A Liberal Theory of Fiduciary Law

Abstract

Fiduciary law requires a coherent theory. When courts are asked to determine whether a relationship is fiduciary, they do not have an operative rule absent statute or contract. They work through the facts with an inchoate idea. This state of incomplete knowledge would not be so problematic if the boundary of the principle is clear and the law is static. By hook or crook, case law and the law generally seem to have gotten the results about right. But there is uncertainty at the margins, and the boundary is continuously tested in litigation and academic conceptualization. Potential elasticity of the concept will test and stress the fiduciary principle as new fact patterns and social problems reveal themselves in the future. A theorization of the fiduciary law is important.

This article advances a liberal theory of the fiduciary relationship. The theory states that a fiduciary relationship arises when: (1) power exists in a relationship; (2) power exists in a systemic and structural state, (3) systemic, structural power negates an initial strong presumption of equal footing, and (4) systemic, structural power is exerted against a critical interest. An important contribution of this theory is that it is independent of correlative notions of “trust, confidence, and vulnerability.” These factors are too elastic and undistinguishing, more rhetoric than causality. The loci of the liberal theory are particular conceptions of power and interest and such power over such interest. Once the real causal elements are unpacked, the theory explains the law as it exists today, fitting into its framework all types of cases in which the law and courts have recognized a fiduciary relationship. As a normative theory, it affirms that the law is about right even if courts have worked from intuitions, inchoate analysis, and rhetoric.

The liberal theory is called as such because it also solves a legitimacy problem. Fiduciary law imposes a mandatory code of stringent conduct on private relationships. A theory must harmonize the fiduciary principle with our political organization. The liberal theory, as a normative idea, is grounded in a foundation of our political economy. Fiduciary law should not conflict with the core values of a liberal, capitalist society with a strong market system. It should start from an initial strong presumption of liberty, agency, and private ordering, and permit intervention only when equal footing cannot be presumed because systemic, structural power is exerted against critical interests. The theory justifies a strong role of the law’s intervention and paternalism under limited conditions and argues that this role advances important values of a liberal, capitalist society.

Keywords: fiduciary law, fiduciary relationship, fiduciary duty

JEL Classification: K1, K12, K2, K222