Fiduciary Law and the Preservation of Trust in Business Relationships

Fiduciaries and Trust: Ethics, Politics, Economics, and Law (Matthew Harding and Paul Miller, eds., Cambridge University Press 2020)

U of Penn, Inst for Law & Econ Research Paper No. 20-52

Vanderbilt Law Research Paper No. 20-54

22 Pages Posted: 12 Oct 2020 Last revised: 21 Oct 2020

See all articles by Brian J. Broughman

Brian J. Broughman

Vanderbilt University Law School

Elizabeth Pollman

University of Pennsylvania Carey Law School; Co-Director, University of Pennsylvania Carey Law School - Institute for Law and Economics; European Corporate Governance Institute

D. Gordon Smith

Brigham Young University - J. Reuben Clark Law School

Date Written: August 4, 2020

Abstract

This chapter explores the role of mandatory fiduciary obligations in preserving trust between business parties. Because contracts are inevitably incomplete, after investment there is always a risk of opportunism. While the parties could try to draft a more detailed agreement prohibiting various forms of opportunism, the very act of haggling over such protections may signal distrust, eliciting costly reactions (defensive measures/hedging/lack of intrinsic motivation) in the counterparty. In the absence of fiduciary protections, a vulnerable party may decide to forgo important protections against opportunism, not because such protections are suboptimal or hard to specify ex ante but because bargaining for them would signal distrust. By contrast, state-imposed fiduciary obligations remove the invocation of distrust by either party to the agreement. We further observe that while fiduciary protections can help prevent distrust among a small number of contracting parties, fiduciary protections may prove inadequate in some settings, especially in addressing horizontal conflicts between beneficiaries. The chapter concludes by observing that the limits of contract and fiduciary law leave a residual zone of vulnerability in which trust and other mechanisms of risk reduction play a significant role.

Keywords: Fiduciary Obligation, Trust, Corporate Law, Distrust

Suggested Citation

Broughman, Brian J. and Pollman, Elizabeth and Smith, D. Gordon, Fiduciary Law and the Preservation of Trust in Business Relationships (August 4, 2020). Fiduciaries and Trust: Ethics, Politics, Economics, and Law (Matthew Harding and Paul Miller, eds., Cambridge University Press 2020) , U of Penn, Inst for Law & Econ Research Paper No. 20-52, Vanderbilt Law Research Paper No. 20-54, Available at SSRN: https://ssrn.com/abstract=3662037 or http://dx.doi.org/10.2139/ssrn.3662037

Brian J. Broughman (Contact Author)

Vanderbilt University Law School ( email )

131 21st Avenue South
Nashville, TN 37203-1181
United States

Elizabeth Pollman

University of Pennsylvania Carey Law School; Co-Director, University of Pennsylvania Carey Law School - Institute for Law and Economics; European Corporate Governance Institute ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States

D. Gordon Smith

Brigham Young University - J. Reuben Clark Law School ( email )

422 JRCB
Provo, UT 84602
United States
801.422.3233 (Phone)
801.422.0390 (Fax)

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