Parsing the law of fiduciary duty, Law Times, Vol. 22, No. 2 at 7 (January 17, 2011)

Parsing the law of fiduciary duty, Law Times, Vol. 22, No. 2 at 7 (January 17, 2011)

By Nikolay Y. Chsherbinin

The law of fiduciary duty evolved from the jurisdiction of the Court of Chancery over trusts and confidences. A fiduciary is often described as someone bound to act in the best interests of a beneficiary. Equity, which is a body of substantive law supplementary to the common law, requires fiduciaries to be faithful to the trust or confidence reposed in them.

To do so, the fiduciary role must be performed with fidelity. Thus, fiduciary law may generally be described as the law of fidelity or loyalty. However, it does not deal with every instance of trust or confidence but only those in which the fiduciary is in a position to affect the legal or vital practical interests of the beneficiary. Corporate directors are classic examples of fiduciaries. A claim that someone has breached a fiduciary duty involves allegations that the fiduciary has contravened reasonable expectations of loyalty and faithfulness. Remedies for such a breach lie in equity, not the common law. Given the propensity of tort duties and fiduciary duties to overlap, the next significant development in fiduciary law will likely be the manner in which the courts characterize the interrelationship between the two areas. This begs the question as to whether a stranger can be liable for inducing breach of a fiduciary duty. Such phraseology is not proper because it intuitively propositions a concurrency between the common law and equity, which does not exist. As the fiduciary duty, being equitable, was unknown to the common law, it is impossible that inducing breach of a fiduciary duty could be a common law tort akin to, for example, the tort of inducing breach of contract.

The Ontario Court of Appeal decision in ADGA Systems International Ltd. v. Valcom Ltd. supports this proposition. Although tort and fiduciary law may result in similar duties, they each deal with obligations imposed for different reasons. Tort law deals with the impact of conduct between people pursuing their own individual interests without any necessary relationship between them. Fiduciary law, meanwhile, operates to sanction conduct amounting to a breach of a trust or confidence not generally found in an arms- length relationship. Therefore, in the equitable parlance, the proper label for such cause of action is knowing assistance in a breach of a fiduciary duty.

The liability for the equitable doctrine of knowing assistance is fault-based. The case in point is the Supreme Court of Canada decision Air Canada v. M & L Travel Ltd., in which two directors caused their corporate travel agency, a trustee of ticket revenues for Air Canada, to wrongfully deposit its trust monies in a general operating account. The deposits were made in breach of trust and were lost when the company’s creditor, a bank, seized funds from the account to pay a line of credit guaranteed by the directors. The central issue was whether the directors were personally responsible to Air Canada for their directing the company to breach its trust. The top court accepted that a stranger could be liable by assisting in a breach of trust while knowing of a dishonest or fraudulent design of the fiduciary. The knowledge requirement for this type of liability is actual knowledge. Notably, recklessness or wilful blindness will also suffice.

Air Canada is a binding authority for the proposition that fiduciaries may be liable for knowingly allowing their corporations to dishonestly participate in breaches of trust. To succeed in the claim for knowing assistance in a breach of a fiduciary duty, the four essential elements must be present: fiduciary relationship; fiduciary fraudulently or dishonestly breaching an equitable duty; the stranger having actual knowledge of the misconduct; and the stranger assisting in the fraudulent or dishonest design.

The Air Canada approach provides a stark contrast to the approach expressed in Said v. Butt, which stands for the proposition that corporate fiduciaries could escape the common law liability for the deliberate breach of a contract between their corporations and a stranger if acting bona fide within the scope of their authority.

While many believe the rule in that case offers fiduciaries an exemption from tortious liability, it may be argued that it instead provides them with an equitable defence rooted in their fiduciary obligation to act in good faith with a view to the best interests of the corporation. Given that governments have enshrined this equitable obligation in s. 122(1)(a) and 134(1)(a) of the Canada Business Corporation Act and Ontario Business Corporation Act, a corporate fiduciary’s equitable duty to a corporation is more important that the common law duty to a stranger. Notably, when equity and common law appear to produce inconsistent results, the equitable result prevails.

It’s clear, then, that fiduciary obligations are equitable obligations, which are not compatible with common law concepts. As such, there is no tort of inducing or knowingly assisting in a breach of fiduciary duty. While corporate fiduciaries may be liable for breaches of their fiduciary duties, remedies for breach arise from equity, not the common law.

No Comments

Sorry, the comment form is closed at this time.