Good Example Of Essay On Fiduciary Relationship And Agency
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Is This Ethical?
I Conflict of Interest
In engaging in business with a competitor of International Widget, John Anderson violated the company’s Code of Ethics provision on Conflict of Interest. According to this section, the employees of the company must act only for its benefit and avoid engaging in business with direct competitors of the company. Providing services to a direct competitor of the company is expressly prohibited by this portion of the Code. A conflict of interest issue occurs when an employee’s private interest infringes or runs counter to the interest of the company. One manifestation of such interference is when an employee allows his interest to take precedence over that of the employer’s (Connors 2009, p. 20). When John engaged in business with a competitor of the company, he did not only act in his own interest, he has also assisted a third party in acting against the interest of International Widget. He, therefore, committed an unethical act against International Widget because of his breach of the conflict of interest provision.
II Legal Avenues
Under common law, an employee owes the duty of loyalty to his employer. Thus, even without a restrictive contract between the employer and the employee, the latter is obliged to be loyal to the employer. A restrictive contract is one in which the employment contract specifically prohibits an employee from competing with the company, whether on his own or through another business entity. The duty of loyalty means that during the duration of a person’s employment, he or she owes a duty of loyalty to his or her employer by generally not acting against the interest of the employers. The Restatement (Third) of the Law on Employment Law specifically provides that “employees owe a duty of loyalty to their employer in matters related to employment relationship” (§8.01[a]). One of the ways in which that duty is breached by the employee is when he or she competes with the employer during the duration of the employment. The duty not to compete with the employer during the employment duration applies to all employees, managerial or non-managerial.
The courts have upheld the concept of the duty of loyalty in many decided cases. In Eaton Corp. v. Giere, 971 F.2d 136 (8th Cir. 1992), for example, a former employee of a company engaged in the manufacture of hydrostatic transmission devices, among others, was held to have breached that duty when he directly contacted one of the company’s biggest customers and offered his own hydrostatic transmission device model. Although he resigned from the company immediately thereafter, the Court held him in breach of the duty because he developed his model at the time he was still employed with the company. The Court held that as an employee he owed his employer “the duty of loyalty which prohibits him from soliciting the employer’s customers for himself, or from otherwise competing with his employer, while he was still employed.” Also, in Maryland Metals, Inc. v Metzner, 382 A.2d 564, the Court held that every employment contract implies a duty of loyalty on the part of the employee to his employer requiring that he acts only for the benefit of the latter in all aspects embraced by his employment. For this reason, an employee must prevent from undertaking acts that conflict with the interest of his employer. Taking into consideration these cases, International Widget can, therefore, bring an action against John Anderson on the grounds of breach of the duty of loyalty.
If John Anderson’s employment duty permits him to deal with third parties on behalf of the company, then he is in a fiduciary relationship with International Widgets. In that sense, he is also an agent of International Widget. As discussed below, a fiduciary relationship must be characterized by confidentiality. The Code of Ethics of the company provides, among others, confidentiality as a guaranteed business principle in the conduct of services to clients. This implies that the company, in the course of its dealing with customers, often comes to possess personal and confidential data. Since the company abides by this ethical principle, this obligation also extends to its employees. Thus, there must be sufficient grounds to claim that the relationship between the employees of International Widget and the company itself is one that is confidential and therefore, fiduciary. Additionally, dealing with third parties on behalf of International Widget also qualifies John as its agent.
A fiduciary relationship is one in which a party places complete trust and confidence in another to act on his behalf and in his interest in dealing with third parties. The relationship is illustrated by relationships between lawyer and client, guardian and ward and employee and employer in certain cases. The duty is a legal one and the party owing the duty is called a fiduciary and the person or entity to whom the duty is owed to is a principal. As a fiduciary, a person is bound to avoid conflicts of interest with respect to the interest of the principal (LII 2015). However, for a relationship of fiduciary to arise, the relationship must be defined by confidentiality or information possessed by the principal and permitted to be accessed by the employee. For example, in Physician Specialists in Anesthesia, PC v Wildmon, 521 S.E.2d 358 (Ga. Ct. App. 1999), the Court held that an action for breach of fiduciary duty must be based on that, but since a former employee who previously held a non-physician administrator post had no confidential relationship with the medical group, there was no basis for the action.
