3. The Stripping Out of Fiduciary Duty
The 1997 Revised Partnership Act and the 2001 Revised Limited Partnership Act generally adopt a contractarian basis for the partnership relationship. Under a contractarian model, the partnership acts are seen as providing “gap fillers” – default rules if the partnership agreement does not address a particular point. This is, of course, quite different than a relationship rooted in fiduciary duty as illustrated by the Labovitz case.
The 1997 Act was an effort to tilt in favor of a contractarian, “libertarian, free market oriented policy” instead of the paternalistic fiduciary duty model:
Questions about whether these rules (the UPA provisions) are default rules or mandatory rules do not arise simply because textual analysis raises the inevitable comparisons. They arise because different policy conclusions could be reached by different people. A libertarian, free-market oriented policy maker is likely to suggest that all the rules governing the relations among the partners should be merely default rules – that partners ought to be held to whatever bargain the negotiate. A more parentalistic policy maker, on the other hand, would be more inclined to support mandatory fiduciary duties to protect minority partners. For example, a parentalistic might resist the conclusion that a minority partner should be permitted to contract away his access to partnership books and records.
The Draft Committee wanted to make clear that all but a very few of the rules governing the relations among partners are merely default rules. It was only in rare situations that the Committee felt that the rules should be mandatory. Mandatory rules governing the relations among partners are essentially parentalistic, and the Committee felt that, with only very limited exception, adults in nonconsumer transactions are old enough and wise enough to be held to their agreements.
Under the contractarian model, of course, the parties could be free to adopt provisions that would, in effect, reinstate a general fiduciary duty to govern the relationship between the general partner and the limited. In theory that freedom to reinsert a fiduciary duty may exist, but as a practical matter it may be illusory:
The issue of fiduciary duties have been framed by contractarians as embodying a choice between a statutory approach which is paternalistic and one which is contractual. By way of illustration, if a paternalistic approach is chosen, the default provision in the statute would be to provide for the broad and general existence of fiduciary duties and then, if necessary, let the parties contract to limit such duties. On the other hand, in a contractarian approach, the statutes would be silent or would have limited fiduciary duties and would permit the parties, if they chose, by contract to impose additional obligations upon themselves.
Thus, we have two approaches to drafting a statute, one paternalistic, seeking to protect people by leaving fiduciary duties as the default provision in the statute, and the other contractarian, which leaves people free to fend for themselves and create whatever protections they need. To sharpen the issue as to which approach is more appropriate, it is also well to postulate, as caricature, that there are two types of business arrangements as well. One situation would envision sophisticated people engage in a significant transaction in which substantial funds are involved, including the funds to obtain sophisticated advice. In the other situation, postulate that the investors are less sophisticated, funds in general are limited, and sophisticated advice is less available, not only because of cost but also the nature of legal practice in the area.
The Revised Uniform Partnership Act (“RUPA”) and the most recent Revised Uniform Limited Partnership Act (“ReRULPA”) each limit the fiduciary duty of loyalty to what is enumerated in the Acts. Both Acts also provide that the partners have an obligation of good faith and fair dealing which “is a contract concept” not a fiduciary duty.
The limitations on the duty of loyalty are problematic: “The duty of loyalty has been called ‘the essence of the fiduciary relationship’ and even has been considered an expression synonymous with fiduciary.” Thus, the limiting and narrowing of the fiduciary duty of loyalty by RUPA and ReRULPA goes to the core of whether Justice Cardozo’s formulation continues to define the partnership relationship under those Acts. The contractual concept of good faith and fair dealing is not an effective substitute.
This contractarian good faith standard crops up also in the Uniform Trust Code as one of the non-modifiable provisions. There is a huge difference, however: “The UTC is supplemented by the common law of trusts, including principles of equity. The Restatement of Trusts is the most complete and readily available reference in which to locate the common laws.”
In other words, the UTC does not abandon the fiduciary duty as its general operating principle, it merely adds to it and clarifies what the settlor and trustee cannot contract away. Thus, the UTC provides that “A Trustee shall administer the trust solely in the interests of the beneficiaries.” The UTC then permits many, but not all, of the common law duties of a trustee to be modified by the terms of the trust. Among the mandatory rules, however, are (i) “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,” and (ii) “the requirement that a trust and its trustees be for the benefit of its beneficiaries.”
