Academic journal article Washington and Lee Law Review

Foreword to Freedom of Contract and Fiduciary Duty: Organizing the Internal Relations of the Unicorporated Firm

Academic journal article Washington and Lee Law Review

Foreword to Freedom of Contract and Fiduciary Duty: Organizing the Internal Relations of the Unicorporated Firm

Article excerpt

This symposium begins with five extraordinary papers on fiduciary duties in unincorporated business associations. It is my pleasure to offer a glimpse of what they contain, and I do so in order of their presentation last November at the Washington and Lee University School of Law in Lexington, Virginia.

Professor Claire Moore Dickerson

Professor Dickerson explains that the standard of performance applicable in the business community has been a norm that lies on a continuum stretching from contract-law good faith to trust-law fiduciary duty. Precise location on the spectrum has been determined by the actor's conflict of interest and dominance. As the power of a transactor becomes greater relative to the other party, and especially as the transactor's conflict of interest increases, the standard of performance for the transactor moves along the continuum toward fiduciary duty. A corollary is that parties should not normally be able to opt out of a higher level of good faith identified by the levels of conflict and dominance. At a minimum, the level of good faith for opting out should be determined by conflict and dominance, and because that can be determined with relevance only at the time of the subject transaction, opting out should be - as it is now for classic fiduciary duty - only on an ad hoc basis and not at formation.

Norm entrepreneurs, positing a level playing field among co-owners of a business, have led an astonishingly successful effort to modify norms applicable to unincorporated businesses. They have directed their efforts toward changing the good faith norm so that the actor's dominance and conflict no longer determine the standard's place on the good faith spectrum. The Revised Uniform Partnership Act (RUPA) and limited liability company (LLC) statutes attempt to move the standard of performance away from the fiduciary duty end of the spectrum and toward the good faith end of the spectrum. The lowering of the standard mandatory minimum of performance adopts by statute the lawyer-economists' contractarian perspective that evolved in the world of incorporated businesses. Success has also been reflected in the adoption of waiver provisions in RUPA and in LLC statutes, some of which track RUPA, some of which provide for waivers in other terms, and some of which make no mention of fiduciary duties.

Where the lawyer-economists see a level playing field, Professor Dickerson sees uneven, hilly terrain. The standard of performance should reflect that terrain, as should the waiver rules. It is appropriate for the law to influence the standard of performance because good faith performance is a nonrenewable resource, and its destruction harms all participants in the business area. The standard of performance on the good faith spectrum is a reservoir of good will and trust that is the commons of the business area. Norm defectors use a supply of good will and trust when they act below the good faith standard. A person who violates a norm - in even the most isolated contract between two willing participants -- adversely affects the community at large. People who act in less than good faith pollute the commons by affecting the good faith norm. They increase the agency costs and the transaction costs generally for the entire community. The law can increase the incentive to cooperate by penalizing defection, thus increasing the relative benefit of cooperation. A law that supports the good faith norm thus reduces agency costs because it reduces the need for monitoring.

As norms come close to a point of equilibrium, or tipping point, between change and not, a tiny incremental effort will have a dramatic effect. Game theory suggests that in a multiparty environment, a sufficiently determined and sufficiently large group of objectors can successfully invade a territory. Once defection begins, others may have incentive to defect as well, in an accelerating pattern. This is what has been occurring with respect to the good faith norm in unincorporated business relationships. …

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