Breach of Fiduciary Duty

Understanding Breach of Fiduciary Duty

A breach of fiduciary duty arises when a person who has accepted a position of trust or discretionary power uses that position for personal benefit or otherwise acts disloyally toward the party they are meant to protect. Fiduciary law exists to preserve the integrity of relationships built on confidence and vulnerability—situations where one party justifiably relies on another to act selflessly and with complete candour.

Unlike an ordinary contractual or negligence dispute, a fiduciary claim does not hinge on mere error or lack of skill. It addresses the betrayal of loyalty. When a director secretly diverts a business opportunity, a trustee self-deals with trust property, or an investment advisor conceals a conflict of interest, the wrong is moral as well as legal. Equity intervenes not to punish negligence but to remove temptation and strip away profit gained through disloyalty.

What is a Breach of Fiduciary Duty?

A breach of fiduciary duty is established when confidential or trusted authority is misused. The Supreme Court of Canada has confirmed that this claim arises not from property ownership but from the duty of trust between parties. As the Court stated in Hodgkinson v. Simms, [1994] 3 S.C.R. 377, fiduciary duty is one of utmost good faith and self-denial, arising where confidence is reposed and influence is accepted.

The central concept is that "where one party has placed its 'trust and confidence' in another and the latter has accepted — expressly or by operation of law — to act in a manner consistent with the reposing of such 'trust and confidence', a fiduciary relationship has been established."

Information or advantages commonly protected under this doctrine include business opportunities, confidential strategies, client relationships, and discretionary decision-making authority. Even without a written fiduciary agreement, courts can find an implied obligation of loyalty when the circumstances show that trust was expected and dependency existed.

Origins and Legal Foundations

Fiduciary duties originated in the law of trusts, where trustees held legal title to property for the benefit of beneficiaries. Over time, equity extended these duties beyond formal trust relationships to anyone who assumed responsibility to act in another's interests.

The modern Canadian test for breach of fiduciary duty derives from Lac Minerals Ltd. v. International Corona Resources Ltd., [1989] 2 S.C.R. 574, and Hodgkinson v. Simms. To establish a breach, three elements must be proven:

1. The existence of a fiduciary relationship
2. A breach of the duties arising from that relationship
3. A resulting detriment to the beneficiary or an unjust gain to the fiduciary

Importantly, a fiduciary relationship may be either per se (automatic, such as trustee-beneficiary or director-corporation) or ad hoc (arising from the specific facts where discretionary power, vulnerability, and an undertaking of loyalty coincide).

The Nature of Loyalty

At the core of every fiduciary obligation lies the duty of loyalty—an expectation that the fiduciary's judgment will remain unclouded by self-interest. Equity's traditional maxim captures it succinctly: "No man can serve two masters."

In Frame v. Smith, [1987] 2 S.C.R. 99, Justice Wilson described three defining characteristics of fiduciary relationships:

1. The fiduciary has scope for the exercise of discretion or power
2. The fiduciary can unilaterally exercise that power to affect the beneficiary's legal or practical interests
3. The beneficiary is particularly vulnerable to the fiduciary's discretion

From these characteristics flow specific obligations:

• Good Faith and Honesty: All decisions must be made sincerely, without deceit or concealment
• Avoidance of Conflict: The fiduciary must not let personal, family, or outside interests interfere with duty
• No Secret Profit: Any benefit derived from the relationship belongs to the beneficiary unless fully disclosed and consented to
• Confidentiality: Information gained through the fiduciary position cannot be exploited for personal gain

These rules are prophylactic—they prevent wrongdoing rather than merely compensating for it. The fiduciary's motive is irrelevant: even honest intentions cannot excuse an undisclosed conflict. As the Supreme Court noted in Strother v. 3464920 Canada Inc., 2007 SCC 24, the law's purpose is to maintain confidence in relationships of trust by "disabling the fiduciary from being swayed by considerations of personal interest."

Relationship to Other Claims

A breach of fiduciary duty often overlaps with other causes of action, such as breach of contract, negligence, and breach of confidence. Understanding how these claims interact helps determine the most appropriate strategy for litigation or settlement.

