The Rise of Fiduciary Law

Tamar Frankel is Professor of Law Emerita Boston University School of Law. This post is based on a paper by Professor Frankel.

Introduction

Fiduciary rules appear in family law, surrogate decision-making, laws of agency, employment, pensions, remedies, banking, financial institutions, corporations, charities, not for profit organizations, medical services and international law. Fiduciary concepts guide areas of knowledge: economics, psychology; moral norms; and pluralism. Fiduciary law was recognized in Roman law and the British common law. It was embedded decades ago in religious Jewish, Christian, and Islamic laws. Internationally, fiduciary law appears in European, Chinese, Japanese and Indian laws.

What explains the expansion and predicts the future of fiduciary principles? Part One offers a short description of fiduciary relationships. Part Two describes the growth of expertise in living beings—from genetic to chosen cooperative specialization. Part Three notes the law’s encouragement of the relationships while discouraging its potential abuses. Part Four highlights criticisms of fiduciary law. Part Five speculates about the future of fiduciary law.

Part One: Fiduciary relationships and the conditions under which they arise.

Fiduciary relationships are crucial to individuals and societies’ few individuals are self-sufficient or can live alone. The fiduciary services respond to both individual humans and society’s needs: medical treatment addresses individual sicknesses as well as society-wide epidemics.

Fiduciaries benefit from their contributions. The recipients of fiduciary services cannot acquire the expertise necessary for all the services that all fiduciaries can, and offer. However, with these services come dependence and often an inability to fully evaluate and judge the quality and reliability of services. Thus, fiduciaries acquire power over the service-recipients. This power can be misused, intentionally or negligently.

The best fiduciary services are rendered voluntarily because forced services might be dangerous to recipients, who do not understand or evaluate these services. The purpose of fiduciary law is (i) to encourage the use of expert services, (ii) entice experts to offer their services and (iii) prevent the experts’ abuse of these unequal power-dependent relationships.

Part Two: The evolution of live group to specialization—from genetic to cooperative.

Most living beings cannot live alone. Their survival depends on the support of others. Theirs services and rewards, however, are genetically compulsory. Thus, the lion’s family members live by genetically-fixed duties of functions and rights. Being the physical protector of the group the male receives the “lion’s share.” The female needs less food being the hunter: small, agile, and ferocious. However, animals may habitually cooperate, e.g., in hunting for food. Cooperation may be a genetic tendency yet requires adjustment to others’ intentions and decision-power that is to cooperate in performing functions for a collective purpose.

Human societies are complex, as compared to the animals’ societies. Humans can develop new expertise which can contribute to other humans, their longevity, pleasure, and well-being. Working together, learning from past successes and failures, and noting changes and opportunities, humans develop knowledge, which is useful to their communities, and members of their species. However, humans’ service to others is not genetic and unlike animals human genes allow more freedom and power. Enticing rewards may drive to acquire and develop various new specialties.

The lion’s family which is driven by genetics is likely to change slowly, while humans can learn and acquire their expertise relatively faster by learning. Learning ability may be genetic but much of it can be taught and self-driven. Therefore, unlike most animals, humans may choose to offer or withhold their expertise from others, as well as accept or reject the expertise of others. The source of the expertise may be chosen. Therefore, humans may persuade their experts to provide them with the fruits of their expertise.

Because more expert services appear, no one human can master all available humans’ expertise. The governing gene has become subject to the person who owns it. But the sharing is less genetically inbred. Further, human expertise is more diverse. Therefore, experts in some areas are non-experts in other areas. Finally, as noted below, many, if not all, humans cooperate, thus creating expertise that none of each participant in the group can create alone.

Therefore, human societies develop mechanisms that enable the members to benefit from the expertise of others by negotiation. Human expertise is marketable rather than innate. Givers and receivers must agree or be forced by law to provide expertise. The rewards to each party may differ, and the exchange terms are flexible as compared to genetic ones. Therefore, human expertise is rarely offered free and is often induced by an exchange of a reward. Receiving expertise model has changed from automatic—genetically driven—to an exchange or a gift, depending on both parties’ bargain.

Part Three. The social impacts of fiduciary relations and the law’s response: encourage the relationships while discouraging the abuse they might pose.

Pre-exchange inequality continues after the relationship is established. The recipient of the expertise obtains its benefits, but not its control, and most importantly, not control over its abuse. The experts have the power of knowledge over the recipients. This power is often continuous and could be hidden.

