What states should know about breach of fiduciary duty

Who can be sued?  In England and other common law countries a civil claim for breach of "fiduciary duty" can usually be made against senior public officials involved in corruption. 

When does it apply? A claim for breach of fiduciary duty is founded on the legal relationship of principal (the state) and agent (the official), similar to the relationship that was historically recognised between a company and its directors.  Those duties include a duty of loyalty and fidelity; a duty to act in good faith and in the best interests of the state; a duty not to create a situation where personal interest conflicts with duties and responsibilities, or where a conflict might be a real possibility; a duty not to prefer personal interests or the interests of others to the interests of the state; and a duty not to make any undisclosed profit from a public position.  Taking bribes, stealing assets, self-dealing, and wrongfully arranging for public assets to be sold or transferred at an under-value are examples of conduct that will breach these duties and permit a claim.

What needs to be proved?  The state must prove that:

• The public official owes a fiduciary duty to the state. This will usually be clear.  Duties may be modified or extended by a written constitution or code of conduct.
• The public official breached that duty. This is a question of fact.   High expectations are imposed on public officials and other "fiduciaries".  
• No prior approval was given by the state to the conduct alleged to amount to a breach.  Effectively the burden is on the defendant to establish approval, if he/she wishes to rely on the approval as a defence.  It is typically very difficult for a public official to show consent to conduct which would ordinarily amount to a breach, and virtually impossible in cases of grand corruption.

What does not need to be proved? It is not necessary to provide dishonesty or bad faith, although this is often present; this can be a significant advantage against some other claims such as knowing assistance.

What can be recovered? Establishing that an official had breached his/her fiduciary duty would allow the state to seek:

• "Equitable compensation" for its financial loss. For technical reasons, an award of equitable compensation may be higher than the financial losses than can ordinarily be recovered in law. This is because legal principles that normally limit the amount that can be recovered do not apply. 
• "Account of profits". A claimant may be entitled to receive the profits its public official has achieved by virtue of the breach of duties.
• Proprietary (ownership) claims are also potentially available to public assets sold in breach of duty.

Can the state escape a contract procured in breach of a fiduciary duty?  States can often escape onerous contracts obtained by a contractor as a result of breach of fiduciary duty by a public official awarding, or influential in awarding, a contract.  Typically that requires participation by the contractor in the breach of fiduciary duty, or knowledge of it.   Escaping a contract can mean terminating it or treating as "rescinded" (i.e. never existing).  The difference between termination and rescission can be very significant.   A state may have to account for benefits received under a rescinded contract, which may not be welcome in some circumstances. Termination may be a contractual alternative to rescission, avoiding the need to account whilst also allowing a contractual claim for compensation.  Whatever the choice, rights must typically be exercised quickly after they become apparent, or the state's ability to escape the contract may be lost.   Claims for compensation are likely also to be available where contracts are obtained through breaches of fiduciary duty by those awarding them.

Please contact James Maton, at jmaton@cooley.com or +44 207 556 4547, or Henry Stewart, at hstewart@cooley.com or +44 207 556 4479, if you require further assistance.

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