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Fiduciary Duty, Part 3: When do Fiduciary Duties Arise? Special Trust Relationships

July 19, 2012 | 2 min read

The fiduciary duty is not recognized in all cases. In fact, the cases where the duty does exist is the exception to the rule. For example, a buyer and a seller typically have no fiduciary duties owed to each other in the market place. Nor, typically, do parties to a commercial contract.

The fiduciary duty arises only when the parties dealing with one another are involved in what the law recognizes as special relationships, or relationships of trust. These can be special relationships that the law recognizes as fiduciary relationships as a matter of law (for example, the trustee/beneficiary relationship), or that arise by virtue of the specific factual circumstances existing between two people that compel the recognition of an additional and independent obligation by one person to protect the interest of the other person with whom they are dealing.

Imagine the bargaining table in the market-place. Typically, the buyer and seller sit on opposite sides of the table, owe no duty to each other, and are free to negotiate in their own best interest. If one side gets the better of the other — so be it. ‘Caveat Emptor’ (Buyer Beware!).

However, where a fiduciary duty is owed in a transaction, that basic rule of commerce no longer applies. Instead, the fiduciary must move to the same side of the table with the client and protect his client’s interest, placing it above the fiduciary’s own interest. If the fiduciary instead uses his position to ‘get the better of the other’, he is in breach of his fiduciary duty and is liable for any damages he causes as a result. It is for that reason that transactions that benefit the fiduciary are subject to intense scrutiny under the law.

Fiduciary duties can arise from a whole host of special relationships, either as a matter of law, or based upon the existing facts and circumstances in a given case, including:

  • Trustee/Beneficiary
  • Conservator/Legal Guardian to a Beneficiary
  • Attorney to a Client
  • Agent and Broker to client
  • Investment Advisor and Stockbroker to a Client
  • Real Estate Agent to a Client
  • Executor and Administrator to a Client
  • Corporate Partners, LLC Members, Joint Venturers, Directors and Officers to Other Corporate Partners, LLC Members, Joint Venturers, Directors and Officers
  • Board of Directors to the Company
  • Partner to a Partner
  • Senior Employee to a Company
  • Retirement plan administrators to retirees and workers
  • Promoters to stock subscribers
  • Liquidators to Company
  • Banks and Investment Corporations to their investors and depositors
  • Guardian to Ward
  • Priest/Minister/Rabbi to Parishioner
  • Receivers/Trustees in Bankruptcy to Creditors.

This is not an exhaustive list, as fiduciary duties can arise in any relationship where a special trust can be shown to exist. Exactly what those duties are, and how they apply in case are often fact-specific inquiries, and determined on a case-by-case basis.