Fiduciary Duty vs. Negligence

The distinction between fiduciary breach and negligence is crucial to understanding remedies. As explained in Nocton v. Lord Ashburton, [1914] A.C. 932 (H.L.), and confirmed in Canadian law:

• Negligence focuses on carelessness—a failure to meet the standard of a reasonable expert. A professional who errs honestly and without self-interest may be liable in tort, but if their error is untainted by conflict, the matter is simply one of professional competence
• Breach of Fiduciary Duty condemns disloyalty. It addresses situations where the fiduciary puts personal interests ahead of the beneficiary's, creating or failing to disclose a conflict of interest

The Supreme Court clarified this in B. (K.L.) v. British Columbia, [2003] 2 S.C.R. 403, stating that breach of fiduciary duty "is rather a question of disloyalty—of putting someone's interests ahead of the child's in a manner that abuses the child's trust. Negligence, even aggravated negligence, will not ground parental fiduciary liability unless it is associated with breach of trust in this sense."

For example, a financial advisor who miscalculates a portfolio return faces a negligence claim. But if that advisor secretly channels investments to a company in which they hold shares, the wrong transcends negligence—the law demands disgorgement of profits, not merely damages.

Fiduciary Duty vs. Contract

A breach of contract claim enforces the specific terms of an agreement, while breach of fiduciary duty relies on equitable principles that apply even where no contract exists. This distinction matters because an obligation of loyalty may arise simply from the relationship between the parties or the nature of the authority exercised.

Fiduciary duties can coexist with contractual obligations. In Hodgkinson v. Simms, the Court held that fiduciary duties survive alongside contractual terms because they protect a different interest: loyalty, not just performance. However, express contractual clauses can sometimes clarify or limit those duties, provided they do not offend public policy.

Equity also differs procedurally. Once a fiduciary relationship is proven, the onus shifts: the fiduciary must demonstrate that they acted with full disclosure and consent. This reversal reflects the law's protective instinct toward the vulnerable party.

Fiduciary Duty and Breach of Confidence

Fiduciary breaches commonly involve misuse of confidential information. Where trust and loyalty intersect with confidentiality, courts may award overlapping relief under both doctrines.

The Lac Minerals decision demonstrates this overlap: the defendant's misuse of geological data violated both confidentiality and loyalty. The Court imposed a constructive trust on the mining property wrongfully acquired, showing that fiduciary principles can provide proprietary remedies where appropriate.

However, not every breach of confidence is a breach of fiduciary duty. The key distinction is whether a relationship of trust and dependency existed. Fiduciary duty requires more than just confidential information—it requires that one party exercised discretionary power over another's interests in circumstances of vulnerability.

Common Fiduciary Relationships

Fiduciary principles reach into nearly every corner of commercial and professional activity. Canadian courts recognize both traditional categories that are automatically fiduciary (per se) and factual situations where fiduciary duties arise from the circumstances (ad hoc).

Directors and Officers

Directors and officers owe twin duties to the corporation: (1) a statutory duty under s. 122(1)(a) of the Canada Business Corporations Act and s. 134(1)(a) of the Ontario Business Corporations Act, R.S.O. 1990, c. B.16; and (2) a common-law fiduciary duty of loyalty and good faith.

They must place the corporation's interests above their own and disclose any conflict in material transactions. Self-dealing—such as purchasing corporate assets at undervalue or diverting opportunities—violates this duty even if the corporation suffers no quantifiable loss.

In Canadian Aero Service Ltd. v. O'Malley, [1974] S.C.R. 592, two senior officers who resigned and pursued a corporate opportunity for themselves were held liable for disgorgement of all profits. The Court reinforced that fiduciaries must refrain from placing themselves in a position where duty and self-interest conflict.

Directors are, however, shielded when acting honestly and prudently under the business judgment rule—a doctrine reaffirmed in Peoples Department Stores Inc. v. Wise, 2004 SCC 68. That rule protects good-faith decisions made on reasonable information, even if hindsight shows them mistaken.

Partners and Joint Ventures

Partners owe each other utmost good faith and full disclosure in all matters affecting the partnership. Ontario's Partnerships Act, R.S.O. 1990, c. P.5, s. 28, codifies some of these obligations. Secret profits, competition with the partnership, or diversion of clients are classic breaches.

