The Misguided Transformation of Loyalty into Contract

Abstract:     
The law of unincorporated associations is engaged in a misguided march in transforming the duty of loyalty into a contractarian construct. This Article argues that these developments reflect doctrinal confusion, outworn economics, and weak policy.

The Article begins by tracing the evolution of the duty of loyalty in the law of unincorporated associations. It begins with a discussion of the struggle between contractarianism and fiduciary duty in the uniform laws promulgated by the National Conference of Commissioners on Uniform State Laws (NCCUSL). It then shifts gears to the more squarely contractarian, and likely highly influential, Delaware statutes. The current state of the doctrine suggests that precious little is left of the duty of loyalty.

The article then shifts to showing that the transformation is troublesome along three dimensions. First, the move conflates fiduciary with contractual duties, notably weak and nebulous notions of good faith. Second, it deploys outworn economic concepts reminiscent of the neoclassical Chicago School. The economic justifications for contractarianism are based on facile assumptions applied in a static manner; they do not represent real humans interacting in real institutions over time. Third, the move from loyalty to contract brings with it a host of public policy problems: it tries to toss out a well developed legal tradition, downplays the role of trust and morality, and ignores the role positive law can play in shaping norms. In the end, the rise of contractarianism reflects a step backward to nineteenth-century legal formalism and presents the risk that its faulty precepts may spread further into corporate law.

Number of Pages in PDF File: 27

Keywords: fiduciary duty, duty of loyalty, contract, unincorporated associations

JEL Classification: K20, L50

Accepted Paper Series