Part One: What are fiduciaries?
Why trust matters
You rely on, and trust, your spouse, your friends, and even your coworkers. You usually won’t continue on with a relationship if you can’t trust the other person in that relationship. Your marriage or your friendships may even end when you can no longer trust the other person, and you might seek another job if you can’t trust the people with whom you work.
Trust exists between individuals, but also between members of a group (drivers trust each other to follow the rules of the road) or between individuals and entities (you trust the manufacturer of your car to honour their warranty).
Trust v. trusts
The word trust is commonly used in two different ways:
- legal trusts are formalized legal and equitable relationships between people that set out how certain property should be managed:
- one person (a trustee) manages that property for others (the beneficiaries of the trust) according to the terms of the trust documentation
- eg. you make a testamentary trust in your Will, leaving your estate to your children in trust until they reach 30
- trust is the reliance one party has on another to do something, or to behave in a particular way
In this article, we are talking about the idea of trust – specifically, the different kinds of trust you place in others, and how some forms of trust are more important than others.
Different kinds of trust
Do you trust everyone equally? Probably not. Consider:
- you trust your friend to show up for spin class so you don’t feel dumb doing it all by yourself
- you trust your lawyer or BC Notary to give you the information you need to make a Will appropriate to your situation
- you trust your doctor to give you all of the important information required for you to give informed consent to a major operation
In some situations (usually because of the nature of the relationship), a special, more serious kind of trust exists between the parties of that relationship. The stakes are higher in these special relationships when that trust fails: the damage that happens when that special level of trust is breached can be devastating.
But if your doctor forgets to tell you that one of the important side effects of the medication they’ve recommended is that you could have suicidal thoughts, the consequences are far more serious, possibly even life threatening.
So how do we tell when the parties in a relationship owe each other a special level of trust and what does that mean for how they need to act?
Identifying special relationships
When this kind of special relationship exists between parties, one party (called a fiduciary) owes a special kind of obligation (a fiduciary obligation) to the other party (often called a beneficiary of that fiduciary obligation).
A fiduciary who is in a “special relationship” with a beneficiary has increased obligations to their beneficiaries. These duties can be wide ranging, often including putting the beneficiaries’ interests ahead of its own, or disclosing any potential conflicts of interest.
So how do you tell if you are in a fiduciary relationship, or owe a fiduciary obligation to another person?
Since there is no easily identifiable overriding principle that tells us how to determine whether a fiduciary relationship exists, we have to rely on case law to tell us which relationships fall into these fiduciary categories, or, whether a fiduciary relationship might exist in a particular situation.
Fiduciary obligations are often deemed to exist because of the type of relationship involved. The idea was that if you had a relationship with another person that fell into a specified set of categories, you were automatically deemed to have a fiduciary relationship with that person.
For example, some fiduciary relationships include see Frame v. Smith:
- a director owes a fiduciary duty to her corporation
- a lawyer or BC Notary owes a fiduciary duty to their clients
- a trustee of a trust owes a fiduciary duty to the beneficiaries of that trust
- an agent holds a fiduciary duty to the principal for whom they act
This deemed fiduciary obligation is specific to the specialized work being performed – your doctor has fiduciary obligations to you when they are performing open-heart surgery, but not when they are recommending a restaurant.
This concept of deeming a fiduciary relationship to exist simply because the parties fell into one of these set categories is tempting, and easy, when you want simple answers about the nature of a relationship, but it doesn’t go far enough.
Judges have also deemed certain situations to be fiduciary relationships even if they didn’t fall into those categories see Guerin v. The Queen and see Frame v. Smith, especially if those relationships have certain characteristics – called fiduciary elements.
- the fiduciary has the ability to exercise some discretion or power over the the beneficiary
- the fiduciary can unilaterally exercise that power or discretion over the beneficiary, and in doing so, can affect the beneficiary’s legal or practical interest
- the beneficiary is “peculiarly vulnerable or at the mercy of the fiduciary”
Another important element exists when determining whether a fiduciary relationship exists: the expectation that one party will act in the other’s best interests. That expectation might arise because one party has undertaken to care for the other, or because there is a reasonable expectation that one party will care for the other.
For example, you might not have a fiduciary relationship with your sister if you are close in age, and grew up together – siblings don’t automatically fall into the “deemed fiduciary” set of categories. But you would have a fiduciary relationship with your sister (and fiduciary obligations to her) if you are acting as her attorney under a Power of Attorney.
So if you find yourself in a relationship that falls into one of these set categories, or with these fiduciary elements, remember that you may have a special duty of care to the beneficiary of this relationship (or they to you).
In part 2 of this discussion, we’ll talk about what it means to have a “special duty of care” to another person.
Thanks to Derrick Murphy for editing assistance.May 18, 2017 10:00 am
Tags: BC Lawyer, BC Notary, fiduciary, Power of Attorney, trust