What Is a Fiduciary Relationship and Avoiding the Trap of Creating One

What Is a Fiduciary Relationship and Avoiding the Trap of Creating One

What Is a Fiduciary Relationship and Avoiding the Trap of Creating One

Travelers Insurance Co.

Design professionals are highly regarded members of a design and construction project because of their level of education, experience and expertise. Architects and engineers and other design professionals are considered specialists in their area of practice, and rightly so. Many design professionals are required to pass rigorous exams and obtain special licensure in order to practice. Naturally, the owner/developer, contractor, subcontractors, end-users of a building or construction project, and even the general public all rely on the presumed knowledge of the design team.

When a client retains a design professional, the unique knowledge and experience that they bring to the project is a crucial factor in the selection process. It logically follows that a client may place a high level of trust in the design professional with the expectation that the professional will make design decisions that are in the best interest of the client and in the best interest of the overall project. Because of the specialized nature of a design professional’s services, the law has established some “ground rules” for the duties a design professional owes its client.

From a legal standpoint, the standard of care requires design professionals to exercise reasonable care in applying their skills, abilities and judgment while performing their services. Clients oftentimes assume then that the relationship established with a design professional is fiduciary in nature. This is problematic since the existence of a fiduciary relationship increases the risk a design professional faces as a result of the heightened duties and legal obligations a fiduciary is required to abide by.

A fiduciary duty is the highest duty imposed under the law. It is essentially a higher level of obligation, which in turn makes the duty easier to breach. Generally speaking, to establish a fiduciary relationship one must have a high degree of control over the property or subject matter of another such that the benefiting party has a high level of trust and confidence in the fiduciary to look out for the beneficiary’s best interest. Said another way, when there is asymmetry in the knowledge, power or prestige of the two parties such that one owes care and loyalty to the other for the other’s protection, a fiduciary relationship is typically created.

Does a design professional, by mere virtue of its status as an expert in its particular practice area, owe a fiduciary duty to its client?

In some jurisdictions, courts have agreed that design professionals are a fiduciary for their client. Courts will consider the type of project, type of services offered, sophistication of the parties involved, and what the contract states regarding the parties’ relationship. Generally speaking, courts are more apt to find that a fiduciary relationship exists if the facts indicate the following:

  • The design professional had specialized and superior knowledge, skills and expertise beyond that typically employed by similar professionals.
  • The design professional was acting as an agent for its client.
    • For example, if the design professional not only provided design services, but also mediated in disputes among the client and other members of the construction team on behalf of the client. It is important to note that in this capacity, the design professional is in the role of a true “mediator” and more than an initial arbiter of disputes.
    • Another example would be if the design professional was managing the contractor on behalf of the client and not purely administering the contract for construction
  • The parties’ contract indicated a clear intent to create a fiduciary relationship between the parties.
  • There is some conflict of interest in the role the design professional had on the project – for instance, if the design professional contracted with the owner but was also receiving payment from the project’s contractor without the owner’s knowledge or consent.
  • The facts indicate more than a mere business relationship, and instead support that the client placed its loyalty and trust in the design professional.
  • The design professional made misrepresentations to the client or engaged in fraudulent activities.
  • The design professional failed to advise the client on some material portion of the project, such as any issues with the design professional’s dealings with the contractor or failing to disclose potential risks of proceeding with the project.

What can a design professional do to avoid creating an unintended fiduciary relationship? This can be partially resolved by taking care to include proper language in your contract.

Most contracts describe the relationship among the parties in some form or fashion. Oftentimes this contract language is focused on ensuring the design professional is an independent contractor and not an employee of the client. By adding additional language that states that nothing in the agreement shall be interpreted to create a fiduciary relationship between the Design Professional and its Client, a design professional can better protect itself from an assertion that it somehow owed and subsequently breached a fiduciary obligation. In addition to contractual language, care should be taken to avoid the specific activities identified by courts as creating the potential for a fiduciary relationship such as conflicts of interest.

In summary, you can best avoid falling into the trap of establishing a fiduciary duty by protecting yourself with an appropriate contract executed with your client and by being aware of what activities can potentially lead to allegations of a fiduciary relationship has been established.

The Travelers Indemnity Company and its property casualty affiliates. One Tower Square, Hartford, CT 06183 This material is for informational purposes only. All statements herein are subject to the provisions, exclusions and conditions of the applicable policy. For an actual description of all coverages, terms and conditions, refer to the insurance policy. Coverages are subject to individual insureds meeting our underwriting qualifications and to state availability.

The views expressed in these materials are those of the author and do not necessarily reflect the views of The Travelers Companies, Inc. or any of its subsidiary insurance companies (“Travelers”). This material is for general informational purposes only and is not legal advice. It is not designed to be comprehensive and it may not apply to your particular facts and circumstances. Consult as needed with your own attorney or other professional adviser. This material does not amend, or otherwise affect, the provisions of any insurance policy issued by Travelers. It is not a representation that coverage does or does not exist for any particular claim or loss under any such policy. Coverage depends on the facts and circumstances involved in the claim or loss, all applicable policy provisions, and any applicable law. Availability of coverage referenced in this document can depend on underwriting qualifications and state regulations. Claims scenarios are based on actual claims, composites of actual claims, or hypothetical situations. Resolution amounts are approximations of both actual and anticipated losses and defense costs. Facts may have been changed to protect confidentiality.

© 2020 The Travelers Indemnity Company. All rights reserved. Travelers and the Travelers Umbrella logo are registered trademarks of The Travelers Indemnity Company in the U.S. and other countries.