Neither under the Uniform Trust Code, or at common law, is good faith used in the contract law sense. Although “good faith” forms an important role under the Uniform Trust Code, it is not a defined term and one would expect the courts to continue to use the extensive body of the common law of trusts for an understanding of its sense and definition.[1] Whether in the context of a non-modifiable baseline rule under Section 105(b)(3) or when defining the limits of absolute discretion under Section 814(a), good faith under the Uniform Trust Code should be understood in its traditional trust sense. It approximates the common law of trusts and, by wedding good faith to the settlor’s intent and the interests of the beneficiaries, it dances back to a general fiduciary duty that cannot be modified by the terms of the agreement: “[A] settlor may not so negate the responsibilities of the trustee that the trustee would no longer be acting in the fiduciary capacity.”[2]
[1] Professor Langbein (one of the Uniform Trust Code drafters), however, suggests that one look to the body of law in contract discussing the meaning of “good faith.” John H. Langbein, “Mandatory Rules in the Law of Trusts,” 98 Nw. U. L. Rev. 1105, at note 96 (2004) (directing one to a treatise by Professor Robert S. Summers for “a succinct account of the nuances developed in contract law … emphasizing the core notion of honest dealing.”) [hereinafter Langbein, “Mandatory Rules”]. Professor Summers’ view of “good faith” as it has developed in contract law will be discussed below.
[2] Unif. Trust Code §105, cmt. Within limits, of course, section 105 permits modification of the basic fiduciary duties, including the duty of loyalty. Sections 105(b)(3) and 814(a) provide absolute backstops to the ability to modify such duties by prohibiting the elimination of the obligation to act in good faith and in accordance with the terms and purposes of the trust and in the interests of its beneficiaries. The “missing” piece of this litany, if you will, is the obligation to act in the “sole” interest of the beneficiaries. This opens the door to permitting trustees to engage in acts of self-interest as long as the activity is in the best interest of the trust beneficiaries. Langbein, “Questioning the Duty of Loyalty,” suprs note 17; Melanie B. Leslie, “In Defense of the No Further Inquiry Rule: A Response to Professor Langbein,” 47 Wm. & Mary L. Rev. 541 (2005). The benefit-the-beneficiaries rule is mandatory. Langbein, “Mandatory Rules,” supra note 45, at 1112(“A default rule is one that the settler can abridge, but only to the extent the settler’s term is ‘for the benefit of [the] beneficiaries.’ The requirement that there be benefit to the beneficiaries sets the outer limits on the settlor’s power to abridge the default law.”). Coupled with the modern portfolio theory of trust investing, the benefit-the-beneficiary rule may cause difficulties when a settlor wishes to have a trust hold a particular asset instead of a broad array of assets and asset classes. Jeffrey A. Cooper, “Empty Promises: Settlor’s Intent, the Uniform Trust Code, and the Future of Trust Investment Law,” 88 B. U. L. Rev. 1165, 1168 (2008) (“Under Professor Langbein’s formulation of the benefit-the-beneficiaries rule, the ‘benefit’ of a trust provision is determined by reference to objective notions of prudence and efficiency rather than the settlor’s subjective intent. Carried to its logical extreme, this emerging reading of the benefit-the beneficiary rule (the ’emerging rule’) could redefine the area of trust investment management. Trust documents frequently include specific investment management directives, such as a mandate that the trustee retain a certain portfolio investment or family business. Whereas trust law historically has honored such restrictions, the emerging rule seemingly would enforce only those which maximize economic value for the trust beneficiaries. If the settlor’s chosen restrictions fail this objective test of economic benefit, they simply can be cast aside.”); Benjamin H. Pruett, “Tales from the Dark Side: Drafting Issues from the Fiduciary’s Perspective,” 35 ACTEC 331, 352 (2009) (“These provisions (the benefit-the-beneficiary rules) leave open the possibility that any provision of a trust that deviates from normal fiduciary practice might be found to be ‘out of bounds’ on the grounds that such a provision violates the rule that the trust provisions must be ‘in the interest of’ and ‘for the benefit of’ the beneficiaries.”)
