A breach of fiduciary duties may entitle the injured party to terminate the contract with immediate effect. Be careful, it might not be as bad as you think. Get it wrong, and you could be in breach of contract yourself. Directors take note.
A breach of fiduciary duties may entitle the injured party to terminate the contract with immediate effect.
A fiduciary duty is, basically, where another gives a position of trust in the management of property or money. Directors are fiduciary. Their duties have been codified by the Companies Act 2006, but the common law remains in tact.
The concept of a fiduciary duty
If a party owes fiduciary duties to others, the relationship is important. There is also inherent trust and confidence. For example:
- Company directors have fiduciary duties – that is set in stone and not open to challenge;
- Individuals in a position of “trust and responsibility” will owe a fiduciary duty;
- Agents, generally, owe fiduciary duties to a principal.
Breach of fiduciary duty
A repudiatory breach is a serious breach, that is fundamental to the contract. It is usually referred to as a breach that goes “to the heart of a contract”. The innocent party can then end the contract and claim damages. However, if the breach is not so serious as to be repudiatory, the innocent party is not entitled to end the contract. They may still claim damages, that is a grey area that we advise on.
Repudiatory breach applied to a fiduciary breach
If a fiduciary duty is breached, you might think the breach is classified as “serious”. After all, the breach is “repudiatory”, so the innocent party can surely end the contract? The answer is not necessarily. You must look at the breach itself, and its consequences. If the consequence relates to a fundamental term of the contract, then termination may be appropriate and justifiable.
The position of the Court of Appeal
The Court of Appeal confirmed this. An agent posted critical comments about the Principal’s service level on its website. The agent described the Principal’s customer order fulfilment process as poor. This was a breach of contract. However, the Court decided it was an insufficiently serious breach to be an intention to repudiate the contract. It did not go to the heart of the contract. If you are an injured party, think if there is scope for claiming breach on another basis. That other basis may justify termination with immediate effect. Warning: follow the termination process with caution.
The decision concerned agency relationships, governed by the Commercial Agent Regulations. If a Principal terminates an agency relationship, the agent is entitled to compensation. The compensation can be significant. However, if a Principal legitimately terminates the contract, then the agent receives no compensation.
Consequently, if the Court found the above breach to be repudiatory, the agent would not have been entitled to compensation.
Helen Curtis is a partner in the commercial team. Deciding to end a contract as a result of breach can have significant consequences if unjustifiable or if done incorrectly. We help you avoid those pitfalls.
Dual-qualified in the UK and USA and a qualified solicitor since 1998, Helen is a partner and heads up the corporate team, advising start-ups, SME companies, partnerships, entrepreneurs, investors and shareholders.