Commercial Transactions and Fiduciary Relationships

Generally, in commercial transactions, there is no duty on contracting parties to disclose all material facts which will likely influence the other party in coming to a decision regarding the transaction so that the parties to the contract may be alert to undisclosed facts concerning the transaction.  The Latin maxim for this principle in contract of sale is “caveat emptor” meaning “let the buyer beware.” Some transactions in this category include contract for sale of goods, credit-sale, bailment, conditional sale, etc.

However, there are exceptions to the caveat emptor rule. This is in respect of certain commercial transactions where one of the parties possesses most of the material facts regarding that transaction. In such situations, the law imposes on him the duty to disclose those facts to the other party with utmost good faith and the failure to do this would constitute constructive fraud. The maxim for this is “uberrima fides”.  In these transactions, the duty of disclosure is imposed not because of the relationship between the parties but because of the nature of the contract. Contracts where this duty exists include:

  • Contract of insurance
  • Contract to purchase shares in companies
  • Contract for sale of land
  • Contracts in which fiduciary relationships exist.

Fiduciary relationships exist where a person places complete confidence in another with regards to a particular transaction or general affairs. The relationship is not necessarily formally or legally established as in a declaration of trust but can be one of moral or personal responsibility due to the superior knowledge of the fiduciary.

In all cases of fiduciary relationships, the law assumes that one party is superior to the other party and the trust of that other person is reposed in him and therefore, the superior party is in the position to take advantage of him.  The cases of London General Omnibus company v. Holloway (1912) 2 KB 72 and Tate v. Williamson (1886) LR 2 CH. APP. 55 are relevant in this regard.

While caveat emptor exists generally in commercial transactions, some of the transactions that require utmost good faith as a result of fiduciary relationship include contracts between partners (partnership), principal and agent (agency), owner and hirer (hire-purchase), sureties, solicitor and client, etc.

We shall now examine fiduciary relationship in three main commercial transactions; namely: contract for sale of goods; hire-purchase, and agency.

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Fiduciary Relationship and Contract for Sale of Goods

Section 1(1) of the sale of Goods Act 1893 defines a contract for sale of goods as a “contract whereby the seller transfers or agrees to transfer the property in goods to a buyer for a money consideration, called the price.”

A sale of goods contract is quite different from other commercial transactions that involve exchange of good for consideration. In a sale of goods transaction, the buyer is expected to be alert and specific as regards his choice of goods because the seller is not under any obligation to disclose all the material facts regarding goods to be sold and this non-disclosure of certain facts may not constitute misrepresentation owing to the fact that there is need to abide by the principle of caveat emptor when dealing with things referred to as “goods” in section 62(1) of the Sale of Goods Act 1893. The relationship between a buyer and a seller in a contract of sale of goods is not a fiduciary one because there is no requirement for utmost good faith.

Also, the Sale of Goods Act 1893 is drawn to govern the buying and selling transaction; thereby, protecting both buyer and seller and thus controlling the likelihood of exploitation of one party of the contract for sale by the other party.

Fiduciary Relationship and Hire-Purchase Transactions

A hire-purchase transaction is a financing arrangement that enables somebody to take possession of an expensive item while making regular installments on it, with legal ownership transferred only after it is paid for eventually.

The relationship between a hirer and an owner is a fiduciary one which requires the owner who is the superior party to disclose all the material facts relating to the transaction to the hirer who is the weaker party (section 6 of the Hire-Purchase Act, Cap. H4, Laws of the Federation of Nigeria 2004). This arises from the fact that the agreement between both parties is drawn by the owner subject to the acceptance and satisfaction of the hirer (section 8 of the Hire-Purchase Act, Cap. H4, Laws of the Federation of Nigeria 2004). This therefore puts the hirer in a position where he may be exploited or fraudulently misrepresented by the owner. For this reason, the law requires disclosure of all material facts by the owner to the hirer, else, when liability arises as a result of non-disclosure of a material fact, the owner will be held liable.

Therefore, the Hire Purchase Act governs the excesses of the owner by affixing necessary terms and conditions (implied terms) by virtue of Section 4 of the Hire-Purchase Act, Cap. H4, Laws of the Federation of Nigeria 2004 to the hire-purchase agreement between the parties when they have not been included and striking out ostentatious and extreme terms (prohibited provisions) by virtue of section 3 Hire-Purchase Act, Cap. H4, Laws of the Federation of Nigeria 2004 which will be detrimental to the hirer. A case in point is Bentworth Finance Company v. De Bank Transport Ltd. (1986) ALR Comm. 52.

In so far as the hirer continues to pay his installments and follows conditions stipulated in the hire-purchase agreement, any liability which arises as a result of an undisclosed fact by the owner will be borne by the owner.