Power can be used to benefit or harm. The recipients’ inability to check the experts’ power and services quality can result in suspicion and withdrawal from the expert. This result conflicts with society’s interests. After all, the financial, health, legal and education systems, to name a few, are built on offer and exchange of expertise.

In response, fiduciary law establishes duty of care ensuring expert services and duty of loyalty prohibiting conflicting interests which undermine trust. Fiduciary law can entice and protect those, who need expert services to rely and trust their experts. The lower the ability to check the experts’ expertise and honesty, the higher the fiduciary duty of experts and their punishment for abuse will be.

Part Four. What are the critics saying about fiduciary law?

Not everyone agreed with this extension of trustworthiness under fiduciary law. One commentator suggests that some breaches of contract are “voluntary but … efficient,” noting “that it is not the policy of the law to compel adherence to contracts, but only to require each party to choose between performing in accordance with the contract and compensating the other party for any injury resulting from a failure to perform.” Yet contracting of a non-expert with an expert can be similar to a contract by a blind person to a party that can see. Freedom to “walk away” by a needy (e.g. for a mortgage) is the freedom to starve. And mortgagors who can walk from their low quality property are just as unfair. Cheating the cheaters is not the solution. Blind who contract with a party that sees should not be defrauded. Contract is biding among equals and inequality in bargain or understanding or driven but fear is not a contract.

A subtle way of undermining fiduciary law is to make the law murky when the duty of care (quality service) and lately (conflicting interests) has been merged into duty to “act in the best interests” of the client or entrustor. This expression merges two different obligations and should be questioned.

Part Five. The future of fiduciary law

Will we need fiduciary law in the future? The impact of fiduciary law is likely to rise. Fiduciary law issues are expanding. Inequality of knowledge and expertise exist and is likely to continue, depending on the degree to which those who rely on the experts can trust the experts, and the degree to which society benefits from this degree of trusting by expanding and exchanging knowledge and helpful services to its members.

Trust is not necessarily emotional. Nor are trusting people foolishly blind. Trust might depend on experience, memory and the level of risk of trusting. If breach of trust brings suspicion if might lead to rejecting reliance on experts, or to additional rules of culture or of law, aimed at maintaining the offering of, and reliance on, the expertise of others.

Alternatively, breach of trust may result in retaliation by the injured people and the withdrawal from experts. That is likely to impoverish the mistrusting societies. Whether experts or the government can revive general trust in experts, may depend on the efforts by the government, the experts, and by their mistrusting, but needy, members of the society. The occasional stock market crashes that this country has experienced need no cited evidence.

Perhaps the success of trusted enterprises and societies, as compared to societies plagued by mistrust and suspicion, may drive to the rise of fiduciary law. Mistrusted people, who benefit from breach of trust, can succeed only in societies, which value the success, no matter how it is achieved, and regardless how short-term it is. Societies that impose a law, which measures and specifies the required level of trust in expert services, are likely to be less successful than societies that impose a law, which requires experts to create and follow a culture of expert’s identification with the people they serve. After all, the test of trustworthiness is not very complicated.

Fiduciary law should be based on one guiding test by a party that offers trusted fiduciary expert: “Would I, the trusted person, like to be treated the way I treat those who trust me? If I do not, then I should not treat others that way. That is, regardless of whether I can blame them or whether they are greedy, foolish, or cruel. Besides, others’ misbehavior does not justify misbehavior. The test: is: Am I abusing the trust put in me. It should be self—imposed, regardless of how others view my behavior, including the law and the government and the victims. I am my own judge and my own potential victim of my own activities.

Fiduciary law has significant influence on society’s culture. Both individuals, and human societies learn, can become wealthier, healthier and flourish by following fiduciary law principles. E.g., exchange is beneficial: to both exchanging parties. Yet, even exchanging products requires a measure of trust and some services are needed more than products. Yet, an exchange may involve unequal knowledge. Also, cooperation is beneficial and often crucial while mistrust destroys it.

Regardless of whether they are enforced by law, by social rules, or by cultural pressures, fiduciary rules are a condition to the long-term well-being of a human society. They induce cooperate-relationships, which require justly rewarded truthful and reliable expert services by humans to other humans. Freedom does not include what fiduciary law prohibits. A society will be wealthier if its fiduciaries self-enforce and follow fiduciary principles. The reverse is likely to be true as well. A society whose fiduciaries do not feel compelled to be trustworthy, will, in the long run, be the poorest.

The complete paper is available for download here.

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