Fiduciary law scholars in the U.S. do not pay enough attention to fiduciary law scholars in other countries. Of course, most of us who write in this area are talking about particular cases decided in the U.S. or areas of law with U.S.-specific attributes. But if you want to learn more about fiduciary law generally, it's worth reading the work of the professors teaching in Commonwealth countries. For example, I highlighted the work of Paul Miller in a JOTWELL post last year. Over the next little while, I will highlight some other work that may be interesting to American academics, and this post is about Lionel Smith's (McGill) excellent article on "Deterrence, Prophylaxis and Punishment in Fiduciary Obligations" in the fine Australian journal (edited by Simone Degeling of UNSW) The Journal of Equity, which you can find on Lexis (but not on Westlaw).

The driving motivation for fiduciary law in the Commonwealth is captured in the oft-repeated refrain that fiduciary duties are proscriptive, not prescriptive. Fiduciary law proscribes conflict transactions, without inquiring into harm to the beneficiary or breach of any other legal norms. Stated another way, fiduciary law in the Commonwealth requires the fiduciary to exercise discretion unselfishly. This is in stark contrast to the American model, at least with respect to fiduciaries in business organizations, under which a breach occurs only when a conflict transaction is unfair, that is, only when the fiduciary has exercised discretion with inappropriate selfishness. (I make this point in Fiduciary Discretion, which should have cited Lionel.)

How should we understand this proscriptive regulation?

Many authors contend that fiduciary law has a deterrence function, but Lionel rightly asks, “what is being deterred?” According to Lionel, fiduciary law cannot plausibly be explained as a deterrent because the level of sanction (avoidance or recission of the conflict transaction or disgorgement of any profits) is simply too low to represent a viable deterrent for most fiduciary breaches. Moreover, the fact that “the no-conflict and no-profit rules operate independently of harm or loss to the beneficiary, bad faith of the fiduciary, the breach of other duties, or any consideration at all” means that the law is unjust because it is “willing to inflict sanctions on people who have not engaged in undesirable conduct.”

Lionel suggests that rather than playing a deterrent role, fiduciary law serves as prophylactic function. According to Lionel, “[d]eterrence operates by aiming to influence human decision-making; prophylaxis operates by the taking of precautions in an effort to avoid an undesirable outcome.” While some references to the prophylactic function of fiduciary law are simply references to the deterrence function, Lionel suggests a different understanding of prophylaxis, which is intimately connected to the duty of unselfishness. In short, fiduciary law prohibits conflict transactions to reduce the likelihood that the fiduciary will exercise discretion for improper reasons.

This is distinct from deterrence because it is not about changing the fiduciary’s motivation, but rather about implementing a precaution. While this is a rather subtle point, it serves to emphasize the crucial difference between fiduciary law in the U.S. and fiduciary law in the Commonwealth. Fiduciary law in the U.S. cannot plausibly be viewed as a prophylactic under Lionel’s reasoning because courts here do not impose the same sort of blanket proscription on conflict transactions that you see in the Commonwelath. Instead, courts are eager to understand whether the conflict transaction was fair and whether the fiduciary acted in good faith.

My description is an oversimplification of Lionel's argument (it's a blog post, after all) and insufficiently nuanced with regard to Commonwealth and U.S. fiduciary law, both of which are highly variegated, coming from multiple jurisdictions. But I hope that I was able to convey the gist of the argument. If you want to read more, you can find Lionel's paper here. 

In a new paper that I am writing this semester, I will argue that the U.S. is uniquely tolerant of conflict transactions, and the lack of any blanket proscription is one evidence of that tolerance. Further, I will argue that this tolerance reflects our general disposition in favor of entrepreneurial action. More on those thesis in posts to come.

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