Fiduciary Relationship and Agency

Agency is a legal relationship where one party (the principal) expressly or impliedly authorizes another party (the agent) to occupy his legal position in transacting with a third party. Where any remuneration or liability is incurred by the services of the agent, they will be considered that of the principal.

The relationship between these two parties is a fiduciary relationship which is based on trust and confidence which the parties must have for each other. It follows that the agent must obey the lawful instructions of the principal, exercise reasonable care, diligence and skill, give full account to the principal, act in person when transacting with third parties and must act in good faith owing to the fiduciary nature of their relationship. Since the agent will be taking the legal position of the principal, when there is a breach of the agency agreement, the principal may terminate his agreement, sue the agent for damages, rescind the contract with third party and cause the agent to be prosecuted for stealing. Some of the various ways by which the agent may be in breach include:

  • Taking bribe detrimental to the principal’s transaction
  • Making secret profits on transactions
  • Placing himself in conflicting positions with the principal
  • Negligently disobeying lawful instructions from the principal.

The principal also has duties which he owes the agent. This includes the duty to remunerate the agent, indemnify the agent, and disclose all the material facts relating to the transaction so as to save the agent from risk which he may not foresee at the time of entering into the contract. When the principal is in breach of his duties, the agent has some rights. They include:

  1. Right of lien. This is the right the agent has to withhold the property of the principal where the principal fails to give him his remuneration or acknowledge his commission.
  2. Sue the principal to bear liability where he (agent) was acting on his behalf and incurred liability but the principal is refusing to indemnify him.

It can therefore be seen that while some transactions are of fiduciary nature, others are not, but rather, based on the principle of caveat emptor. Where a fiduciary relationship exists, there is complete trust and confidence. In such situations, utmost good faith is not only a legal requirement, but also a personal requirement and liabilities which arise as a result of non-disclosure of material facts to the weaker party will be borne by the superior party in the fiduciary relationship.


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19 comments on “Commercial Transactions and Fiduciary Relationships
  1. Job Faith says:

    Good work Prisca. But I’ll have to disagree with you on a fiduciary relationship existing in a hire purchase agree. Why? This is because a fiduciary relationship can not possibly exist between a hirer and an owner (@ least not all the time). Despite the fact that there is a weaker and stronger party (hirer and owner), I believe there is more than that to a fiduciary relationship. The only relationship that exist is a legal/contractual one. But however, it’s just my opinion. Cheers!!!

  2. bossdemuyi says:

    I also disagree with the fact that fiduciary relationship exist in a hire-purchase agreement based on the maxim caveat emptor although parties to a hire-purchase agreement are suppose to act in good faith based on the maxim uberrima fides.

    • @osazee says:

      Nice work! Have a question though: will an agent be in breach if he mistakenly or negligently leads a third party to carry out another transaction on behalf of himself or principal, and there is a damage as a result. Who will be held liable: Principal, Agent or third party?

      • Yanyangbini Eric Pere says:

        Osazee u know that,should anything be done through somebody is done by himself.Therefore any act or wrong done by the agent through the third party is done by the Principal who carries the cross.However such act or transaction must be a legal one that is not encumbered in any way.It must fall within the frame work of the Agency.Also the agent must have committed the third party on the premise that the principal was disclosed to the third party.The principal would carry any liability if he was properly briefed by the agent before any challenge crops up resulting from the third parties transaction or act .At the time of that transaction,the principal must have capacity in terms of age,must be sane etc.In same vain,anything short of the above,the liability becomes that of the agent who has been on the frolic of his own.

  3. @queenedward says:

    Nice work! Yeah, I also agree with Faith, reason being that the possibility of a fiduciary relationship existing between the hirer and an owner is a thin line; one is the superior the other an inferior. It exists more where there is a master and servant relationship. This is my opinion, anyway. Good work you got here!

  4. ada says:

    I agree with your definition of fiduciary relationship being one based on uberrimae fidei (utmost good faith). But on the issue of contract of sale of goods not being one of fiduciary relationship I do not agree. From my understanding of the topic, it occurs in a situation were one of the parties takes a superior position in a transactional relationship based on certain facts or advantage known to him which by virture of the trust and confidence the other party has in him, he should disclose. Therefore, my point is that a fiduciary relationship can exist in a contract for the sale of goods where the seller being aware of certain defaults as concerns the goods but fails to disclose same, he has breached the trust and confidence the buyer had in him to his own advantage. Eg:where a seller presents a second-hand good to a buyer as brand new good. Igwe Philipa

