Breached fiduciary duties: Key examples and legal remedies

Contents

What is a breach of fiduciary duty?
What are examples of breach of fiduciary duty?
What is the standard of care for agents and trustees?
What are the legal remedies against breached fiduciary duties?
How can lawyers help in cases of breached fiduciary duties?
Breached fiduciary duties: How the law deals with distrust

Trustees are there for a reason, and as exactly as what their title suggests, we trust them for who they are and to do what they're supposed to. But what are your legal remedies when your relationship with your trustee goes sour, or worse, when they breach their fiduciary duties against you?

In this article, we'll discuss the basics of fiduciary duties and the legal effects when these are violated. This is helpful for beneficiaries, who must know the legal remedies that they can resort to against breached fiduciary duties.

What is a breach of fiduciary duty?

Breached fiduciary duties can be committed by any person who is trusted by another over a specific matter. One perfect example of is an estate trustee, who violates the beneficiary and executor's trust imposed on them.

What are examples of breach of fiduciary duty?

Breaches of fiduciary duties can be viewed from different perspectives or areas where it may be applicable. The most common example would be when estate trustees breach their fiduciary duties. However, other examples include agents, a company's board of directors, employees, and partners who may also violate their fiduciary duties.

Estate trustees: How they breach their fiduciary duties

In the context of estate laws, breached fiduciary duties refer to that material violation by an estate trustee of their legal responsibilities. It can be an act or misconduct of a trustee that either:

violates the rights of the beneficiaries
breaches the terms of the trust agreement or the will
involves the mishandling of the trust's properties
benefits personally the trustee, to the disadvantage of the trust

"An estate trustee has a legal obligation to act with honesty, loyalty, diligence, prudence, and in the best interests of the beneficiaries," says Philip Bitar, a tax lawyer at Spiegel Ryan LLP.

In Québec, this is outlined in section 1309 of the Civil Code of Québec (CCQ). Other provincial laws about this include the Trustee Act of Ontario and Alberta.

"A breach occurs when the trustee acts in their own self-interest, shows favouritism, neglects their responsibilities, or mismanages the estate," he adds.

Example: Trustees violating their fiduciary duties under the CCQ

For instance, Bitar highlights sections 1310 and 1311 of the CCQ, which prohibit the trustee from placing themselves in a position where their personal interests conflict with their duties. "Specifically, a trustee cannot exercise their powers for their own benefit or that of a third party."

However, Bitar adds that while having one's trust in the trustee is essential, it does not override their legal obligations. "A breach is determined based on actual conduct, not mere suspicion or theoretical concerns, as confirmed in Brassard v. Brassard, 2009 QCCA 898," he says. As such, "the trustee must always prioritize the interests of the beneficiaries."

Here's a video which explains the other examples of breached fiduciary duties:

Check out our directory of Lexpert-ranked personal tax planning and estate law firms in Canada if you're looking for firms to handle your trustee's breached fiduciary duties.

Agents and employees: How they breach their fiduciary duties

Like estate trustees, agents and employees may also commit breaches of fiduciary duties against their principal and employers. While being an agent is usually a contract-based relationship between an agent and a principal, employees may also be considered an agent of their employers in some circumstances.

Below are some examples of agents and employees violating their fiduciary duties:

disobeying a direct order of the principal or employer
having competing interests with their principal or employer
being negligent in carrying out their duties

Board of directors: When corporation stakeholders lose their trust

In a corporate setting, the board of directors are the agents of the shareholders and the corporation by large. They can also be held liable for breached fiduciary duties in the following ways:

violating their duties, as listed under the corporation's articles and by-laws
not following the principles of corporate governance
self-dealing, insider trading, and other violations under corporate and securities laws

The same applies to partnerships, as in the case where a partner or a managing partner commits similar violations.

What is the standard of care for agents and trustees?

Common law provides that the standard of care of an estate trustee is one of ordinary prudence, as if they're managing their own affairs. In the following decisions, the standard of care of trustees is stated as follows:

Norberg v. Wynrib, [1992] 2 S.C.R. 226: The Supreme Court said that a fiduciary, such as an estate trustee, must exercise the power entrusted to them exclusively for the beneficiary's good and exclusive benefit. This is because the assumption of this duty, which normally resides in the beneficiary, is conditioned on the trustee's duty to always act for the benefit of the beneficiary.
Valard Construction Ltd. v. Bird Construction Co., 2018 SCC 8: When it comes to the trustee's duty to disclose the trust's existence, the Supreme Court said that the standard of the trustee is that of honesty, and reasonable skill and prudence. The Court also said that when unreasonable disadvantage is caused to a beneficiary because they were not informed of the trust's existence, this disadvantage must be measured according to the trust's nature and terms, plus the beneficiary's entitlement to it.

As always, trustees and agents must act according to the best interests of the beneficiary, disregarding their personal interests in the trust.

