Fiduciary Relationship and Contract of Sale

This article explains whether or not there is a fiduciary relationship between the parties in a contract of sale: the seller and the buyer. We will see that in contract of sale of goods, goods are the subject matter, and in any fiduciary relationship trust (good faith, confidence, and condor) is paramount between the persons. The word ‘fiduciary’ has its roots in the Latin word “fiducia” which means “confidence”. A fiduciary relationship is thus a relationship of confidence. The person in whom confidence is reposed within that relationship is referred to as the fiduciary. In contract of sale, the seller is a person who sales or agree to sale goods to the buyer. Conversely, the buyer is a person who buys or agrees to buy goods: section 1(1) of the Sales of Goods Act 1893. Their coming together is anchored on their interest to part or acquire the possession and property in the goods, the subject matter of the transaction.

[Click on each button below to reveal more text!]

Fiduciary Relationships

Fiduciary relationship is one in which one person is under a duty to act for the benefit of another person on all matters within the scope of their relationship; one who owes to another the duties of good faith, trust, confidence and condor.

A fiduciary relationship encompasses the idea of faith and confidence and is generally established when the confidence given by one person is actually accepted by the other person. Mere respect for another individual’s judgment or general trust in his or her character is ordinarily insufficient for the creation of a fiduciary relationship. The duties of a fiduciary include loyalty and reasonable care of the assets in his custody. All of the fiduciary’s actions are performed for the advantage of the beneficiary.

A fiduciary relationship extends to every possible case in which one side places confidence in the other and such confidence is accepted. This causes dependence by the one individual and influence by the other. Blood relation alone does not automatically bring about a fiduciary relationship. A fiduciary relationship does not necessarily arise between parents and children or brothers and sisters.

A fiduciary relationship may be created by express agreement of the parties, or it may be imposed by law where established by the conduct of the parties. Typical fiduciary relationships exist between agents and principals, attorneys and clients, executors or administrators and legatees or heirs, trustees and beneficiaries, directors or officers and stockholders, receivers or trustees in bankruptcy and creditors, guardians and wards, and confidential advisors and those advised.

From the above, we can deduce to the two key features in fiduciary relationship; namely:

          i.            Existence of trust (good faith, confidence, and condor)

        ii.            Acting for the benefit of another

If a fiduciary abuses his or her position to obtain an advantage or benefit at the expense of the confiding party, the latter will be able to seek relief from court to prevent such advantage accruing to the fiduciary.

Contract of Sale

The relationship between the seller and buyer in any contract of sale of goods has no elements or features of fiduciary relationship. It is merely a contractual relationship. Some may think that for parties to enter into any contract of sale there must be trust, from which they have the notion that such relationship if fiduciary. Mere respect for another individual’s judgment or general trust in his or her character is ordinarily insufficient for the creation of a fiduciary relationship. Though there might be a fiduciary relationship between the seller and the buyer personally in any respect but not in the contractual relationship of sale. That is why when the fiduciary relationship between the parties is being imported into the contract of sale and a fiduciary abuses his or her position to obtain an advantage or benefit at the expense of the confiding party, the latter will be able to seek relief from court to prevent such advantage accruing to the fiduciary.

Thus, in Tete v Williamson (1886) L.R. 2Ch. App. 55, an Oxford undergraduate, finding himself in financial difficulties, sought the advice of his tutor. The tutor advised him to sell some land belonging to him, and offered to buy it himself. He (the tutor) failed to disclose to the student that the land contained some minerals, which would have considerably enhanced its market value, and so bought it for half the price it would otherwise fetched. After the infant had drunk himself to death at the age of 24, his executors brought an action, to challenge the validity of the agreement. It was held that the tutor was guilty of constructive fraud, and that the agreement was voidable at the instance of the infant’s executors.

In all cases of fiduciary relationship, the law assumes that the one person is in superior position to the other and the trust and confidence of that other is reposed in him. The party in the superior position is, therefore, in a position to take advantage of the other party in a contract between the two. The court will declare the contract voidable and, therefore, susceptible to rescission by the other party if the terms are regarded by the court as being unfair to him.

The Differences

There are slight differences between a contractual relationships where fiduciary relationship exist and that of contract of sale simpliciter.

Fiduciary relationship usually arises in one of the four situations:

  1. When one person places trust in the faithful integrity of another, who as a result gains superiority or influence over the first.
  2. When one person assumes control and responsibility over another
  3. When one person has a duty to act for or give advice to another on matters falling within the scope of the relationship, or
  4. When there is a specific relationship that has traditionally been recognized as involving fiduciary duties.

 Typical fiduciary relationships exist between

  • agents and principals,
  • attorneys and clients,
  • executors or administrators and legatees or heirs,
  • trustees and beneficiaries,
  • corporate directors or officers and stockholders,
  • receivers or trustees in bankruptcy and creditors,
  • guardians and wards, and
  • confidential advisors and those advised.

We can see from the above examples that the relationship usually arises in one of the four situations mentioned above.

On the other hand, contract of sale simpliciter does not usually arise in one of the four situations mentioned, because every party in the contract of sale is acting for his own benefit and not for the other party.

Example

Where A told B to go down to Lagos to clear his goods at the seaport and bring them back to Benin. B (agent) is acting under the authority of A (principal). A did that because of the trust (good faith, confidence, and condor) he had in B, which is the same reason why B accepts to do such work for A.

An agent is one who is authorized to act for or in place of another; a representative. This shows that the agent’s activities are for the benefit of his principal.

But where you walked down to a shop where you do not know the shopkeeper and bought a book; you, being the buyer and the shopkeeper, the seller. What happened between the parties was mere contract. This is so because before, at the time, and after, the contract was entered into there was no fiduciary relationship between them.

On the other hand, persons having fiduciary relationship are precluded from entering into the contract of sale. For example, a principal can sell his car to his agent. But if one abuses his or her position to obtain an advantage or benefit at the expense of the confiding party, the latter will be able to seek relief from court to prevent such advantage accruing to the fiduciary. Tete v Williamson (supra)

Conclusion

There is no fiduciary relationship in a contract of sale simpliciter. Often, the seller does not usually know the buyer, and after the transaction they part ways. Mere respect for another individual’s judgment or general trust in his or her character is ordinarily insufficient for the creation of a fiduciary relationship.

Posted in Law Tagged with: ,

Leave a Reply