Courts have extended similar principles to joint ventures and pre-contractual collaborations where one party undertakes to act for both. In Lac Minerals, the Supreme Court imposed fiduciary liability on a mining company that misused confidential geological data shared during negotiations, establishing that fiduciary duties can arise even before a formal partnership is created.

Trustees and Executors

Trustees are paradigmatic fiduciaries. Their duties of loyalty, prudence, and impartiality are codified in the Trustee Act, R.S.O. 1990, c. T.23. They must invest only as permitted, account regularly to beneficiaries, and avoid any transaction that benefits themselves.

Self-dealing is voidable regardless of fairness or intent. In Fales v. Canada Permanent Trust Co., [1977] 2 S.C.R. 302, the Supreme Court underscored that trustees must exercise the care, diligence, and skill of a prudent person of business.

Misuse of trust property or personal borrowing from the estate constitutes a clear breach and may lead to removal or surcharge, as confirmed in Ontario cases such as Fox v. Fox Estate (1996), 28 O.R. (3d) 496 (C.A.).

Professional Advisors

Professionals such as lawyers, accountants, and financial consultants often occupy dual roles—as contract service providers and as fiduciaries. Where they exercise discretionary authority or hold confidential information, courts presume fiduciary duties of loyalty and candour.

In Hodgkinson v. Simms, an investment advisor failed to disclose that he was receiving commissions from developers to whom he steered his clients. The Supreme Court held him liable for both the clients' financial losses and the profits he earned, stressing that fiduciary law demands transparency "where one party's expertise and influence create a corresponding duty of loyalty and disclosure."

For lawyers, the fiduciary obligation extends beyond competence to conflicts of interest. Rules 3.4-1 to 3.4-4 of the Rules of Professional Conduct (Law Society of Ontario) reinforce this equitable standard in regulatory form.

Employment and Senior Executives

Not all employees are fiduciaries. However, those occupying senior management or strategic roles—who influence policy, pricing, or client relations—bear fiduciary responsibilities to their employer. They must not compete, solicit clients, or misuse confidential information during or shortly after employment.

In Canadian Aero Service Ltd. v. O'Malley, the Court described these duties as continuing even after resignation when the opportunity pursued "was acquired through the employee's position and special knowledge." The fiduciary obligation does not automatically end upon termination if the misuse of trust continues.

Equitable relief can include injunctions restraining solicitation or disclosure, as well as an accounting of profits earned from diverted opportunities. For ordinary employees, obligations are limited to contractual and statutory duties of fidelity under the Employment Standards Act, 2000, S.O. 2000, c. 41, and common-law implied terms.

Types of Fiduciary Breaches

Once a fiduciary relationship is established, the plaintiff must show that the fiduciary failed to uphold its core obligations—loyalty, honesty, good faith, and avoidance of conflict. Breaches take many forms, but all share the common thread of divided loyalty or abuse of trust.

Self-Dealing and Conflicts of Interest

Self-dealing occurs when a fiduciary enters into a transaction with the beneficiary for personal gain, or places themselves in a position where personal interest conflicts with duty. This includes:

• Purchasing assets from the beneficiary at undervalue
• Selling personal property to the beneficiary at inflated prices
• Taking a position adverse to the beneficiary's interests in related transactions
• Failing to disclose relationships with third parties involved in transactions

The classic statement of this principle appears in Aberdeen Railway Co. v. Blaikie Bros. (1854), 1 Macq. 461 (H.L.), where Lord Cranworth stated: "No one, having [fiduciary] duties to discharge, shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound to protect."

Undisclosed Profits and Kickbacks

A fiduciary who accepts secret commissions, kickbacks, or other benefits in connection with their role commits a serious breach. These profits belong to the beneficiary, regardless of whether the beneficiary was harmed by the transaction.

In Strother v. 3464920 Canada Inc., a tax lawyer continued advising one client while secretly investing in a competing venture that exploited the same tax strategy. The Supreme Court found a breach even though the lawyer's conduct initially appeared within contractual limits. Equity demanded disgorgement of all profits derived from the conflict.

The fiduciary's intent is irrelevant. Even well-meaning actions constitute a breach if they create a conflict or yield undisclosed profit.

Misuse of Confidential Information

Fiduciaries frequently have access to confidential information by virtue of their position. Using this information for personal advantage—even if the beneficiary is not directly harmed—violates the duty of loyalty.

