corporate officer or director, peremptorily and inexorably, the most scrupulous observance of his duty, not only affirmatively to protect the interests of the corporation committed to his charge, but to refrain from doing anything that would work injury to the corporation, or to deprive it of profit or advantage which his skill and ability might properly bring to it, or to enable it to make in the reasonable and lawful exercise of its power.”

Additionally, courts have imposed the following duties:

  • Duty of Good Faith: Requiring the director to advance interests of the corporation, not violate the law, and fulfill his or her duties.  For a thorough discussion of this duty, see In re The Walt Disney Co. Derivative Litig., 906 A.2d 27 (Del. 2006).
  • Duty of Confidentiality: Required directors to keep corporate information confidential and not disclose it for their own benefit.  Consult Guth v. Loft, Inc., 5 A.2d 503 (Del. 1939) for more information.
  • Duty of Prudence: Requires a trustee to administer a trust with a degree of care, skill, and caution that a prudent trustee would exercise.  Consult Amgen Inc. v. Harris, 136 S. Ct. 758 (2016) for more information.
  • Duty of Disclosure: This duty requires directors to act with “complete candor.”  In certain circumstances, this requires the directors to disclose to the stockholders “all of the facts and circumstances” relevant to the directors’ decision.

These duties do not mean, however, that the court will always impose its own review over directors’ decisions.  Under the “business judgment rule” the court presumes “that in making a business decision the directors of a corporation acted in an informed basis, in good faith and in the honest belief that the actions taken was in the bests interests of the company.”  Under this rule, courts will generally refrain from questioning the directors’ judgment so long as their judgment can be attributed to some rational corporate purpose.

For a very thorough discussion of corporate officers’ fiduciary duties, consult William M. Lafferty, Lisa A. Schmidt, & Donald J. Wolfe, Jr., A Brief Introduction to the Fiduciary Duties of Directors Under Delaware Law, 116 Penn. St. L. Rev. 837 (2012).


2. Charities and Fiduciary Duty

Some courts have not required officers of a charity to abide by the same rules as corporate officers.  For example, an officer may be allowed to deal in a manner financially advantageous to himself or herself, so long as the charity is not subject to any expense. This does not mean, however, that an officer of a charity is permitted to divert earning capacity of his charity to himself. For further information consult Boston Athletic Assoc. v. Int’l Marathons, Inc., 392 Mass. 356 (1984), and Samuel & Jessie Kenney Presbyterian Home v. State, 174 Wash. 19 (1933).


3. Fiduciary or Confidential Relations

Certain relationships impose fiduciary duties.  For example, attorneys have a fiduciary duty to their client, a principal to his agent, a guardian to his ward, a priest to his parishioner, and a doctor to his patient.  Fiduciary duty is imposed whenever confidence is reposed on one side in a contractual relationship, so as to allow that side to exert influence and dominance over the other.

Different states treat transactions between the fiduciary and the beneficiary differently, but typically in favor of favor of the beneficiary.  Thus, transactions between parties in a fiduciary or confidential relationship are voidable, or prima facie voidable, or may be declared void, or the contract may be canceled.  The fiduciary must prove the transaction was fair.


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Last edited in July, 2016 by Eugene Temchenko.