The Fiduciary Gap

Contractarians, who believe that fiduciary relationships are a species of contract, and anti-contractarians, who believe those relationships are sui generis, have long debated what fiduciary duties are and how they should be applied. Contractarians frame the fiduciary duty as one of loyalty that prohibits a fiduciary from engaging in conflicts of interest without the beneficiary’s permission. They see fiduciary duties as gap fillers that help courts determine the parties’ responsibilities if a situation arises that was not contemplated by the parties’ original agreement. Anti-contractarians, on the other hand, view fiduciary duties as a means to protect vulnerable parties from their more sophisticated counterparts. They see the duty as more expansive, requiring the fiduciary to zealously pursue the best interests of the beneficiary and to protect the beneficiary from bad outcomes whenever possible. This aspirational view informs the moral rhetoric used by courts in addressing fiduciary problems and much of the lay understanding of what fiduciary duties entail.

The aspirational view is not enforced by courts and is, in fact, unenforceable. Nevertheless, many beneficiaries believe their fiduciaries owe them something like the devotion described by the aspirational view. That highlights a flaw in the contractarian approach. Contractarians believe that courts should deal with unforeseen circumstances by determining what the parties – a fiduciary and a beneficiary – would have agreed to. But in many cases those parties would have agreed to a provision calling for devotion, and such a provision cannot be enforced. Both camps –contractarions and anti-contractarians – fail to realize that even if the parties are willing to agree to aspirational fiduciary terms, they are better off if those terms are not enforced.

In The Fiduciary Gap, I argue that the devotion expected by the parties to a fiduciary relationship is the rare contract term that both parties may be willing to agree to, but cannot and should not be enforced by courts. The fact that the parties may be willing to agree to the term means that doing so would be mutually beneficial, but such a term is far too imprecise to enforce with liability. This space between the parties’ expectations and even desires for their agreement and what courts can do to fill the gaps in that agreement is the fiduciary gap the article identifies. Because of this gap, fiduciary duties are incomplete gap fillers, at best. Courts cannot necessarily arrive at the outcome the parties might have agreed to because it is not possible to define or enforce true devotion between parties that have negotiated at arm’s length.

While it might seem that courts could use equitable powers to find in favor of disappointed beneficiaries and arrive at something approximating a devotion term, that would harm both parties. First, it would almost certainly make fiduciary services difficult to find and prohibitively expensive if fiduciaries thought a court would decide what their behavior should have looked like according to aspirational notions of selfless devotion. Such a standard has no limit. A standard of care centered around devotion, requiring tireless effort and utmost competence, would be impossible for most people to satisfy.

For the fiduciaries’ part, they are able to distinguish themselves by the level of devotion they provide more easily if that is not the legal standard. A fiduciary could work to develop a reputation for doing more than is legally required, which would benefit a fiduciary’s business more than a higher legal standard would. Allowing intrinsic motivations to guide the performance of open-ended contracts often leads to better outcomes for the party with less market power; in this case, the beneficiary.

Both parties to a fiduciary relationship are better off if they acknowledge the fiduciary gap and its contours. Understanding the fiduciary gap gives beneficiaries more realistic expectations for their fiduciaries. It will help to prevent beneficiaries from putting too much trust in their fiduciaries. Appreciating the fiduciary gap gives fiduciaries a space to fill when building their reputations. As such, reputation is a better mechanism for measuring and rewarding devotion than anything courts might require.

This post comes to us from Professor Kelli Alces Williams at Florida State University College of Law. It is based on her paper, “The Fiduciary Gap,” which is available here.