Examples include:

• A director using corporate strategy to benefit a personal investment
• A lawyer exploiting client information in unrelated matters
• An advisor using confidential data to compete with the beneficiary
• A trustee trading on inside information derived from trust holdings

The breach occurs regardless of whether the beneficiary could have used the information profitably. The law removes the possibility of temptation by requiring fiduciaries to account for any gains.

Diversion of Corporate Opportunities

Corporate directors and senior officers are prohibited from diverting opportunities that rightfully belong to the corporation. This principle, established in Canadian Aero Service Ltd. v. O'Malley, applies when:

• The opportunity was discovered in the course of the fiduciary's duties
• The corporation had an interest or expectation in the opportunity
• The fiduciary's position enabled them to learn of or secure the opportunity

The duty continues even after resignation if the opportunity was "maturing" at the time of departure. Directors cannot time their resignation to exploit corporate opportunities, as this would undermine the prophylactic purpose of fiduciary law.

Remedies for Breach of Fiduciary Duty

Remedies in fiduciary law are designed to restore integrity and strip away advantage, not merely to compensate. The equitable jurisdiction of Canadian courts allows a wide range of responses tailored to the nature of the wrongdoing.

Disgorgement and Accounting for Profits

The most common remedy is disgorgement, which compels the fiduciary to surrender all gains obtained through the breach, regardless of whether the beneficiary suffered loss. This is sometimes expressed as an "accounting for profits." Its purpose is prophylactic: to ensure that loyalty, not opportunism, governs fiduciary behaviour.

In Canadian Aero Service Ltd. v. O'Malley, the Court required former executives to account for profits from a government mapping contract they had usurped. Similarly, in Strother, the lawyer was ordered to disgorge earnings from his undisclosed participation in a competing business.

The quantum is determined by tracing benefits directly or indirectly flowing from the breach. The fiduciary bears the burden of proving that any profits were not attributable to the breach—a difficult task given the strict nature of the duty.

Key principles of disgorgement include:

• The beneficiary need not prove actual loss—the fiduciary's gain alone triggers the remedy
• All profits must be surrendered, including those the beneficiary could not have obtained
• The fiduciary cannot offset personal expenses or efforts unless clearly separable from the breach
• Joint profits with innocent third parties may be apportioned, but the burden lies with the fiduciary

Constructive Trusts

Where the fiduciary acquires property through disloyal conduct, equity may impose a constructive trust, effectively transferring ownership to the beneficiary. This remedy is proprietary rather than monetary—it recognizes that the property rightfully belongs to the person wronged.

Courts invoke constructive trusts where:

1. There is a fiduciary relationship
2. The fiduciary acquired specific, identifiable property
3. A causal link connects the breach to that acquisition

In Soulos v. Korkontzilas, [1997] 2 S.C.R. 217, a real-estate agent purchased a property his client had been negotiating for. Even though the client suffered no economic loss, the Supreme Court imposed a constructive trust over the property to uphold fiduciary integrity.

The Court emphasized that equity's purpose is to prevent fiduciaries from retaining ill-gotten gains, not simply to repair measurable damage. The constructive trust also gives the beneficiary priority over the fiduciary's other creditors—a significant advantage in insolvency scenarios.

Equitable Compensation

When the breach causes identifiable financial loss, the court may award equitable compensation. This remedy resembles damages in tort but operates on different principles: causation is applied flexibly, and foreseeability does not constrain recovery. The fiduciary must restore the beneficiary to the position they would have occupied had the duty been fulfilled.

In Canson Enterprises Ltd. v. Boughton & Co., [1991] 3 S.C.R. 534, negligent solicitors failed to disclose a secret profit in a real-estate transaction. The Court awarded compensation for the immediate loss resulting from the breach but refused to extend liability for subsequent market declines, distinguishing between equitable and tortious causation.

Equitable compensation is therefore discretionary; it depends on fairness, proportionality, and the causal nexus between the breach and the loss. Key features include:

• No requirement to prove foreseeability (unlike tort damages)
• Flexible causation that considers the fiduciary's duty to account
• Focus on restoring the beneficiary's position, not punishing the fiduciary
• Can be combined with disgorgement where appropriate

Plaintiffs often combine equitable compensation with restitutionary remedies to address both loss and gain comprehensively.

