Understanding a Breach of Fiduciary Duty

In the world of business, law, and estate management, trust is a cornerstone. When that trust is legally binding—as it is in a fiduciary relationship—violating it can result in serious consequences. A breach of fiduciary duty occurs when a person entrusted with the responsibility to act in another's best interest fails to uphold that duty. This can lead to financial loss, damaged relationships, and costly litigation.

Whether you’re a business partner, trustee, corporate officer, or shareholder, it’s vital to understand what fiduciary duties are, how breaches occur, and what actions you can take to protect your interests.

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What Is a Fiduciary Duty?

A fiduciary duty is a legal obligation where one party must act in the best interest of another. This duty arises in relationships based on trust and confidence, often involving the management of money, property, or decision-making power. The fiduciary is expected to act with loyalty, care, honesty, and good faith.

Common examples of fiduciary relationships include:

• Business partners, who must act in the best interests of the partnership and one another.
• Corporate directors and officers, who are responsible for acting in the best interests of shareholders and the corporation.
• Trustees and estate executors, who manage assets for beneficiaries.
• Financial advisors, who must act in the best financial interests of their clients.
• Attorneys, who must act in the best interests of their clients in legal matters.

Each of these roles carries a legal and ethical obligation to avoid conflicts of interest, disclose material facts, and manage duties with diligence and integrity.

To learn more about fiduciary responsibilities in estate planning, check out guide to the role of a trustee.

Common Types of Breach of Fiduciary Duty

Not every mistake is a breach of duty—but when a fiduciary puts their own interests ahead of the person or entity they serve, or fails to act responsibly, it can qualify as a breach. Here are several common types:

• Self-Dealing
• This occurs when a fiduciary uses their position for personal gain. For example, a board member awarding a company contract to their own business without disclosure or approval.

• Misappropriation of Assets
• This is the outright misuse, theft, or diversion of funds or property under the fiduciary’s control. For example, a trustee using trust funds to cover personal expenses.

• Failure to Disclose Conflicts of Interest
• Fiduciaries must disclose any personal interests that could interfere with their duty. If they fail to do so and act anyway, that nondisclosure can be a serious breach.

• Negligence or Incompetence
• Even without ill intent, a fiduciary can breach their duty by failing to act with proper care, such as ignoring red flags, failing to investigate important issues, or making uninformed decisions that lead to harm.

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Legal Remedies Available to Victims

If someone has suffered a loss because of a fiduciary’s actions—or inaction—they may be entitled to legal remedies through a civil lawsuit. Courts can impose a variety of penalties and relief measures depending on the nature and severity of the breach.

• Damages
• The injured party may be awarded monetary compensation for the financial losses directly caused by the breach.

• Disgorgement
• If the fiduciary made a profit from their misconduct, the court may require them to return any improperly gained profits.

• Injunctions
• Courts can issue orders to stop certain actions, such as preventing the fiduciary from continuing to manage funds or engage in further misconduct.

• Removal
• A fiduciary who violates their obligations may be removed from their position—this is especially common in trust and corporate settings.

For legal standards and best practices, the American Bar Association offers guidance on fiduciary law and litigation.

How to Prove a Breach of Fiduciary Duty

If you believe a fiduciary has acted improperly, it’s not enough to simply raise the issue. To prevail in court, you must provide evidence supporting four key elements:

1. The existence of a fiduciary relationship — You must show that the fiduciary had a legal obligation to act in your best interest.
2. A breach of that duty — You must prove that the fiduciary acted in a way that violated their obligations, whether through misconduct, omission, or negligence.
3. Causation — You must demonstrate that the fiduciary’s actions directly caused harm or loss.
4. Damages — You must show that you suffered actual harm, such as financial loss, missed opportunities, or reputational damage.

Supporting evidence may include contracts, trust documents, communications, financial records, and expert testimony.

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How to Prevent a Breach Before It Happens

The best way to handle a breach of fiduciary duty is to prevent one from occurring in the first place. Here are some proactive steps businesses and individuals can take:

• Use Clear, Well-Drafted Agreements
• Whether you're forming a partnership, setting up a trust, or joining a corporate board, use written agreements that clearly define roles, responsibilities, and expectations. This reduces ambiguity and provides a legal foundation if problems arise.
• For more on drafting protective documents, see guide to business partnership agreements.

• Disclose Conflicts Early
• Fiduciaries should be transparent about any potential conflicts of interest. Disclosing and managing those conflicts early can often prevent legal issues later.

• Perform Regular Reviews and Audits
• Reviewing financial records and fiduciary decisions regularly can catch problems early. In corporate or estate settings, third-party audits can help verify that the fiduciary is acting properly.

• Maintain Open Communication
• Fiduciaries should communicate clearly and frequently with beneficiaries, stakeholders, or clients. Lack of communication can lead to misunderstandings that escalate into legal conflicts.

• Obtain Insurance
• Business leaders and fiduciaries should consider Directors and Officers (D&O) or Errors and Omissions (E&O) insurance to protect against personal liability for fiduciary mistakes.

For fiduciary compliance in corporate settings, visit the U.S. Securities and Exchange Commission for detailed governance resources.

Real-World Example: Breach in a Business Partnership

Imagine two business partners, Alex and Taylor, co-own a consulting firm. Unbeknownst to Taylor, Alex starts diverting high-value clients to a new business he secretly created. The firm’s revenue declines, and Taylor discovers the misconduct.

In this case, Alex breached his fiduciary duty by engaging in self-dealing and failing to disclose a conflict of interest. Taylor may be entitled to file a lawsuit seeking damages, removal of Alex as a partner, and recovery of lost profits.

This kind of situation is not uncommon and underscores why documenting agreements and maintaining transparency is vital in any fiduciary relationship.

Key Takeaway

A breach of fiduciary duty is more than just bad behavior—it’s a serious legal violation with long-lasting consequences. If you’re in a fiduciary role, you must act with integrity, care, and loyalty. If you’re relying on someone else to act in your best interests, it’s important to know your rights, recognize red flags, and act swiftly when those rights are violated.

Understanding your legal obligations—and working with the right professionals—is essential to protecting your business, your reputation, and your financial future.