Although use of the “good faith” standard is a “contractarian” norm, the UTC uses it as a way of implementing the terms of the trust agreement. John H. Langbein, one of the drafters of the UTC, acknowledges that “good faith” is not defined by the UTC and directs one to a treatise on American contract law for “a succinct account of the nuances developed in contract law … emphasizing the core notion of honest dealing.” Nevertheless, the “duty of good faith functions as an intention – implementing standard”:
“Courts use the good faith norm to regulate performance in cases in which the contract or the circumstances confer significant discretion on one party … In the formulation of Easterbrook and Fischel, ‘The concept of the duty of good faith like the concept of fiduciary duty is a stab at approximating the terms the parties would have negotiated had they foreseen the circumstances that have given rise to their dispute.'”
A key difference in the partnership acts treatment and that of the UTC is that the UTC directs that the trustee operate in good faith, not just in implementing the terms of the trust agreement, but also “in the interests of the beneficiaries.” That standard certainly dances back toward a general fiduciary duty which cannot be modified by the agreement.
Regardless of Professor Langbein’s linking the function of good faith dealings with the function of the fiduciary duty, clearly good faith is not the same as a fiduciary duty:
“In general, the contracting party’s duty of good faith establishes nothing like the full panoply of fiduciary obligations. Judge Posner says as much in one of his judicial opinions: ‘The particular confusion to which the vaguely moralistic overtones of ‘good faith’ give rise is the belief that every contract establishes a fiduciary relationship. A fiduciary is required to treat his principal as if the principal were he, and therefore he may not take advantage of the principal’s incapacity, ignorance, inexperience, or even naivetÃ© … But it is unlikely that Wisconsin wishes, in the name of good faith, to make every contract signatory his brother’s keeper … In fact the law contemplates that people frequently will take advantage of the ignorance of those with whom they contract, without thereby incurring liability … [E]ven after you have signed a contract, you are not obliged to become an altruist toward the other party.'”
The UTC, recognizes that “most of American trust law consists of rules subject to override by the terms of the trust” and therefore it addresses what cannot be overridden. Under the UTC other “higher” fiduciary standards apply unless otherwise changed by the agreement. Under RUPA and ReRULPA the good faith standard controls unless the agreement states otherwise. A general fiduciary duty will only govern conduct if the partnership agreement mandates such a standard of conduct.
 Donald J. Weidner, “The Revised Uniform Partnership Act Midstream: Major Policy Decisions,” 21 U. Toledo L. Rev. 825, 827-8 (1990). Professor Weidner is the Reporter for the Revised Uniform Partnership Act.  Charles W. Murdock, “Limited Liability Companies in the Decade of the 1990s: Legislative and Case Law Developments and Their Implications for the Future,” 56 Bus. Lawyer 499, 530 (Feb. 2001).  “ReRULPA” to distinguish it from the 1982 revision.  RUPA (1997) § 404, Comment. Section 404 of RULPA and Section 408 of RULPA are set forth in the appendix hereto.  Karen E. Boxx, “Of Punctilios and Paybacks: the Duty of Loyalty under the Uniform Trust Code,” 67 Mo. L. Rev. 279, 2820 (2002).  David M. English, “The Uniform Trust Code (2000): Significant Provision and Policy Issues,” 67 Mo. L. Rev. 143, 148 (2002). Also, according to its Reporter: “The UTC was drafted in close coordination with this (the third) revision of the Restatement of Trusts to the extent that a significant minority, if not majority, of the UTC provisions could be described as a modification of the Restatement.”  UTC § 802, “Duty of Loyalty.” This section lists certain exceptions to the general rule – all exceptions carved out by the cases interpreting the duty at common law.  UTC Section 105(b).  UTC § 801.  John H. Langbein, “Mandatory Rules in the Law of Trusts,” 98 Northwestern Univ. L. Rev. 1105, footnote 96 (2004).  Langbein, “The Contractarian Basis of the Law of Trusts, John H. Langbein, “The Contractarian Basis of the Land of Trusts,” 105 Yale L.Rev. 625, 655 (1995).  Scott Fitzgibbon, “Fiduciary Relationships are not Contracts,” 82 Marq. L. Rev. 303, 324 (1999).  David English at 154.