The fiduciary gap.

AuthorAlces, Kelli A.
  1. INTRODUCTION II. FIDUCIARY THEORY A. Fiduciary Relationships as Contracts 1. When a Fiduciary Relationship Exists 2. What Duties Are Owed B. Relationships Based in Trust 1. When a Fiduciary Relationship Exists 2. What Duties the Fiduciary Owes III. HARMONIZING THE THEORIES AND REVEALING THE FIDUCIARY GAP IV. THE FIDUCIARY GAP: THE SPACE BETWEEN DUTIES AND EXPECTATIONS A. High Versus Low Expectations B. The Limits of the Law--The Duty of Care C. The Limits of the Law--The Duty of Loyalty D. Modeling the Fiduciary Gap 1. Fiduciary Expectations and the Application of the Duty of Loyalty 2. Enforceable Expectations with High Expectations and No Explicit Fiduciary Duties a. Devotion/Duty of Loyalty b. Devotion/No Duty of Loyalty Because Trusted Party Lies c. Devotion or Duty of Loyalty/No Duty of Loyalty--No Fault V. WHY THE LAW SHOULD NOT FILL THE FIDUCIARY GAP A. Is There a Fiduciary Relationship? B. What Duties Apply? C. Well-Defined Duties as Contract Terms VI. NARROWING THE FIDUCIARY GAP A. Dialing Down the Rhetoric B. Improved Communication C. Reputation VII. CONCLUSION I. INTRODUCTION

    In our daily interactions with others, we hope that the other party will not take advantage of us or cheat us. In some settings, we may go so far as to hope that the other party will act with our best interests at heart, that she will do for us as we would have done for ourselves or for someone we love. In a world of free contracting, we should be able to pay someone enough to agree to put our interests above all others in the performance of some task on our behalf. We should at least be able to induce them to agree to eschew self-interest in performing what is promised.

    Indeed, we can make such fiduciary agreements, though the law will not enforce them to the full extent of their aspirational terms. The law will not enforce one party's agreement to be devoted to another's interests or to care for another to the same degree one would for a best friend, family member, or for one's self. Instead, fiduciary contracts are enforced to the extent practical to ensure that the fiduciary does not indulge conflicted interests. The gap between the aspirational views many of the parties hold of fiduciary relationships and the realities of enforcement adds a layer of uncertainty and incompleteness to fiduciary contracts that neither the law nor scholarship have considered. This Article reveals this unappreciated gap in fiduciary agreements, and, in doing so, discovers an unenforceable contract term that both parties may want to agree to, but neither would actually want the law to enforce.

    All contracts are, to some degree, incomplete. (1) An agreement between two parties can neither comprehensively define all of the ways the parties are to behave in performing their obligations under the contract, nor provide for every possible circumstance the parties will encounter during their interaction. This kind of contractual incompleteness has been thoroughly studied and theories about how to fill gaps in incomplete contracts are well-developed. (2) Fiduciary contracts are considered the most incomplete contracts in that regard. (3) They provide the least specificity about how the fiduciary is to perform her contracted obligations because the vulnerable party, the beneficiary, usually lacks the expertise to specify terms and further lacks the time, expertise, or both, necessary to carefully monitor the fiduciary. Beneficiaries defer to the fiduciary's discretion in the performance of the task. (4)

    Courts rely on "gap fillers" to determine unspecified obligations in contractual relationships. (5) Gap fillers are standards that guide courts in figuring out what outcome is appropriate given the conditions of contracting and the parties' expectations. (6) One common method of gap filling is considering a "hypothetical bargain" between the parties, that is, determining what the parties would have agreed had they negotiated about the unanticipated circumstance at the outset. (7) Some scholars argue that fiduciary duties are gap fillers in some kinds of incomplete contracts. (8) Courts considering an unanticipated event in a fiduciary relationship begin with the premise that the fiduciary agreed not to self-deal in the performance of its obligations. That duty of loyalty to the other party guides courts in deciding what the parties would have agreed about how the fiduciary should behave in unanticipated circumstances.

