II(a). To what extent is the duty of loyalty a legal standard?

Fiduciary relationships are concerned with situations in which one person, the fiduciary, has discretion, hence power, with regards to the other person’s affairs, as the fiduciary undertakes or agrees to act in the interests of another.Footnote ²⁹ These relationships arise in cases where the circumstances are such that they do not allow for the monitoring or supervision of the fiduciary in order to protect the interest of the other person, the beneficiary.Footnote ³⁰ In these cases, mostly characterized by information gaps between the parties, Common Law jurisdictions recognize that it is necessary to monitor the relationships using a special legal norm, since contract or tort law would not provide sufficient protection of the interest of the beneficiary. Fiduciary law aims to ensure that the power given to the fiduciary will not be abused. It applies to many different legal relations, both personal and commercial, as “[t]he categories of fiduciary, like those of negligence, should not be considered closed.”Footnote ³¹

Throughout fiduciary law, one common thread is the concept of loyalty.Footnote ³² While some jurisdictions include other duties, such as the duty of care,Footnote ³³ as an integral part of the obligations of a fiduciary, it is generally accepted that the idea of ‘loyalty’ stands at the core of fiduciary relations. The duty of loyalty aims to decrease a possible misuse of the power granted to the fiduciary. Similar to the concept of ‘good faith,’ the idea of loyalty is considered a general legal concept, that is, a concept that applies to diverse relationships across different legal categories. It is present in all fiduciary relationships, from trustee and beneficiary, to an officer and the company, an agent and the principal, and even a doctor and a patient.Footnote ³⁴ Overall, loyalty requires that the fiduciary avoid any conflict of interest, as their actions should be directed towards promoting the best interests of the other.Footnote ³⁵ The possibility of opt-out is limited, as in the vast majority of cases the duty of loyalty is a mandatory one.Footnote ³⁶

This primary idea of loyalty leads to different requirements, such as the prohibition of unauthorized profits (the ‘no profit’ rule)Footnote ³⁷ or different duties of disclosure. The exact content of these requirements, or the determination of what exactly would count as acting in the best interests of the beneficiary, could vary depending on the purposes of the type of relationships. Moreover, the consequences of a conflict could also vary according to the specific type of relationship,Footnote ³⁸ and hence the exact content of the duty is not predetermined.Footnote ³⁹ According to some, the fiduciary’s loyalty should be interpreted in light of ‘moral’ loyalty.Footnote ⁴⁰ However, others have rejected this link between legal and moral understanding of loyalty,Footnote ⁴¹ and even suggest that the legal term ‘loyalty’ might be misleading. According to this perspective, fiduciary relationships are not concerned with the commonsense understanding of the term ‘loyal.’Footnote ⁴² Indeed, legal and extra-legal meanings of ‘loyalty’ could be quite different, and it is not always clear how these different meanings ought to fit together.Footnote ⁴³ Considering all the above, understanding fiduciary loyalty is not an easy task, and theoretical writing on fiduciary law has been struggling to explain its aims and content.

Prima facie, the perception of the duty of loyalty as determining a general level of behavior, acting for the interests of others, does lead to its classification as a pure standard.Footnote ⁴⁴ Respectively, much academic writing on fiduciary law tends to disregard this question and takes the ‘loyalty-as-a-standard’ view for granted.Footnote ⁴⁵ Upon closer examination, the intuitive classification of this duty as a ‘pure’ standard is not accurate, as it fails to identify a different possible evolution of the duty, which might generate norms that could even be described as rules. Overall it is true that the content of the duty of loyalty is determined in the concrete cases in which it is applied, depending on the specific type of relationship and the relevant factual circumstances. Some aspects of this duty could still be classified as a standard at its ‘ideal’ type, providing only general guidance to the application of the law in a specific case. However, it is also clear that this is not always the case.

In fact, fiduciary law does include many formalistic rules, in certain cases also statutory,Footnote ⁴⁶ which determine clearly what would be considered a breach of the duty of loyalty or when a conflicting interest transaction would be prohibited.Footnote ⁴⁷ In different cases, as part of the process of implementation of loyalty, more specific rules have been developed. This development should confine the understanding of the duty as positioned only at the ‘standard’ edge of the continuum. In reality, it is possible to locate different legal norms that are closer to the form of ‘rules,’ which originated from the duty of loyalty. However, as these rules become more precise, their connection to the original general guiding principle of ‘loyalty’ is sometimes forgotten.

Aspects of this development were explored by Robert Sitkoff. Drawing on economic analysis theories of rules and standards, Sitkoff distinguishes between what he calls ‘primary’ fiduciary duties and ‘subsidiary’ fiduciary duties. Primary duties, such as the duty of loyalty, are “structured as broad, open-ended standards that speak generally,” while subsidiary duties “are typically structured as rules or at least as more specific standards.”Footnote ⁴⁸ The claim is relative and not absolute, meaning that it suggests that between the ideal types of ‘rule’ and ‘standard,’ subsidiary duties are more specific than the primary duty of loyalty.Footnote ⁴⁹ Sitkoff focuses on the trade-off between ‘decision costs’ (the costs of conducting the judicial proceeding) and ‘error costs’ (the costs of applying an inappropriate norm on the specific situation) while designing a policy based on either rules or standards.Footnote ⁵⁰ According to this view, standards would minimize error cost, while increasing uncertainty and decision costs.Footnote ⁵¹ Sitkoff further argues that subsidiary duties are “field-specific elaborations of the primary duties of loyalty and care that address commonly recurring circumstances within the particular type or kind of fiduciary relationship.”Footnote ⁵²

