The Uniform Trust Code provides that the traditional fiduciary obligations operate as default rules that can be modified somewhat by the trust agreement.[1] This very approach suggests a contractarian approach to the law of trusts.[2] Certain rules, however, are non-modifiable, including the ability of any trust agreement to alter the “duty of a trustee to act in good faith and in accordance with the terms and purposes of the trust and the interests of the beneficiaries.”[3] Although this is framed in what may sound like contractarian vocabulary (“good faith”), it is in fact close to the classic formulation of the fiduciary duty of loyalty.[4] The Uniform Trust Code may be “permeated with (contractarian) default rule rhetoric”[5] but it came out solidly in the anti-contractarian camp by rejecting a pure “good faith” standard in the contract, Uniform Commercial Code, sense.[6]
[1] Unif. Trust Code § § 801-804; 105(b).
[2] “Of course, parties to a trust instrument may, to a considerable extent, tailor a trustee’s fiduciary duties to facilitate the settlor’s objectives. But it is a long leap from the proposition that fiduciary duties can be tailored to further individual objectives to the conclusion that fiduciary duties are merely gap-filling default rules, similar to those found in the Uniform Commercial Code’s (“U.C.C.”) Article Two.” Leslie, “Trusting Trustees” supra note 13, at 69. According to Professor Leslie, one consequence of embracing a contractarian view is that it may dislodge fiduciary duty from its moral/equitable moorings: “[L]abeling fiduciary duties ‘default rules’ threatens to strip fiduciary rules of their moral content. Fiduciary duties are most effective when they function both as legal rules and moral norms. A label that equates the duty of loyalty with, say, a U.C.C. provision allocating risk of loss undermines the duty’s normative force.” Id. at 70.
[3] Unif. Trust Code § 105(b)(2). The Reporter for the U.T.C. explains the purpose of providing default rules backstopped by non-modifiable provisions: “Most American trust law consists of rules subject to override by the terms of the trust. But, prior to the U.T.C., neither the Restatements, treatise writers, nor state legislatures had attempted to comprehensively list the principles of law not subject to override by the trust terms. The U.T.C. collects these principles in Section 105(b).” David M. English, “The New Mexico Uniform Trust Code,” 34 N.M. L. Rev. 1, 9-10 (2005).
[4] “Close to” but not exactly equal to the fiduciary duty of loyalty. “The duty of loyalty requires a trustee ‘to administer the trust solely in the interest of the beneficiary.’ This ‘sole interest’ rule is widely regarded as ‘the most fundamental’ rule of trust law.” John H. Langbein, “Questioning the Trust Law Duty of Loyalty: Sole or Best Interest?,” 114 Yale L.J. 929, 931 (2005)(a rule that Professor Langbein considers “unsound”)[hereinafter Langbein, “Questioning the Duty of Loyalty”]. See Unif. Trust Code § 802(a) for the classic definition of the duty of loyalty with the obligation to administer the trust “solely” in the interest of the beneficiary. The extent a trust instrument can modify or eliminate the “sole” benefit rule has broad-sweeping implications, including the impact on the no-further-inquiry approach to self dealing. See Melanie B. Leslie, “Common Law, Common Sense: Fiduciary Standards and Trustee Identity,” 27 Cardozo L. Rev. 2713 (2006).
[5] Leslie, “Trusting Trustees,” suprs note 13, at 71.
[6] Somewhat similarly, under Delaware corporate law, “good faith” is used as an element of the duty of loyalty: “[T]he term good faith has long been used as the key element in defining the state of mind that must motivate a loyal fiduciary. To wit, the duty of loyalty most fundamentally requires that a corporate fiduciary’s actions be undertaken in the good faith belief that they are in the best interests of the corporation and its stockholders … For these reasons, it has been traditional for the duty of loyalty to be articulated capaciously, in a manner that emphasizes not only the obligation of a loyal fiduciary to refrain from advantaging herself at the expense of the corporation but, just as importantly, to act affirmatively to further the corporation’s best interest. In this respect, our law has been clear that the duty of loyalty is implicated by all director actions because all such actions must be undertaken in good faith to advance the corporation’s best interests and because directors owe an affirmative obligation to put in a good faith effort to responsibly carry out their duties.” Strine, et al., “Loyalty’s Core Demand,” supra note 9, at 633-4 (2010)
