51 Pages Posted: 18 Aug 2006
This paper covers three distinct but inter-related topics. These are: (1) the functions served by characterizing breach of fiduciary duty as a tort; (2) how best to define a fiduciary relationship in light of the range of situations in which one party is subject to a fiduciary duty to another; and (3) implications and questions that follow from the fact that many contemporary fiduciaries are organizations that assign individual employees or other agents to act on behalf of clients to whom the organization itself owes fiduciary duties.
The paper begins by examining how breach of fiduciary duty is characterized by Restatement (Second) of Torts. In Section 874, Restatement (Second) treats breach of fiduciary duty as a tort that subjects a fiduciary to liability to the beneficiary for harm caused by the breach. The definition of a "fiduciary" relation articulated in Section 874 is both under- and over-inclusive, leaving out some well-established categories of fiduciaries but also potentially encompassing many non-fiduciary relationships. Nonetheless, the paper argues that it's useful to situate breach of fiduciary duty within tort law to anchor the basic availability of damages for harm caused by the breach. This anchoring has practical as well as theoretical significance because some breaches of fiduciary duty, although productive of loss to the beneficiary, generate no identifiable profit for the fiduciary to which restitutionary remedies might apply.
The paper then articulates a proposed approach for defining when a relationship is fiduciary in character. This is whether the plaintiff (or claimed beneficiary of a fiduciary duty) could justifiably expect of loyal conduct on the part of an actor. Breach of fiduciary duty then turns on whether the actor's conduct contravened that expectation. This test turns on what's distinctive about fiduciary duties, as opposed to the wider range of duties recognized by the law. The paper uses this approach as a framework to evaluate a series of recent cases that assess whether one party owed another a fiduciary duty when the parties' relationship was not one conventionally characterized as fiduciary, such as agent-principal, trustee-trust beneficiary, director-corporation, or lawyer-client. Within this framework, the paper articulates characteristics that define patterns of relationships in which expectations of loyalty may be justified.
Finally, the paper explores implications of the fact that many contemporary actors who are subject - on one basis or another - to fiduciary duties are themselves corporations or other legally-constituted organizations. On the ground level, the conduct that constitutes a breach of fiduciary duty is conduct of an employee or other agent of the organization. The paper examines the bases on which the agent's wrongful conduct may be attributed to the organization for purposes of imposing liability and awarding remedies. It is necessary to consider principles of agency law and restitution, in addition to tort law, to reach a complete answer.
Suggested Citation: Suggested Citation
DeMott, Deborah, Breach of Fiduciary Duty: On Justifiable Expectations of Loyalty and Their Consequences. Arizona Law Review, Vol. 48, 2006; Duke Law School Legal Studies Paper No. 113. Available at SSRN: https://ssrn.com/abstract=924776