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  • Print publication year: 2020
  • Online publication date: March 2020

14 - Fiduciary Law and the Preservation of Trust in Business Relationships

from Part IV - Trust and Fiduciary Law in Context

Summary

This chapter offers a new explanation for mandatory fiduciary protections in certain business relationships—the preservation of trust that might otherwise be eroded through the bargaining process. Any contract a hypothetical entrepreneur and an investor might enter would inevitably be incomplete and give rise to potential opportunistic behavior. While the parties could draft a more detailed agreement prohibiting various forms of opportunism, the very act of bargaining over these protections could undermine whatever trust existed between the parties at the outset of their relationship. By contrast, a prohibition limiting opportunism in state-imposed fiduciary obligations removes the invocation of distrust by either party to the agreement. Fiduciary protections, however, do not provide a perfect solution in all business relationships. Although fiduciary duties can usefully constrain opportunism and preserve trust in vertical business relationships, such as in a simple principal-agent arrangement, other situations involve complexity that pose challenges for fiduciary law. We illustrate this observation with examples of various horizontal conflicts, or diverging interests, in the venture capital-backed startup context. To the extent that contract and fiduciary law are each incomplete, a residual domain for trust and other mechanisms for risk reduction or self help remains.