The Notion of Trust as a Comprehensive Theory of Contract and Corporate Law: A New Approach to the Conception that the Corporation is a Nexus of Contract
Interdisciplinary Center (IDC) Herzliyah - Radzyner School of Law; Harvard University - Edmond J. Safra Center for Ethics
GWU Law School, Public Law Research Paper No. 53
The paper argues that the concept of trust is inevitably latent in every contractual relationship, and is best understood as a comprehensive theory and justification of contract law as both trust and contracts (more than any other legal action) are aiming toward the same universal goal of cooperation, risk-taking, and fulfillment of reasonable expectations. Contract law, per se and through its "good faith" doctrine, could then function as an expressive, coercive, and thus corrective legal tool, serving to symbolize, build, and internalize a culture of trust wherever it has failed to develop. Accordingly, while viewing the corporation as a nexus of contracts and as a voluntary organization based on cooperation and consent, trust can thus function as an axis that best fits corporate law, and also serves to justify it.
The paper is organized as follows. Part I, briefly considers the essential role of trust. Although trust is discussed in this paper as a crucial concept in the corporate arena, some interdisciplinary insights about the "axiomatic" necessity of trust are cited in order to substantiate its systematic and universal role. The major theoretical claim of the article is then been outlined, namely, that the concept of trust serves as a comprehensive theory of contract law. Since the claim is that contract law is justified and also serves as the main legal bridge toward substantiating the social norm of trust, reference is also been made to the recent literature discussing the interaction between social norms and the law. Part II, illustrates the doctrinal ways by which the Israeli supreme Court integrates between the concept of trust, contract law and corporate law and substantiate the social norm of trust in the corporate context. Israeli precedent resorts rather extensively to the "good faith" doctrine of contract law in corporate contractual settings, explicitly justifying this recourse by reference to the trust principle, and stressing the implicit obligation of the corporation and its organs to fulfill the reasonable expectations of all corporate actors. Part III, points out some preliminary thoughts concerning specific issues in corporate and securities law that seem best suited for a research project based on the trust theory of contract and corporate law outlined here, such as issues of comparative corporate law, the search for an efficient corporate governance structure, the scope of mandatory rules in corporate law, the justification and content of the disclosure philosophy in securities regulation and legal methods for the protection of mixed investors within a corporate law model of shareholders supremacy. Part IV concludes with a discussion about the potential role of the corporation in generating an environment of universal trust, which is crucially important in the global economy.
Number of Pages in PDF File: 42working papers series
Date posted: March 27, 2003
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