Duty of Care
Reviewed by Aug 27, 2020| Updated on
What is Meant by Duty of Care?
Duty of care applies to a fiduciary responsibility held by the directors of the company that demands them to live up to a certain level of treatment. This obligation, which is both ethical and legal, requires them to make a good faith and reasonably wise decisions. To fulfil their fiduciary duty, these people are expected to exercise the utmost caution in making business decisions.
Duty of Care Explained
Duty of care is also an implied obligation that comes with being a director of a corporation. Still, it can also be part of a written agreement. This duty allows them to take financially, ethically, and legally sound decisions. Such decisions will be taken after considering all the details available. Managers must act in a reasonable manner which promotes the best interests of the company.
Consequently, the duty of care can be summarised as the obligation that directors be present, informed, and engaged. They should use good and unbiased judgment, consult with experts for advice and trustworthy knowledge, and check minutes of the meeting.
They have to keep abreast of legal changes, good governance and best practices impacting their companies. Directors will also plan topics, such as budget concerns, executive compensation, legal enforcement, and strategic direction, and be prepared to address and evaluate them.
The other big fiduciary concern is the responsibility of allegiance, in addition to the duty of treatment. This responsibility allows company executives to place the company's fiduciary interests above their own, and to report any conflicts of interest.
The duty of care extends even to other positions within the financial sector. Accountants and auditors are responsible for their clients' best interests and are bound by them. Manufacturers are kept accountable for the goods they manufacture and sell for the health of the customers.
Implications of Negligence in the Court of Law
Failure to uphold the duty of care can result in shareholders or clients taking legal action for negligence. In the case of company directors, courts usually do not decide on whether a corporate decision has been a sound one or not.
It is known as the law of business decision, meaning courts will usually adhere to corporate executives' judgment. Alternatively, they concentrate on determining if the directors:
- Fulfil their duty of care by behaving in a fairly responsible way while deciding the corporation's best interests.
- Do proper due diligence, also known as an ordinary treatment.
- Perform in good faith
- Expend no corporate assets or capital by overpaying for products, land, or labour.
Given that the courts appear to defer to executive discretion, arguing a duty of care violation can be extremely difficult.