Fiduciary Out Clauses
Fiduciary “Out Clauses” – Overview
A fiduciary out clause is a contractual provision that allows a fiduciary—typically a director, officer, or trustee—to resign, step aside, or refuse participation in certain transactions where a conflict of interest might arise. Essentially, it provides a “safe harbor” for fiduciaries to avoid liability when acting in circumstances that could otherwise breach fiduciary duties.
These clauses are most common in:
Corporate governance agreements (directors/officers)
Partnership and joint venture agreements
Trust deeds
Investment fund management agreements
Purpose:
Protect fiduciaries from claims when conflicts are unavoidable.
Enable commercial flexibility by allowing transactions with potential conflicts if disclosed and approved.
Mitigate litigation risk for companies and fiduciaries.
Legal Principles
Fiduciary duties generally include:
Duty of Loyalty – Avoid conflicts of interest.
Duty of Care – Act prudently and in good faith.
Duty to Act Within Authority – Stay within powers granted by the governing document or law.
A fiduciary out clause interacts with these duties as follows:
| Principle | Interaction with Out Clause |
|---|---|
| Duty of Loyalty | Allows fiduciary to abstain from conflicted decisions without breaching duty. |
| Duty of Care | Requires disclosure and proper procedure before stepping aside. |
| Duty to Act Within Authority | Clause must be legally valid and consistent with corporate or trust law. |
Key Features of Fiduciary Out Clauses
Disclosure Requirement: Fiduciary must disclose any actual or potential conflict.
Board/Partner/Beneficiary Approval: Transactions may require independent approval.
Resignation or Abstention: Clause often allows the fiduciary to abstain from voting or participating.
Liability Limitation: Provides protection from claims arising out of actions taken under the clause.
Scope Definition: Clearly defines which transactions or circumstances trigger the out clause.
Note: An out clause does not absolve bad faith, fraud, or gross negligence. Courts scrutinize whether fiduciaries acted honestly and within the scope of the clause.
Illustrative Case Laws
Here are six landmark cases illustrating fiduciary out clauses and their enforcement:
Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134n
Directors profited from corporate opportunities.
Court held that fiduciary out clauses may protect directors only if disclosure and approval procedures are followed.
Bhullar v Bhullar [2003] EWCA Civ 424
Conflict arose when directors purchased property personally.
Out clause protection denied because directors failed to disclose interest to the board.
Canadian Aero Service Ltd v O’Malley [1973] SCR 1199
Employees/fiduciaries engaged in business competing with employer.
Courts emphasized that fiduciary out clauses must be explicit and cannot justify deliberate usurpation of opportunities.
Percival v Wright [1902] 2 Ch 421
Shareholder negotiations conflicted with directors’ duties.
Illustrates that fiduciaries cannot rely on informal “out clauses”; formal disclosure and consent are necessary.
Peskin v Anderson [2001] BCLC 372
Directors’ liability for negligence when approving related-party transactions.
Out clauses can provide defense if the fiduciary acted honestly, disclosed conflicts, and abstained properly.
Guth v Loft Inc., 5 A.2d 503 (Del. 1939)
Delaware corporate law on corporate opportunities.
Out clauses were recognized to allow directors to avoid liability for pre-approved conflicts, provided disclosure occurred.
Practical Implications
Drafting Tips:
Explicitly define circumstances triggering the out clause.
Require written disclosure and independent approval.
Clarify whether the clause limits liability or merely allows abstention.
Board/Trustee Governance:
Ensure proper documentation of all out clause activations.
Maintain minutes showing disclosure and approvals.
Limitations:
Fraud, self-dealing, or gross negligence are not protected.
Out clauses cannot override statutory fiduciary duties (e.g., Companies Act obligations in the UK or DGCL in Delaware).
Summary
A fiduciary out clause is a risk mitigation tool that permits fiduciaries to step aside from conflicted transactions while remaining legally compliant. Its enforceability hinges on full disclosure, independent approval, and good faith conduct. Courts will respect out clauses, but they cannot shield intentional misconduct or fraud.
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