The Fiduciary Relationship: Its Economic Character and Legal Consequences

Despite the centrality of fiduciary relationships to Anglo-American law, the scope of fiduciary rights and duties has eluded definition. Using the analytical tools provided by law and economics, in particular the principal-agent model, this Article provides a more precise definition offiduciary rights and duties in Anglo-American law and the economic consequences that such rights and duties generate. The authors contend that because appropriation is both very profitable for the fiduciary and difficult to detect by the beneficiary, fiduciary law appropriately infers disloyalty from its appearance. Moreover, they argue that if the beneficiary establishes the appearance of disloyalty, it is proper for fiduciary law to require the fiduciary to bear the burden of proving her innocence and to increase the sanction for misappropriation to include punishment and not just compensation. In contrast, the authors contend that lack of care by the fiduciary is much less profitable than outright misappropriation. Thus, courts should not infer lack of care from its mere appearance. Moreover, the authors conclude that compensatory liability for harm resulting from lack of care usually suffices to deter such behavior, provided that the standard of care is set according to the Hand Rule for tort negligence.