Freedom of Contract, Fiduciary Duties, and Partnerships: The Bargain Principle and the Law of Agency

I. Introduction The topic of freedom of contract and waivers of or substantial inroads into fiduciary duties in the context of unincorporated business associations has enjoyed widespread attention lately.1 In part, this is the result of a bold sally made by the revised Uniform Partnership Act (1994) (RUPA),2 which directly influenced the Uniform Limited Liability Company Act (1995) (ULLCA).3 This Article will describe and briefly comment on the relevant provisions of RUPA. Its main focus, however, will be on the argument that the law of agency provides a compelling analogy for the use of the bargain principle in the context of defining fiduciary relationships among partners.4 This Article will conclude that, absent special circumstances, contracts addressing fiduciary duties should enjoy the same treatment as contracts on other matters. II. Fiduciary Duties A leading authority defines a fiduciary as "a person having a duty, created by his undertaking, to act primarily for the benefit of another in matters connected with his undertaking. "I The usual expectation, based on the nature of the relationship, is that a fiduciary will discharge this undertaking to act on behalf of6 another in a selfless manner and will indeed act "primarily" for the benefit of the other, which includes keeping the interests of the other foremost in mind (through loyalty and full disclosure) and acting with care.7 A fiduciary relationship is a relationship of trust, which necessarily involves vulnerability for the party reposing trust in another. One's guard is down. One is trusting another to take actions on one's behalf. Under such circumstances, to violate a trust is to violate grossly the expectations of the person reposing the trust. Because of this, the law creates a special status for fiduciaries, imposing duties of loyalty, care, and full disclosure upon them.8 One can call this the fiduciary principle. To recognize such duties and enforce a reasonable expectation of trust, requiring a person granted the trust of another to honor and respect that trust is both understandable and of utmost importance. The law would be abandoning one of its most basic functions if it were to overlook the importance of recognizing and enforcing relationships of trust.9 III. The Default Nature of Fiduciary Duties One feature of the law of fiduciary duties is that it is open-textured and uncertain.10 The very breadth of the fiduciary principle and the indeterminate number and kind of relationships that it touches lead to such a consequence. This results in considerable vagueness and ambiguity,11 creating an incentive under some circumstances to attempt to reduce the risks posed by vague and ambiguous standards by agreeing to redefine or even waive some or all fiduciary duties. Does the law allow this? The thesis of this Article is that the special status of fiduciary duties, as important as it is, should be of a default nature only.12 Fiduciary duties reflect the unspoken expectations of persons entering into a relationship of trust and thus exist in every such relationship when nothing specific is said about such duties. If, however, people choose to bargain expressly on this matter, their bargain should be respected, assuming that the parties observe the customary limits on contract bargaining. The very existence of an agreement on the nature and the extent of fiduciary duties tempers and qualifies the degree of trust one places in another. Expectations have changed. To ignore this is to raise fiduciary duties almost to the status of natural law,13 an approach inconsistent with the fundamental tenets of American law. IV. The Bargain Principle The bargain principle lies at the core of contract law. It states that courts will enforce a bargain according to its terms, with the object of putting the promisee in as good a position as if the bargain had been performed, assuming that the traditional defenses of fraud, undue influence, duress, or unconscionability do not exist to undermine the validity of the contract. …