Businesses run on promises, in a sense. Those promises are often codified in contracts and other legal documents. Failing to keep those promises or commitments (“breaches”) can result in civil and possibly even criminal legal action.
Two common types of breaches are breach of contract and breach of fiduciary duty. Too often, they’re confused, so it’s important to know how they differ and when legal action can be taken against the party committing the breach.
First, a breach of fiduciary duty generally includes at least one breach of contract. However, a breach of contract doesn’t necessarily involve a breach of fiduciary duty. Let’s look a little more closely at both types of breaches.
Breach of contract
A breach of contract occurs when a party to a contract fails to fulfill one or more terms. This could include not completing a project on time, not delivering products or services as promised or raising a price without getting the other party’s consent.
Many contracts – especially for construction and other projects – include a force majeure clause that helps protect at least one party from a breach of contract action if an unforeseeable event occurs that prevents them from abiding by the terms of the contract – like a price or a deadline. Both parties, of course, need to agree to the force majeure terms.
Breach of fiduciary duty
A breach of fiduciary duty requires a legally recognized relationship between the parties. That relationship requires the party with a fiduciary duty to act in the best interests of the other or some other stated party.
Business partners, for example, have a fiduciary duty to each other and to the business itself. Financial advisors, real estate agents, attorneys and other professionals have a fiduciary duty to act in the best interests of their clients.
Common breaches of fiduciary duty include “self-dealing,” which may involve taking money or clients away from the company, and conflicts of interest where someone acts in the interests of someone else to the detriment of the party to whom they owe a fiduciary duty. If someone is negligent or unqualified to fulfill their fiduciary duty, that could potentially be considered a breach as well.
Whenever someone suspects that another party has engaged in some type of breach – even if they’re not sure what type – it’s crucial to get experienced legal guidance sooner rather than later. Waiting to take action can lead to more financial and reputational harm.