Injunctions and Rescission

Fiduciary breaches often require injunctive relief to prevent ongoing harm. Because equity acts in personam, courts can issue interim or permanent injunctions tailored to the fiduciary's conduct, including:

• Prohibiting further misuse of confidential information
• Restraining competition by a former executive who breached their duty
• Requiring delivery up or destruction of materials obtained through breach
• Freezing assets pending resolution of the claim

To obtain an injunction, a party must meet the three-part test from RJR-MacDonald Inc. v. Canada (Attorney General), [1994] 1 S.C.R. 311:

1. There is a serious issue to be tried
2. The applicant will suffer irreparable harm if the injunction is not granted
3. The balance of convenience favours granting the order

Where a contract or transaction is tainted by breach, the court may order rescission, setting it aside entirely. For example, if a fiduciary induces a beneficiary to enter an agreement through nondisclosure, rescission restores both parties to their pre-contract positions, subject to restitution of benefits.

Rescission is discretionary and may be denied if:

• The parties cannot be restored to their original positions
• Innocent third parties have acquired rights in the property
• The beneficiary affirmed the transaction with full knowledge of the breach
• Undue delay (laches) has prejudiced the fiduciary

Third Party Liability

Fiduciary accountability extends beyond the immediate wrongdoer. Equity recognizes that those who knowingly assist or benefit from a fiduciary's breach should not retain ill-gotten gains.

Knowing Assistance

A third party who knowingly participates in the fiduciary's disloyal acts may be liable for knowing assistance. The classic test from Air Canada v. M & L Travel Ltd., [1993] 3 S.C.R. 787, requires:

1. A fiduciary duty and its breach
2. The third party's knowledge of that breach (actual, wilful blindness, or recklessness)
3. Participation that furthers or facilitates the breach

Knowledge is key. Innocent intermediaries are not liable, but deliberate or reckless involvement—such as assisting in the diversion of corporate assets—creates joint responsibility for the resulting loss.

Examples of knowing assistance include:

• A lawyer facilitating a transaction knowing the fiduciary is acting in breach
• A financial institution processing transfers it knows are misappropriations
• A business partner helping a fiduciary divert opportunities from the beneficiary
• An accountant structuring arrangements to conceal conflicts of interest

The third party faces potential liability for the full loss or profit, joint and several with the breaching fiduciary.

Knowing Receipt

A third party who receives property derived from a fiduciary breach may be liable for knowing receipt if they knew, or should have known, that the property was misapplied. Even passive retention can trigger restitutionary obligations once knowledge arises.

Equity demands that recipients return or account for such assets to prevent unjust enrichment. The test requires:

1. Receipt of trust or fiduciary property
2. Knowledge (actual or constructive) that the property was transferred in breach
3. Retention of the property or its proceeds

For instance, if a fiduciary transfers company funds to a relative's account and the relative becomes aware of the wrongdoing, the court may order repayment or impose a constructive trust on the proceeds.

Tracing

Canadian courts permit tracing—the equitable process of following misappropriated assets through transformations or transfers—to recover property or its substitutes. As long as the asset can be identified in some form, beneficiaries may claim it or its value.

This tool ensures that fiduciaries cannot obscure their wrongdoing through layered transactions. Ontario's tracing remedies derive from equitable doctrine and are frequently applied in conjunction with the Trustee Act and Rules of Civil Procedure, R.R.O. 1990, Reg. 194.

Tracing is available where:

• A fiduciary relationship existed
• Property was misappropriated or wrongfully applied
• The property can be followed into specific, identifiable assets
• It would be inequitable to deny the claim

The beneficiary may trace into mixed funds using equitable presumptions that favour the innocent party. Courts apply the "lowest intermediate balance" rule to protect the beneficiary's claim against dissipation.

Defences to Breach of Fiduciary Duty

While fiduciary duties are stringent, they are not absolute. Courts recognize a limited number of defences grounded in consent, authorization, or fairness.

No Fiduciary Relationship

The most fundamental defence is to deny that any fiduciary relationship existed. Commercial parties often argue that their dealings were arm's-length and governed solely by contract. The burden lies with the plaintiff to prove the relationship's fiduciary character.

