Resolving Conflicts of Duty in Fiduciary Relationships

Abstract

Fiduciaries who represent multiple principals often encounter conflicts of duty, torn between promoting the interests of one principal and those of another. Courts have not done a good job of articulating principles for resolving these conflicts. They resort to inconsistent approaches and seek to elide underlying tensions in the cases. Scholars have addressed sources of fiduciary duties, and whether they constitute default contractual terms, but they have paid little attention to resolving conflicts when they arise. This Article seeks to fill the gap, presenting an account to explain and justify the cases. Fiduciaries are subject to common law duties of loyalty and care, and many difficult cases present a conflict between enforcing the duty of loyalty owed to one principal and the duty of care owed to another. The key to understanding how courts resolve such conflicts lies in the different nature of these duties. The duty of loyalty is a negative duty to avoid harm; it is a duty of omission. The duty of care is a positive duty to promote the interests of the principal, a duty to act. To explore the nature of the duties, the Article draws on Kant's discussion of perfect and imperfect duties. It explains that duties of care, like Kant's imperfect duties, can never be fully satisfied, but by enforcing the prohibitions imposed by the duty of loyalty, courts ensure that when the fiduciary acts, she acts consistently with the duty of care as well. The Article applies these principles to three types of fiduciaries: attorneys, financial firms, and company directors, explaining why courts treat a breach of the duty of care more leniently than a breach of the duty of loyalty, much like the common law has treated omissions more leniently than acts. The Article concludes that the theory presented not only justifies how courts resolve difficult cases, it also explains the behavior of individual fiduciaries, financial firms, and regulators.

Keywords: fiduciary duty, conflicts of duty, acts and omissions, Kant

JEL Classification: K13, K22