  5. Dorathy says:

    Good job Prisca but I have a little problem on ‘fiduciary relationship and hire purchase Transaction”. I agree with your definition of fiduciary relationship where one party is superior and has more knowledge about thetransaction in question. But I think in a hire purchase agreement the issue of Fiduciary relationship is not really necessary or important because the hirer(buyer) should be aware of the vehicle or product being purchased. In my understanding I feel there should be little or no fiduciary relationship in a Hire Purchase Agreement but the parties should rely on the ‘caveat emptor’ rule.thanks…. Nwanise Dorathy

  6. Comfort Sekibo says:

    Good write up Prisca. I think I align myself with what Prisca has said about a fiduciary relationship existing in a hire-purchase transaction because the hire purchase agreement is being drawn up by the owner but with the approval of the hirer. The owner could alter some facts so the hirer could go into the agreement. The law expects the owner to disclose all relevant facts and that is why the HPA provides for the prohibited and the implied provisions.

  7. olivia arusuraire says:

    In my opinion , I think there is a bit of fiduciary relationship between the hirer and owner in a hirer purchase agreement because it is well known that the hire purchase Act was created mainly to protect the hirer being that the hirer is more at risk to take for instance where the owner misrepresents facts of the hp agreement to him.but on the other hand I think that the fiduciary relationship in a HP agreemnt has very minimal significance since the owner is not bound to disclose all material facts but only relevant facts concerning the hp agreement.

  8. edwinw says:

    the agent is the agent of the principal and not the third party. thus, the legal implication that guides agency relationship will apply in this instance. which is that the agent negotiates contracts between third parties and the principal, and in so doing the principal is bound by all the liabilities and benefits that accures from such contract. also an agents capacity to act as an agent is based on the grounds that he is acting on behalf of someone else who in this instance is the principal, and not himself. therefore, the negligence of the agent within the cause of his duties, is bound on the principal to borne based on the common law principle of vicarious liability.

  9. thelma ubaike says:

    Nice work Prisca. I agree with the fact that fiduciary relationship exist in a hire-purchase transaction reason being that persons who are in superior position (owner) to their subordinate (hirer) should discharge the trust and confidence their subordinate repose to them. I.e., since the hirer has intended to go into the hire-purchase transaction the law requires the owner to exercise utmost good faith to the other party.

  10. Jerry says:

    @Osazee, Prisca noted that the agent must obey lawful instructions of the principal, exercise reasonable care, diligence and skill… Thus, according to Barr. Nwazi, “where an agent commits crime, his principal will not bear/suffer any liability because there is no vicarious liability in criminal law, rather everyone carry his own cross”. Prisca also noted that when there is a breach of the agency agreement like in case of negligence, the principal may terminate his agreement, sue the agent for damages or hold him responsible for his act… But if an agent makes an honest mistake, then in the view of Barr. Okobor, the master can only be responsible for acts done by the servant when the servant is doing what the master has authority, and in the way and manner approved by the master.

  11. Jerry says:

    @Prisca, following your observation that the agreement between both parties is drawn by the owner subject to the acceptance and satisfaction of the hirer, i would like to ask, who is the offeror and the offeree in this contract, when and how is acceptance deemed?

    • @osazee says:

      @Jerr¥, I think the hirer is the offeror because it is the hirer who goes to the owner with the offer to hire a vehicle for instance, for a specified period of time.

  12. Semirah OKWILAGUE says:

    @osazee my answer to your question is, the agent will be held liable for the damage if he was acting outside the scope of work

  13. NWAKA ADAORA says:

    I think that there is no fiduciary relationship existing in a HP agreement,reason being that an owner is not bound too disclose all the facts of the subject an owner can tell the hirer that he is sure the engine of the car is sound but it is not compulsory to tell him that he bought the car from Togo. A hirer can not therefore decide to terminate the agreement on the grounds that he wasn’t told the car was bought from Togo. Therefore an owner can withold certain informations as long as it is not to the detriment of the contract. We can compare this with other suitations where fiduciary relationship exsits like Doctor and Patient, Lawyer and client etc and see the difference. It’s just my opinion. Interesting article all the same.

  14. thelma ubaike says:

    @jerry…I think the hirer is the offeror and the offeree is the owner because the hirer goes to the owner FO̶̷̩̥̊͡Я the offer of the transaction while the owner has the right to accept or reject the offer.

  15. Sandra Bonn says:

    Nice article..but I don’t think a fiduciary r/ship exist in a hire purchase agreement because drs a stronger and also a weaker party to the agreement and the superior who is the owner is not bound to disclose all the facts

  16. Kelechi says:

    In my own view, I don’t think a fiduciary relationship exist in hire-purchase agreement because the owner is not bound to disclose all the facts and also I think the hirer is expected to know the specfic goods regarding his choice to purchase the goods.

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