It comes naturally to humans to act in their own best interests, but it is another matter when someone has an obligation to act in the best interests of another party. In business, the obligation to act in another’s best interest is called a fiduciary duty.
If you do something that’s contrary to that duty, it’s referred to as a breach of fiduciary duty. In this post, we will dive into the elements of breach of fiduciary duty and give you some examples of this as well.
Principal-agent relationship
When a person or business hires someone to act on their behalf, a principal-agent relationship has been established. The principal is the business or individual doing the hiring and the agent is the one who has been hired.
The most common type of agents in business are employees, though not all employees are hired as agents. If the employee signs contracts on behalf of the company or makes payments or purchases on behalf of the business, the employee is an agent.
Outside contractors can also be agents, though, like employees, whether they are an agent or not depends on their responsibilities.
Duties of agents and principals
Agents have certain duties, including the duty to be loyal and to act in the principal’s interest; the duty to use their expertise; the duty to notify the principal if important situations or information come up; and the duty to account for their time and for money spent.
Principals have duties as well, including duties to compensate agents and the duty to reimburse them for expenses.
Examples of breach of fiduciary duty
Examples of an agent violating their duties to a principal include:
- Sharing trade secrets
- Improper use of the employer’s funds
- Acting in the interest of a competitor
- Profiting at the employer’s expense
Business partners have a fiduciary duty to act in the best interest of their partner and the company, which can be breached in matters such as comingling company funds with their own, failure to disclose conflicts of interest, self-dealing and damaging the company’s reputation by engaging in illegal activities.