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Understanding Breach of Fiduciary Duty in Business Relationships

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Trust is one of the most important aspects of any business relationship. Importantly, in business, there are a number of parties who owe fiduciary duty to each other and the company. This is the highest level of loyalty that applies to people placed in a position of trust. Disregarding these obligations can result in a breach of fiduciary duty — and the wrongdoer may be held personally liable for any damages that arise as a result.    

What is a Fiduciary Duty in a Business Relationship?

A fiduciary duty in business relationships refers to a party’s obligation to act in the best interests of business partners and the company. Various business relationships involve fiduciary duties — this obligation may apply to partners, members, shareholders, officers, and many others. The fiduciary duty owed by these parties can be broken down into three main components: the duty of care, the duty of loyalty, and the duty of good faith. 

 In business, fiduciaries are required to prioritize the needs of the company above their personal interests. Specifically, the duty of care requires fiduciaries to act with prudence and make reasonably informed decisions on behalf of the company. The duty of loyalty is the legal obligation to always act in the best interests of the company. The duty of good faith means that a fiduciary must act with honesty and transparency in their business dealings and transactions.       

How Can a Fiduciary Duty Be Breached in Business?

There are many ways a fiduciary duty can be violated. Simply put, a breach of fiduciary duty occurs when a party in a position of trust takes advantage of their position and engages in an act that benefits themselves — rather than the company or partners. Common examples of the ways in which a fiduciary duty can be breached include:

  • Self-dealing 
  • Engaging in a competing business venture
  • Failing to properly manage assets
  • Misappropriating assets
  • Embezzlement
  • Failing to disclose a conflict of interest
  • Taking advantage of a corporate opportunity
  • Embezzlement, fraud, or deception

 What are the Consequences of a Breach of Fiduciary Duty?

A breach of fiduciary duty in business relationships can harm a company’s reputation and its bottom line. There are a wide range of damages that may be available in a case involving a breach of fiduciary duty, depending on the facts and circumstances. Available legal and equitable remedies in these matters can include the following:

  • Compensatory damages — This can include lost profits and other financial losses suffered due to the breach of fiduciary duty.
  • Restitution — If restitution is ordered, the breaching party would be required to return any profits or assets that were wrongfully obtained. 
  • Injunction — An injunction can be issued to stop a party from engaging in wrongdoing or compel them to take certain action.
  • Appointment of a receiver — A receiver may be appointed in some cases to investigate claims of financial mismanagement or oversee the business.
  • Punitive damages — If the wrongdoer’s actions were particularly egregious, punitive damages may be awarded to punish them for their conduct and deter others from acting in a similar manner. 

Notably, breaches of fiduciary duties can be prevented with regular oversight, clear agreements, and by disclosing any potential conflicts of interest before they arise. Fiduciaries should ensure the decisions they make are well-informed, documented, and satisfy the company’s objectives. Fiduciaries can also avoid breaching their fiduciary duties by obtaining approval from disinterested shareholders before they engage in a transaction.  

Contact an Experienced New York Business Attorney

If you or your company has been harmed by a breach of fiduciary duty — or you have been sued for a breach — it’s essential to have a knowledgeable business attorney by your side who can advise you and guide you through the legal process. Offering reliable representation and personalized legal services, Barnes & Barnes, P.C. handles matters involving breaches of fiduciary duty on Long Island and New York City. Contact us at (516) 673-0674 to schedule a consultation.

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