What are the legal remedies against breached fiduciary duties?

The following actions can be taken against estate trustees if they have breached their fiduciary duties:

Removal and replacement with another trustee
To be compelled to do a "passing of accounts"
Held liable for damages suffered by the beneficiaries
Imprisonment when the breach of fiduciary duty amounts to a crime

We'll discuss these legal remedies below. Although these are in the context of estate trustees who violated their fiduciary duties, the same may be applied to agents, partners, directors, and other persons who do the same.

1. Removal of an estate trustee

One of the immediate remedies against an estate trustee is to remove and replace them. Beneficiaries can then apply to the court for the following reliefs:

that the trustee should not be appointed for legitimate reasons (e.g., if a trustee is named in a will)
for the removal of the trustee, due to breached fiduciary duties or other grounds under the law
that the trustee must be replaced by other qualified persons or entities allowed by law, after violating their fiduciary duties

The removal of an estate trustee is governed by provincial or territorial laws. This may include the removal of a will's executor or estate's administrator.

Removal of estate trustees under the CCQ

Bitar says that one of the legal remedies under the CCQ when an estate trustee breaches their fiduciary duties is their removal. Three provisions are relevant for this remedy:

section 1290: allows the court to remove a trustee for serious misconduct or failure to fulfill their obligations
section 1294: empowers the court to amend or terminate the trust, if a trust no longer reflects the settlor's original intent
section 1360: permits the replacement of an administrator who is unable or unwilling to perform their duties properly

Notably, Bitar says that the courts are cautious in removing a trustee, which requires substantial evidence of misconduct. "In Brassard, the court emphasized that removal is only justified when there is clear evidence of a significant breach of duty by the trustee."

Legal standing to remove a trustee

In addition, provincial laws state that only those who have legal and financial interest to the following have the legal standing to ask for the removal of an estate trustee:

the trust
the properties left behind
the beneficiary's welfare

Grounds for removing an estate trustee

Here's a list of the usual grounds, as found in provincial laws and in common law, to remove an estate trustee:

Animosity between the trustee and beneficiary: While simple disagreements between them will not result in a trustee's removal, the animosity must be so grave that the court will see that the trustee cannot fulfill their duties properly.
Conflict of interest on the trustee: When there's conflict between the interests of the trustee and the trust or beneficiary, it may lead to breached fiduciary duties. Here, the beneficiary must prove that this conflict is significant and has resulted or will likely result in the wasting of the trust or estate.
Misconduct of the trustee's fiduciary duties: Removal of a trustee may not be proper for simple misconduct. However, if it involves the breach of fiduciary duties of a trustee, which is similar to the forms of misconduct under the law, then a trustee's removal may be possible.

More grounds are found in common law and in provincial statutes, which an estate lawyer near your area would have expertise on.

2. Compelled to do a passing of accounts

When there are allegations that the estate is being mismanaged, the beneficiary can ask the court that the trustee does a passing of accounts. This can also be done when the estate trustee refuses to do an accounting.

In this case, the trustee will account for all the money which came in and out of the estate. The trustee can be ordered to return to the estate what has been lost if the court finds that:

there are unexplained expenses or disbursements; or
the estate's assets are being wasted away

3. Suit for damages against an estate trustee

A claim for damages can be filed against the estate trustee for the actual loss and emotional suffering of the beneficiaries. The trustee's negligence is another possible ground for this, aside from the breached fiduciary duties.

4. Criminal action on an estate trustee

In addition to civil actions, criminal cases can be filed against estate trustees for breached fiduciary duties. Section 336 of the Criminal Code provides for offense of breach of trust, and the penalty for this is imprisonment of not more than 14 years.

For this crime, the following must be present to prove criminal breach of trust beyond reasonable doubt:

the offender is a trustee (although common law interprets the term "trustee" in a broad manner)
the purpose of the trust is either for:
the use or benefit of another person; or
a public or charitable purpose
the offender converts the thing, or any part of it
the conversion of the thing was:
for a use that is not authorized by the trust,
done with intent to defraud, and
in contravention of the trust

How can lawyers help in cases of breached fiduciary duties?

"Lawyers assist beneficiaries by evaluating whether the trustee has violated fiduciary duties," Bitar says. "They help gather admissible evidence to substantiate claims of misconduct and ensure the allegations meet the legal requirements for serious breaches."

As for trustees, "lawyers provide guidance on fulfilling their fiduciary duties, addressing conflicts of interest, and responding to allegations," he adds. Lasty, a "legal counsel helps resolve disputes efficiently, ensuring the estate is administered in the beneficiaries' best interests."

Breached fiduciary duties: How the law deals with distrust

When the legal ties between an estate trustee and a beneficiary must come to a bitter end, the law is there to protect the beneficiary and discipline the erring trustee. Asking for the help of an estate lawyer is necessary, especially when looking into the claims for breached fiduciary duties.

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