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Vanderbilt Law Review

D. Gordon Smith

First Page

1397

Abstract

This Article proposes a new theory to unify the law of fiduciary duty. The prevailing view holds that fiduciary law is atomistic, arising for varied reasons in established categories of cases (such as trustee-beneficiary and director-shareholder) and ad hoc in relation- ships where one person trusts another and becomes vulnerable to harm as a result. By contrast, the critical resource theory of fiduciary duty holds that every relationship properly designated as "fiduciary" conforms to the following pattern: One party (the "fiduciary') acts on behalf of another party (the "beneficiary') while exercising discretion with respect to a critical resource belonging to the beneficiary.

Relying on insights from the property rights theory of the firm, this critical resource theory holds that the primary purpose of the law of fiduciary duty is to combat opportunism within relationships that fit this pattern. The beneficiary initially protects against opportunism through self-help-denying or threatening to deny the fiduciary access to the critical resource that is an essential platform for opportunistic behavior in these settings. Fiduciary law supplements self-help by depriving the fiduciary of the benefits from opportunism.

By requiring the existence of a critical resource at the core of all fiduciary relationships, the critical resource theory assists courts in differentiating fiduciary relationships from relationships in which harm is caused merely by misplaced trust. The critical resource theory also justifies the varying intensity of fiduciary duties across fiduciary relationships: Where self-help is effective, fiduciary constraints are relatively weak, and where self-help is weak, fiduciary constraints are relatively intense.

Three additional implications of the critical resource theory of fiduciary duty are also developed: (1) The critical resource theory implies that fiduciary duty and the contractual obligation of good faith and fair dealing are close cousins, both imposing loyalty obligations of varying intensity to combat opportunism; (2) the critical resource theory affirms the capacity of parties in a fiduciary relationship to contract out of fiduciary duties; and (3) the critical resource theory explains why restitution is the usual remedy for a breach of fiduciary duty.

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