Fiduciary Duty in Contracts: What It Really Means
What Is a Fiduciary Duty?
A fiduciary duty is the highest standard of care in law. When someone owes a fiduciary duty, they must act in the best interests of another party, putting that party's interests ahead of their own. Fiduciary duties arise from relationships of trust and can be imposed by law, by contract, or both.
Who Owes Fiduciary Duties?
- Corporate directors and officers to their company and shareholders
- Trustees to trust beneficiaries
- Partners to each other in a partnership
- Agents to their principals
- Attorneys to their clients
- Financial advisors to their clients (in some cases)
The Core Components
Fiduciary duty is typically broken into two main obligations:
Duty of care — Acting with the care that a reasonably prudent person would exercise in similar circumstances. This means making informed decisions, conducting appropriate due diligence, and exercising sound judgment.
Duty of loyalty — Acting in the best interest of the beneficiary and avoiding conflicts of interest. This means not self-dealing, not taking corporate opportunities for personal gain, and not competing with the entity you serve.
Fiduciary Duty in Contracts
Contracts may reference fiduciary duties in several ways:
- Acknowledging existing duties — Confirming that a party's fiduciary obligations exist alongside the contract
- Expanding duties — Imposing fiduciary-level obligations on parties who would not otherwise owe them
- Limiting or waiving duties — Some agreements attempt to reduce fiduciary obligations (permissible in some contexts like Delaware LLCs)
- Fiduciary out clauses — Allowing a party to take actions that would otherwise breach the contract if their fiduciary duties require it
When to Consult a Lawyer
If your contract creates, modifies, or waives fiduciary duties, consider having an attorney evaluate the implications. Breaching a fiduciary duty can result in significant personal liability.
This article is for informational purposes only and does not constitute legal advice. Consult a licensed attorney for guidance specific to your situation.