The Tort Foundation of Duty of Care and Business Judgment

This Article corrects a misconception in corporation law--the belief that principles of tort law do not apply to the liability scheme of fiduciary duty. A board's duty of care implies exposure to liability, but the business judgment rule precludes it. Tort law finds fault; corporation law excuses it. The conventional wisdom says that the tort analogy fails. This dismissal of tort principles is wrong. Although shareholder derivative suits and ordinary tort cases properly yield systemically antipodal outcomes, they are bound by a common analytical framework. The principles of board liability are rooted in tort doctrines governing duty, customs, and pure economic loss. Properly applied, they produce a duty "to care" (vis-a-vis duty of care), based on good faith undertaking of care, but upon such undertaking no liability for negligently inflicted economic loss--the exact result achieved by the fiduciary duty of care and the business judgment rule. A sound tort analysis not only theorizes the enigmatic relationship between the duty of care and the business judgment rule, but it also explain Delaware's puzzling procedural-substantive divide. Fiduciary duty in corporation law rests on a tort foundation. Lastly, the thesis of this Article has a broader implication. The contractarian view of corporation law seeks to relegate the role of courts to passive custodians of the corporate contractual terms provided by the legislature and the corporation's constituents. However, this view is constrained by a tort framework wherein courts do and should play a robust, albeit reserved, role in regulating important aspects of corporate governance through continued common law process of doctrinal development of the idea of a wrong. INTRODUCTION The structure of corporation law is built on two grand rules limiting the liability of participants in the corporate enterprise. The first is the rule of limited liability of shareholders. (1) The second is the rule limiting the liability of directors under the business judgment rule. Jointly these rules promote enterprise by allowing shareholders and directors to take risks without fear of catastrophic personal liability. Without them there would be no corporation as we know it. While the theory of shareholder limited liability is well understood today, (2) we still lack a consensus on the theory of the relationship between the duty of care and the business judgment rule. (3) The academic literature has instead focused on instrumental policy grounds to justify the consensus view that the business judgment rule generally produces correct outcomes. This is a curious state of academic affairs given the importance of the issue. The theoretical deficit has not been for want of scholarship, which has been voluminous. (4) The duty of care and the business judgment rule are bound together in an enigma. (5) The mystery deepens when the tort analogy is applied. A director's duty of care is frequently analogized to the duty of care in tort law, which is the language of culpability seen in accident law. (6) "Yet, the one thing about the business judgment rule on which everyone agrees is that it insulates directors from liability for negligence." (7) Tort law finds liability; corporation law excuses it. The apparent failure of the tort analogy--the schizophrenic invocation and rejection of negligence--is jarring. Although most people agree that, generally speaking, board liability should be limited, this broad policy is intrinsically unhelpful in conceptualizing the liability boundary. The duty of care and the business judgment rule are not only important to corporation law inter se, but also corporation law influences the laws of other business organizations, (8) including the use of the business judgment rule. (9) Thus, the inquiry here has broad implication in the entire field of business organizations. This Article provides a theory of the duty of care and the business judgment rule through the prism of tort theory and principles. …