The concept of fiduciary is closely related to the concept of agency. According to the Restatement (Third) of Law on Agency, agency arises when a party authorizes another to act on his behalf or interest under his control and the other consents to do so (§1.01). The goal of agency is to allow the principal to conduct his business on a wider reach and scale through his agents. Fiduciary is a core principle in agency, because principals entrust their agents with trust and confidence to act on their behalf. As fiduciaries, agents are bound to act only on behalf of the interest of the principal and never against it. Under an employer-employee relationship, agency arises when an employee deals with third parties to pursue and advance the interest of the employer. This is illustrated in the case of sales persons who directly deal with customers on behalf of their employers. The effect of agency is that any sale, transaction or negotiation made by sales persons, and similarly situated employees, to third parties bind the principal.
An agent owes several duties to his or her principal. These duties include the following: general fiduciary principle; not to acquire material benefits from a third party through transactions conducted on behalf of the principal or while working as an agent for the principal; not to act as or on behalf of a party whose interests are adverse to the principal; to abstain from competing with the principal or work for or assist the principal’s competitor; not to use the principal’s property for personal or third party use; not to share confidential information of the principal with third parties or for personal benefit; in getting consent for acts that would otherwise breach an agent’s duty he or she should act in good faith, disclose all material facts, and generally deal with the principal fairly; and duties of performance, such as abiding by the terms of the contract of agency, to act with care, competence and diligence, to act only within the scope of lawful authority granted to him by the principal, to act reasonably so as not to besmirch the reputation of the principal, to disclose to the principal all relevant information, and to respect the property of the principal by not using it for personal purpose or co-mingle it with his own property and to render account of all money and property received on behalf of the principal (Restatement [Third] Agency, §8.01-8.12).
John Anderson’s actions, i.e. engaging in business with a direct competitor of International Widget, proved that he has breached many of his duties as an agent. By engaging in business with a competitor of his principal, he has violated the most sacred of all fiduciary duties, which is to act loyally to his principal. Aside from his disloyalty he is also liable for assisting a party whose interests are naturally adverse to International Widget and helping that party in competing with the latter. Moreover, it is likely that in dealing with the competitor, he divulges confidential information that the principal is bound to keep secret to protect clients. His actions can also be characterized as bad faith. He also failed to disclose material facts relevant to International Widget re his dealings with a company competitor.
Options Available to the Company Re John Anderson
There are many options open to Gloria and the company. First, they should terminate the services of John Anderson. Since John is most probably covered by at-will employment, he can be fired at any time for any reason. Any exceptions to the at-will employment termination (ILO 2000, p. 366), if applicable, can be justified by the breaches he committed against the company’s Code of Ethics, the common law concept of duty of loyalty and breach of fiduciary duties all of which could justify his termination. In addition, the company can file an action of tort against John for breach of common law loyalty or contract, if a contract of employment exists. The company can also bring an action against John for tort for breach of fiduciary duty. Under the Restatement (Second) of Torts, “one standing in a fiduciary relation with another is subject to liability to the harm resulting from a breach of duty imposed by the relation” (§874). In the case of Hill v. Bache Halsey Stuart Shields Inc., 790 F.2d 817 (10th Cir. 1986), the Court held that the principal may recover from a fiduciary in an action for breach of fiduciary duty by proving the following: the principal gave his trust and confidence to the fiduciary; the fiduciary breached his duty by his failure to deal with the principal in utmost good faith; that the principal incurred damages or losses, and; that such damages or losses were caused by the act of the fiduciary.
Connors, R. (2009). Warren Buffett on Business: Principles from the Sage of Omaha. John Wiley & Sons.
Eaton Corp. v. Giere, 971 F.2d 136 (8th Cir. 1992).
Hill v. Bache Halsey Stuart Shields Inc., 790 F.2d 817 (10th Cir. 1986).
ILO (2000). Termination of Employment Digest. International Labour Organization.
LII (2015). Fiduciary Duty. Legal Information Institute, Cornell University Law School. Retrieved from https://www.law.cornell.edu/wex/fiduciary_duty
Maryland Metals, Inc. v Metzner, 382 A.2d 564.
Miller, R. and Gaylord, J. (2010). Business Law Today, Standard Edition. Cengage Learning.
Restatement (Third) Agency.
Restatement (Third) Employment Law.
Restatement (Second) of Torts.
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