The term ‘fiduciary duty’ is used regularly and in several different contexts. It is crucial for anyone who manages the affairs or interests of another at any point in time to understand what it means and what the limits are.
In short, fiduciary duty entails the obligation to look after the affairs of another person or an entity while taking proper care and acting in the best interests of that other person or entity in all dealings with their property, rights and interests. In South African law, there is no general duty to care for the interests of another person.
Fiduciary duty usually arises whenever an unequal relationship exists where one person is tasked to care for the affairs of another, e.g. the relationship between a trustee and the beneficiary of the trust, a director and a company and its shareholders, a member of the board of a retirement fund, a public functionary towards the members of the public served by that function, an executor in a deceased estate, and a financial planner and his/her clients.
Why fiduciary duty exists
The fiduciary duty of a director exists to ensure that the company produces sustainable profit for shareholders while complying with all legal requirements.
A board member of a retirement fund’s board of trustees is required by legislation to act independently, impartially and with due care, diligence and good faith to ensure that the best interests of members are always protected, while avoiding conflicts of interest.
A trustee of a trust is required to act with the care, diligence and skill that can reasonably be expected of someone who manages the affairs of another, and an executor of a deceased estate has been held in our case law to stand in a fiduciary relationship to the beneficiaries in respect of his administration of the estate.
Public functionaries like civil servants and politicians are also bound by legislation and case law to act in the best interests of the public they serve. So, for example, are municipal managers bound by the Municipal Finance Management Act, Act 56 of 2003, not to use the position or privileges or confidential information for personal gain or to improperly benefit another person. I shall leave it to readers to decide whether the municipal managers where they live comply with this requirement.
The unequal relationship
The main reason for the existence of the fiduciary duty is the unequal relationship. The fiduciary is subject to the duty because the beneficiary of the duty is unable to control the actions of the fiduciary, e.g. a minor beneficiary of a testamentary trust is not able to keep an eye on what the trustee of that trust is doing.
A further example is the relationship between financial planner and client. As the financial and tax legislation and environment, as well as financial products and solutions, become more and more complex, the superior knowledge of a properly qualified financial planner places the client at a disadvantage. This gives rise to the duty of the financial planner to care for and act in the best interests of the client. Legislation deals with this to an extent, but the standard of behaviour of a financial planner should be beyond the minimum requirement set by legislation.
Conflict of interest
Fiduciaries are, by the nature of what they do, always in danger of finding themselves in a conflict-of-interest situation. Conflicts of interest arise where behaviour in relation to or professional judgement about a primary interest or task is influenced unduly by a secondary interest.
Someone who is remunerated for acting in a fiduciary capacity, like an executor, company director, trustee, public functionary, or financial planner, will always have a secondary interest, i.e. the remuneration. That should not be a problem as that secondary interest is out in the open – everybody knows about its existence. It is also unavoidable. A secondary interest becomes a problem and causes a conflict of interest when it is not in the open and is not disclosed.
A municipal manager who is in an intimate relationship with a director or employee of a company tendering to deliver services to that municipality is immediately conflicted, must disclose the relationship to the council, and should refrain from taking any part in decisions about that tender.
Legislation prohibits the purchasing of an estate asset by the executor of that deceased estate without permission from the Master of the High Court, and a professional trustee of a trust should avoid supplying other goods and services to the trust at a cost to the trust.
A case to take note of
In a 2021 Western Cape High Court judgement, the court removed executors of a deceased estate due to a conflict of interest, because they were also trustees of a trust and lodged a claim in that capacity against the estate for a loan which they alleged was granted to the deceased by the trust. As there was also a claim from the widow under the Maintenance of Surviving Spouses Act, 27 of 1990, the court held that the executors were fatally conflicted as they had to decide between competing claims. The outcome of their decision had a direct impact on their own interests, and they had a secondary interest which interfered with their duty as executors.
Existing or potential conflicts of interest should be disclosed at all times to all interested parties. The golden rule should be: When in doubt, disclose.
