Breach of Fiduciary Duty in Business: What Owners Need to Know

You own a business and put people in place capable of running it. How do you know that they will do their job to make the company successful? The truth is that you don’t. While there is a certain amount of trust that comes with owning a business, the law also provides protection. A fiduciary duty in business requires owners and leaders to act in the best interests of the business over their own. Understanding this legal responsibility can help business owners protect themselves.

What Is a Fiduciary Duty in Business?

A fiduciary duty is a legal requirement to act in the best interests of another party rather than pursuing your own personal interests. The law imposes a strict standard of loyalty, care, good faith, and fair dealing. This obligation applies to the people who are in ownership or leadership positions of a business. Fiduciaries are typically the corporate officers, directors, LLC members, or business partners. 

North Dakota Business Law

The North Dakota Century Code imposes fiduciary duties on LLC members and managers. Partners and corporate directors are also subject to similar legal requirements. When disputes reach court, judges evaluate fiduciary duty claims based on both statutory provisions and prior case decisions. The focus is not just on the outcome of a decision, but on whether the fiduciary acted in the company’s best interest at the time the decision was made.

What Constitutes a Breach of Fiduciary Duty?

A breach of duty happens when the business owner fails to uphold their duty of loyalty, care, and good faith. How this looks in real life can vary significantly. Because of this, each claim is highly fact-specific.

Common examples of a breach include misusing company funds, self-dealing, failing to act with reasonable care, hiding a conflict of interest, or directly competing with the business. A breach could be intentional or created through negligence.

Legal Elements of a Claim

To have a successful damages claim for breach of fiduciary duty, a plaintiff must typically prove four elements.

• Existence of a fiduciary relationship
• Breach of that duty
• Causation (link between breach and harm)
• Damages to the business or stakeholders

The court will analyze each element based on the facts and the evidence presented by the parties. Typical evidence includes financial records, communications, and governance documents.

Consequences of Breach

A breach of fiduciary duty comes with serious consequences. This could include civil lawsuits that lead to paying monetary damages. Depending on the breach, there could also be government regulatory action. Any financial gains accomplished through fraud would be taken and returned. This is often accompanied by interest penalty payments on the amount recovered. A finding of breach of duty may also result in the removal of the individual from their position within the company.

How Business Owners Can Protect Themselves

Taking proactive steps is the best way to protect business and personal liability. This starts with drafting clearly written operating agreements and bylaws for the business. Duties and responsibilities should be clearly outlined for each partner, owner, and investor. That way, everyone is on the same page with operating expectations.

When making financial decisions, maintain transparency. Clearly document the way and how financial decisions are made and carried out. That way, it’s easier to retrace steps and establish impropriety.

Business owners cannot predict the future or avoid all situations that could present a conflict of interest. Prepare in advance and process for disclosing a potential conflict of interest. That way, business operations aren’t halted, and owners can protect themselves.

Have routine audits or internal reviews done. These periodic checks ensure that business operations are being handled correctly. Any potential issues can be promptly addressed before harm is caused.

Contact a Business Litigation Attorney

A breach of fiduciary duty can disrupt more than just day-to-day operations. It can undermine trust at the core of a business and create lasting financial harm. Knowing how fiduciary obligations work and how they are enforced under North Dakota law gives business owners a clearer path forward when disputes arise. Fremstad Law represents business owners across North Dakota in complex litigation involving fiduciary duty and other commercial disputes.

We welcome you to contact us online or call 701-401-9220 to learn how we can assist you.