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Is That Really Enforceable?

Fiduciary Duty

Can you force a fiduciary duty – the highest duty recognized in law – on someone in a boilerplate contract?

Contracts are a result of the meeting of the minds, they say, and these same folks also say that you are deemed to own what you sign. Especially if you live in contract-friendly states like Texas. But is that always the case?

What about if someone puts language in a contract that requires a person to assume fiduciary duties and obligations that impose a heightened legal duty? Some non-disclosure agreements have started to create a ‘fiduciary duty lite’ approach, requiring someone to agree to this duty, when they do not understand what they are signing.

It is not just that someone may not understand a term in the contract – not a particularly strong position, by the way – but they assume legal duties that don’t fit. A fiduciary duty – whether one exists – is determined by the judge. Is there a formal fiduciary duty (for officers, partners, senior managers, trusted agents, etc.), or an informal fiduciary duty based on prior dealings and trust and confidence between the parties?

Can a party agree to assume a fiduciary duty, if none exists in law or as part of a confidential relationship? In other words, if you stick it in the contract that someone assumes a fiduciary duty, does it make it so?

From the Trial Lawyer’s Perspective – Charles Vethan’s Three Reasons to say “No,” You Can’t Impose a Fiduciary Duty that Does Not Exist

First. Whether the law will recognize a formal fiduciary duty is a question for the Court. Even for informal duties, the Court decides whether such a duty should exist. So, the judge looks at the relationship to determine a duty. Merely saying it exists does not make it so.

Second. What did the parties understand they were agreeing to? Is an agreement to incorporate the highest legal duty recognized in the law something that is haphazardly agreed upon? Probably not.

If There is no meeting of the minds as to what a term of art means in the contract, how may any of the parties agree to it? Even if they sign a contract – a non-disclosure agreement - with that language in it, can that person be held to the highest duty in the law?

Third. If they did not understand what fiduciary duty means, how can they agree (see point above). This means there is either a latent or patent ambiguity and the Court would have to allow the parties to bring in outside evidence (parol evidence) to prove what the deal actually meant. At the end of the day, the Court must look at the relationship to determine if there is a formal or informal fiduciary duty.

From The Appellate Lawyer’s Perspective, Joe Lanza’s – But Wait. There are some points to ponder

A fiduciary relationship is one of special trust, created either by operation of law or, in certain circumstances an informal relationship based on a special relationship of trust. A fiduciary duty imposes on anindividual the duties of good faith, utmost loyalty, candor, integrity of the strictest kind, to refrain from self-dealing, and of fair, honest dealing. High standards and, as the Texas Supreme Court has said, courts do not impose them lightly.

Court will always look at the facts surrounding the creation of a fiduciary duty. Some are created by operation of law—corporate directors and officers, trustees, executors—regardless of whether a contract is signed. In the case of corporations, limited liability companies, partnerships, and limited partnership, the Texas Business Organizations Code allows company agreements to modify fiduciary duties to make them less or even more restrictive.

But what about contracts in general? Most contracts are arms-length transactions. You don’t put any special trust in a salesman when buying a good or service. Fiduciary duties are not arms-length obligations, however, precisely because they impose a relationship of special trust—one party relies on and trusts the other, the fiduciary. Thus, I don’t think you can create a fiduciary duty in an ordinary contract simply by putting such a duty in a contract. I do see, however, two potential pitfalls.

First, at least for an informal relationship, some factual determination would be needed to determine whether the fiduciary relationship would exist. Suppose, for example, my mother decides she needs help keeping up with her banking account because due to her advanced age she is not as mentally sharp as she once was. She adds me to her checking account so that I can pay her bills for her. We sign an agreement that says we have a fiduciary relationship. I take all the money in the account and use it to buy myself a luxury car. Can the court consider the contract and her adding me to the account and trusting me to find the existence of an informal fiduciary duty? Probably so. The contract is some evidence that we intended this relationship to be a fiduciary relationship.

Second, as we all know, many contracts contain “recitals”—e.g., the parties acknowledge that this contract is intended to create a fiduciary duty between John Jones and Jane Smith. There is a reason that such recitals are in contracts. If I agree that the contract creates a fiduciary relationship (even though as a matter of law one would not be created) and the other party relies on that assertion, can I later renounce that assertion?Or will I be barred by the doctrine of promissory estoppel from asserting that no fiduciary relationship was created? That recital may well bar me from alleging there is no fiduciary relationship.

As is often the case, there does not appear to be a black-and-white answer, which is why courts tend to look at the facts and circumstances surrounding the creation of fiduciary duties to determine if, in fact, one was created.

If you have questions about terms in your contract and partnership issues, contact the Vethan Law Firm, P.C.

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