Courts consider whether there was genuine vulnerability or a mutual understanding of loyalty. Mere reliance on skill or expertise, without discretionary control, is insufficient to create a fiduciary relationship.

In Galambos v. Perez, 2009 SCC 48, the Court refused to find a fiduciary relationship between an employer and employee in the absence of vulnerability or an undertaking of loyalty. The decision emphasized that not every relationship involving trust creates fiduciary obligations.

Demonstrating that the information was public, that parties dealt at arm's length, or that no discretionary power existed can defeat a claim at an early stage.

Informed Consent

If the fiduciary made full disclosure and obtained informed consent to act in a potentially conflicting capacity, liability may be avoided. The consent must be truly informed: the beneficiary must understand the nature and implications of the conflict.

In Kelly v. Cooper, [1993] A.C. 205 (P.C.), real-estate agents representing competing clients were excused because all parties knew and accepted the potential conflicts in advance. The key is that consent must be:

• Given with full knowledge of all material facts
• Freely given, without coercion or undue influence
• Specific to the conflict or benefit in question
• Obtained before the transaction or conduct occurs

Vague or general consents are insufficient. The fiduciary bears the burden of proving that disclosure was complete and that the beneficiary truly understood what they were consenting to.

Statutory or Contractual Authorization

Some fiduciaries operate within statutory or contractual frameworks that permit limited self-interest if proper procedures are followed. Under s. 132 of the Business Corporations Act (Ontario), a director may engage in a contract with the corporation if they:

• Disclose the interest to the board
• Abstain from voting on the transaction
• Ensure the transaction is fair and reasonable to the corporation

Similarly, partnership agreements may allow certain outside ventures provided disclosure is made. Compliance with these provisions can shield the fiduciary from equitable liability, though courts will scrutinize whether statutory requirements were genuinely satisfied.

Laches and Limitation Periods

Equitable claims are subject to defences based on delay. The doctrine of laches bars relief where the plaintiff's unreasonable delay prejudices the defendant. Factors courts consider include:

• Length of the delay
• Prejudice to the defendant (loss of evidence, changed positions)
• Whether the plaintiff knew or should have known of the breach
• Whether the plaintiff acquiesced in the conduct

In Ontario, statutory limitation periods under the Limitations Act, 2002, S.O. 2002, c. 24, Sch. B, impose a two-year window from the date the breach was discovered or ought reasonably to have been discovered.

However, concealed wrongdoing may suspend this period until the beneficiary learns of the misconduct. Courts apply limitation periods carefully in fiduciary cases, recognizing that the relationship of trust may prevent discovery.

Where laches or limitation defences apply, the defendant may also seek a declaration of non-liability or damages for any improper injunction obtained by the plaintiff.

Absence of Loss or Profit

Although fiduciary duties are strict, equity will sometimes decline to grant remedies if the breach caused no detriment and yielded no benefit. The principle arises mainly in discretionary relief, where courts balance deterrence with proportionality.

For instance, technical non-disclosure that produced no gain or prejudice may not warrant disgorgement, though the fiduciary may still face costs consequences or declaratory relief. However, courts generally take a strict view: the absence of harm does not excuse disloyalty, and even nominal breaches may justify prophylactic remedies.

Business Judgment Rule

For corporate directors, the business judgment rule provides protection where decisions were made:

• In good faith
• With reasonable information
• In the honest belief that the decision was in the corporation's best interests

In Peoples Department Stores Inc. v. Wise, the Supreme Court held that directors are not liable for honest business decisions that turn out poorly. The rule protects entrepreneurial risk-taking and prevents courts from second-guessing decisions with the benefit of hindsight.

However, the rule does not protect directors who act in bad faith, with a conflict of interest, or who fail to inform themselves adequately. It applies only where the director's loyalty was undivided.

Other Defences

Additional defences may include:

• Independent development: The fiduciary can prove the opportunity or profit arose independently of the breach
• Public interest disclosure: Rarely, disclosure of wrongdoing by the beneficiary may justify breach
• Impossibility: Circumstances made compliance with fiduciary duties impossible
• Exoneration clause: A properly drafted contract clause (scrutinized carefully by courts) may limit liability

These defences are narrowly construed. Equity's prophylactic approach means that fiduciaries face a high burden to justify conduct that appears disloyal, even where technical defences exist.