Few industries contain as many agency relationships as the horse industry and because of the relatively small size of the industry, conflicts of interest can and do arise on a regular basis. Fortunately, most can be avoided with a little knowledge about the laws governing fiduciary relationships.
Creating A Fiduciary Relationship
Fiduciary relationships can be established from many different situations and, unfortunately, no universal definition or standard exists for determining when a fiduciary relationship has been created. Most agree, however, that a fiduciary relationship arises when one party places his or her trust in another. One recent court decision defined a fiduciary relationship as one “founded on trust or confidence, reposed by one person in the integrity and fidelity of another.” Many situations in the horse industry can create such a relationship and while the fiduciary relationship can arise from a written document, the horse industry sees many come about by implication or oral agreement. Further, no compensation is required to create the fiduciary relationship.
In order to determine if a fiduciary relationship exists, you must ask yourself this question: Has one person placed money, assets, trust or confidence in the hands of another? If you answer yes, then a fiduciary relationship exists.
The following represents only a partial list of examples of fiduciary relationships in the horse industry:
- Trainer - Owner
- Agent - Buyer
- Agent - Seller
- Employer - Employee
- Sales Company - Consignor
- Director/Officer - Corporation (or other business entity)
- Partners (to other Partners)
- Syndicate Manager - Syndicate
- Boarding Barn - Horse Owner
The Fiduciary Duty
So you have determined that a fiduciary relationship exists. What does that mean? It means that the individual with whom the money, assets, trust or confidence has been placed (“agent”) owes a fiduciary duty to the party (“principal”) placing money, assets, trust or confidence. Again, however, no universal law exists that defines a fiduciary duty. As a general rule, most courts require the agent to exercise the highest degree of good faith and loyalty, and to act solely for the benefit of the principal in all matters connected with the relationship.
Typical Fiduciary Relationships and the Requirements
Agent—Buyer or Seller. An agent often serves as an intermediary in a horse sale. In many cases, the agent will represent only one of the parties, either the buyer or seller (for situations where the agent represents both the buyer and seller, read further). Typically, the agent will receive a commission in exchange for his or her expertise and time spent in assisting the buyer or seller. Keep in mind, however, that an agent does not need to receive a commission in order for the agent to owe a fiduciary duty to the buyer or seller.
One of the most important duties agents have in buying and selling is to disclose all that they know of the transaction to the party they represent. For example, Bill, a trainer, is trying to help his customer find a new English pleasure horse. Bill has a prospect picked out and has made arrangements for his customer to ride the horse. However, Bill knows that the prospective horse has behavioral problems in the ring and, according to the law, he is required to disclose this information to his customer, even if he believes he can eventually correct the problem. This duty might prove difficult when the agent stands to gain a large commission. Nevertheless, legally, the agent owes it to the buyer.
“One of the most important duties agents have in buying and selling is to disclose all that they know...”
A common breach of the fiduciary duty in horse sales arises when the agent takes a secret commission or markup on a horse. For example, if a buyer enlists the help of an agent to purchase a horse, the agent must be truthful with the buyer about commissions and add-ons. A recent federal court case examined a situation where a horse buyer’s agent, who was to receive a standard commission, sold several horses to the buyer for more than the sellers were asking. The agent pocketed the difference in addition to the standard commission. The federal court determined that it was a breach of his fiduciary duty, and awarded monetary damages to the buyers.
Agent—Buyer and Seller. When someone acts as an agent in a horse sale, they owe a duty to act solely for the benefit of the buyer or seller. It would follow then that an agent will find it impossible to represent both buyer and seller, as it would be impossible to act for the sole benefit of both parties. The only way for an agent to safely and legally represent both the buyer and seller in a horse sale transaction is to obtain consent for the dual representation from both parties.
For example, Vickie has trained horses for Susan for several years. When Susan decides to sell her horse, she asks Vickie to help her. Vickie has another customer, Jeff, whom she has been helping to find a new horse. Vickie must proceed very carefully if she decides to sell Susan’s horse to Jeff. Vickie should tell both Susan and Jeff that she is representing them both in this sale, and obtain their consent, or agreement, preferably in writing, to that arrangement. Most states require the buyer and seller be aware of, and consent to, the dual representation. Without such consent from both parties, either one can rescind the sale, even if no bad faith was exercised by the agent.
“A common breach of the fiduciary duty in horse sales arises when the agent takes a secret commission or markup on a horse without disclosing the information.”
Partners. Co-owners of property, including horses, are classified as partners and, as such, owe a fiduciary duty to each other. One such duty is to avoid secret profits from the sale of partnership property. The key to fulfilling fiduciary duties in partnership arrangements is clear and open disclosure, as well as proper treatment of partnership funds. In effect, each partner represents the partners in the partnership.
In one prominent case on the fiduciary duties of partners, one partner purchased the partnership’s horse at a public auction through a secret agent. Shortly after the purchase, the purchasing partner re-sold the horse for a significant profit. The court found in favor of the partnership (and against the purchasing partner), as every partner must share with the partnership any profits generated from partnership property.
Trainer—Owner. Some agents, such as trainers, serve as long-term agents for their fiduciaries. A trainer’s duty can cover a wide range of activities, including management of horses, accounting of expenses and income, advertising and business decisions (i.e., determining whether to buy and sell horses). Such relationships require trainers to act in good faith and for the sole benefit of their clients and, most importantly, to act within the authority given by the client.
Let’s say Hope has her former national champion gelding in training with Tom. Although Tom believes the horse is capable of winning more national championships, Hope wants to limit the shows the gelding is taken to and does not want him shown at Nationals any more. Even if Tom wants to continue campaigning this horse, he is under an obligation as Hope’s fiduciary to not do so. In a recent case, a trainer took a client’s horse to several shows (and incurred a great deal of expenses that were billed to the client) without the owner’s consent. The court ruled that the owner was not responsible for unauthorized show expenses.
Damages for Breaches of Fiduciary Duty
When an agent breaches the duty owed to his or her fiduciary or client under the law, the courts can grant the fiduciary various remedies, including:
- The ability to rescind the transaction.
- The ability to demand an accounting from the agent.
- Withholding compensation for the transaction from the agent.
- Taking profits from the transaction away from the trainer.
- Charging the agent for any damages that result from the breach of duty.
Because the fiduciary relationship arises in countless horse transactions, it should be taken seriously. As outlined above, many of the problems can be avoided with a little common sense and some knowledge of the rules of the game. If not handled correctly, as recent cases illustrate, what started out as an ordinary transaction could turn into an ugly and expensive court battle.
Mike Beethe practices in the areas of equine, general business and corporate law and is involved in the Arabian horse world. Tonna Farrar practices in the areas of equine and commercial litigation and shows quarter horses. Both show on the national level.
This article provides general coverage of its subject area. It is provided with the understanding that it does not intend to be viewed as rendering legal advice or service.