AFM231 Lecture Notes - Lecture 16: Disclose, Punitive Damages, Fiduciary

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Published on 17 Apr 2013
AFM 231 – Business Law
Tuesday, March 12, 2013
Lecture 16: Fiduciary Duties
If yes to any of these (and many others)
Or, if you intend to interact with any of the above.
Then, you had better ensure you understand what fiduciary responsibility means and how it works.
What is a fiduciary relationship?
Relationship that exists because the law of equity says it does.
Why does the law impose this relationship in particular circumstances? Because the relationships require trust – beyond that of
a normal contract.
Critical thing to understand: once the relationship is said to be fiduciary, the obligations are imposed and you cannot avoid
(contract out of) them.
Let’s look at examples.
The current test of whether/not there is a fiduciary relationship: are there “elements of trust and confidence and
reliance on skill and knowledge and advice” (Hodgkinson and Simms 1994)
Typically fiduciary relationships are either business or personal (e.g. teacher, trustee, parent). Here we focus on the
Fiduciary Duties:
P565 or 309
For example:
oAvoid conflicts of interest – literally avoid
oDo not use the relationship for personal profit (ie secret commission) that profit belongs to the beneficiary
oFollow all of the beneficiary’s instructions
oDisclose all relevant information to the beneficiary
oAct honestly, in good faith, and with due care
oKeep beneficiary’s information confidential
oThe two principal problems: normally not allowed. Where it is, why would you go along with it (ie - real estate agent
acting for both parties)
Fiduciary vs. Contract relationships in business
When is an employee in a fiduciary relationship?
If they are an agent of the business
If they are a director or officer of the business
Otherwise, generally they will be an employee
An employee may be a fiduciary for some aspects of their work and not others – e.g. if a senior IT employee is also expected to
seek out major sales from time to time.
Businesses may enter into partnerships and they enter joint ventures. Partnerships impose fiduciary duties. Joint ventures are
solely contractual arrangements.
Think of these duties as the closest thing to the law imposing ethical responsibilities.
We are looking often at relatively ‘high level’ contexts. Yet before very long these duties will be imposed on you.
Let’s start by acknowledging what might make us not do what seems fairly obviously the right thing.
In a corporate setting
Beginning point: the corporation needs humans to take actions on its behalf.
Officers (e.g. CEO, CFO) and Directors are those humans – as well as all the other agents such as sales staff – who act as its
The fiduciary duties that Officers and Directors owe the corporation are the equivalent of those the agent owes. They just
operate in the specialised context of the corporation.
Consider duties in practice
What follows are examples of how fiduciary duties might arise in practice in the business context.
Example 1
The Board of ABC approves a multi-million dollar contract with Supplier Z. Director S participated in the Board vote. S is also
a 10 percent shareholder of Supplier Z.
If we assume X is in a fiduciary relationship with ABC (which s/he is) what duty might ABC argue has been broken?
Is there any way this ‘deal’ could be signed without S violating her/his fiduciary duty?
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