    While the gap-filling view of fiduciary duties is helpful, it is not universally accepted. The two dominant perspectives in the debate about the nature of fiduciary relationships and duties disagree about whether fiduciary relationships are contracts at all and how courts should respond to problems within the relationship. Contractarians (9) argue that fiduciary relationships are contracts and fiduciary duties are the chosen gap fillers courts use to respond to unanticipated problems. (10) Anti-contractarians, on the one hand, argue that contract law does not explain the nature of many fiduciary relationships, which they believe are based on trust, not the result of bargaining. (11) Anti-contractarians see fiduciary relationships as involving a moral dimension that supersedes any sort of agreement the parties may have reached even in commercial contexts. (12) Contractarians, on the other hand, focus on what the parties could reasonably expect from each other given the price attached to their explicit agreement. (13)

    Anti-contractarians find support in the moral language that judges use to describe fiduciary relationships. Judge Cardozo's highly moralistic language in Meinhard v. Salmon has been regarded as the seminal statement of the fiduciary standard. (14) Cardozo opined that courts should hold fiduciaries to a higher standard than others in the marketplace and that fiduciaries must act with a "punctilio of an honor most sensitive" and must renounce "thought of self." (15) This rhetoric influences judges, lawyers, and parties to fiduciary relationships and it creates high expectations for those relationships.

    Those high expectations may be misplaced, however. Because those moral standards are amorphous and impossible to enforce, fiduciary law has evolved toward greater precision over time. (16) For the most common situations involving fiduciary duties, the law has distilled the fiduciary relationship's basic requirements to more specific rules. (17) Contractarians find support for their interpretation in this more precise definition of fiduciary duties, notwithstanding the references to imprecise moral standards that run through the case law. Although courts may offer abundant dicta about how fiduciaries should behave in an ideal world, the standard of liability fails to reach the heights of the rhetoric. More specific rules benefit fiduciary relationships by making enforcement easier and more predictable, but they do so at a cost. In particular, the greater specification compromises the benefits beneficiaries (and perhaps even society) would enjoy from a standard that would facilitate absolute trust between the parties.

    Accepting the hypothetical bargain as a useful framework for understanding fiduciary enforcement, this Article adds a new dimension to the theoretical and descriptive analysis of both fiduciary law and incomplete contracting. It contributes to the incomplete contracting literature by revealing that fiduciary duties are incomplete gap fillers, that is, there is a gap in the understanding of fiduciary obligation that prevents fiduciary duties from completing fiduciary contracts. This "fiduciary gap" is the gap between the standard of fiduciary behavior the parties may agree to or justifiably expect and the relatively limited duties of loyalty and care courts will enforce. The gap prevents fiduciary law from resolving all unanticipated disputes in a way that is likely to conform to what the parties would have agreed at the outset of the relationship. Courts will not enforce a fiduciary's promise to be devoted to the beneficiary's interests. The fiduciary gap, then, is the rare unenforceable contract term that both parties may agree to or expect or want to define their interaction, but that will not be enforced. Moreover, both parties (and society generally) are better off for that term's unenforceability.

    This Article contributes to the fiduciary literature by bridging the divide between the contractarian and the anti-contractarian views. It acknowledges that the aspirational view of fiduciary relationships is one many fiduciary parties may share and that view may drive the justifiable expectations fiduciary parties have about how their agreement will be enforced. Those expectations can fit into the hypothetical bargain theory if we think of them as among the expectations courts consider in determining what terms to impose on parties to fill the gaps in contracts. However important those expectations are to the parties and to their understanding of their relationship, they cannot and should not be legally enforced in fiduciary litigation. The law cannot and should not fill the fiduciary gap. This Article imports the aspirational view of fiduciary duties from the anti-contractarian camp into the hypothetical bargain theory advanced by contractarians and finds that fiduciary duties are incomplete as gap fillers and should remain that way.

    Part II of this Article introduces the opposing sides of the fiduciary debate--the contractarian and anti-contractarian views of fiduciary obligation. Part III harmonizes the opposing arguments and shows how they can coalesce to yield a theory of fiduciary obligation that leads to a more accurate and complete understanding than we currently have. The contractarian and anti-contractarian views are compatible if we acknowledge that parties may have greater expectations than courts can enforce. The hypothetical bargain can expand to include such higher moral expectations while...

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