Recognizing that the subsidiary duties vary across fiduciary relationships, Sitkoff also claims that “versions of several of the subsidiary duties are evident in multiple fiduciary fields, reflecting a commonality in recurring circumstances across those fields.”Footnote ⁵³ The claim is then tested with regard to different kinds of fiduciary relationships, in both private and public law. For example, in the sphere of agency law, the duty of loyalty was particularized to more specific duties, such as duties that focus on the material benefit of the agent, competition with the principal, and use of their property.Footnote ⁵⁴ The same could be seen in corporate law, where rules about the role of management in the process for selling control over a company, or disclosure of information to shareholders, had developed from the general standard of loyalty.Footnote ⁵⁵ Of course, these are not the only examples.Footnote ⁵⁶ Sitkoff’s main argument is that the function of what he calls subsidiary duties is to implement the primary duties of loyalty and care. He concludes that allowing a combination of subsidiary and primary duties to the same conduct provides fiduciary law with both the flexibility of standards and the specifications of rules.Footnote ⁵⁷ Accordingly, it allows fiduciary law to mitigate the disadvantages of governance based on either rules or standards.Footnote ⁵⁸

Sitkoff bases his claims regarding the actual development of the law on an agency costs theory of fiduciary law.Footnote ⁵⁹ In his view, “[s]tripped of legalistic formalisms and moralizing rhetoric, … the functional core of fiduciary obligation is deterrence.…Fiduciary law thus minimizes transaction costs.”Footnote ⁶⁰ Indeed, as Sitkoff himself points out,Footnote ⁶¹ one does not have to subscribe to an agency cost theory of fiduciary law in order to accept this argument. Yet this point of view does not reveal the whole story, that is, why and how the primary duties evolved into subsidiary ones,Footnote ⁶² and how the conclusion as to the desirability of the combination between rules and standards should affect the future interpretation of primary duties. It should be emphasized that these are not (only) historical questions about how the duty of loyalty has evolved so far. Rather, the question is a normative one, determining how the court—considering the advantages and disadvantages of legal standards—should deliver and explain its conclusion when a claim for a breach of the duty of loyalty is brought before it. From this perspective, differentiating between subsidiary and primary duties (or even implementing dutiesFootnote ⁶³) might be confusing, as this usage could be understood as disconnecting the idea of ‘loyalty’ from the rules that follow it. Understanding of the nature and function of these ‘subsidiary’ duties requires comprehending where they originated—that is, from the need to provide specific content to the general standard of loyalty in a specific case. ^{Footnote 64} Hence, the following part, directed towards the future, will use the taxonomy of ‘implementation’ and interpretation of the duty of loyalty, and not a primary-subsidiary distinction.

In light of the understanding that, contrary to the primary intuition, classifying ‘loyalty’ as an ideal standard might not be accurate, the question remains: what are the implications of the actual location of this duty on the continuum between rules and standards? The next part of the article will examine the different possibilities for ‘movement’ along this continuum. It will suggest how an adjudicator, facing a concrete dilemma about the implementation of ‘loyalty’ to a specific case, could and should act, considering the disadvantages that accompany legal standards.

II(b). Moving along the continuum

As discussed in the first part of the article, the design of legal norms as standards has costs. The idea of ‘loyalty’ as a legal standard might provide insufficient guidance for the expected behavior of fiduciaries, therefore diminishing compliance with fiduciary law.Footnote ⁶⁵ A legal norm that is broad and ambiguous, such as the idea of ‘loyalty,’ might lead to uncertainty.Footnote ⁶⁶ As explained above, difficulties arising from designing a legal norm as a standard do not relate solely to the predictability of the law. The concern is also that this design would result in arbitrariness, hence jeopardizing the rule of law. Finally, allowing the courts (rather than the legislator) to determine the underlying values of fiduciary loyalty might affect the legitimacy of fiduciary law, since as already mentioned, it raises the concern that the ideology of the judge would determine the concrete outcomes of the case. ^{Footnote 67} As loyalty emerged from the courts of equity, which are associated with the employment of “flexible, morally sensitive principles, and a mode of legal reasoning that is ex post and discretionary in nature,” questions of legitimacy might be even more prominent.Footnote ⁶⁸

In this regard, it is important to elucidate that the application of fiduciary law is not limited to a closed list of legal relationships or situations.Footnote ⁶⁹ As already mentioned, the standard of loyalty could apply to commercial, professional, and even private relationships. In order to operate efficiently, the participants in the market should be able to make fully informed decisions, and legal uncertainty could limit the ability to act on such an informed basis.Footnote ⁷⁰ Commercial activity, it is often said, depends on legal certainty, which allows for the planning of commercial transactions while anticipating the possible legal liability.Footnote ⁷¹ Clear rules also lead to faster and more efficient dispute resolution, with lower litigation costs, which are also necessary for an efficient commercial community.Footnote ⁷² Hence, undoubtedly, concerns about the lack of coherence and clarity of the law are also present with regards to this duty.Footnote ⁷³

Indeed, it is not surprising that these concerns, while not necessarily understood as arising from the design of the duty of loyalty as a ‘standard,’ are compatible with often-heard criticism about fiduciary law in general.Footnote ⁷⁴ It is not hard to find critiques that point out that it is “impossible to predict whether a relationship will or will not be accounted fiduciary when a case comes to court,”Footnote ⁷⁵ or that fiduciary law is accompanied by “inconsistency” and “uncertainty” and therefore “[has] troubling implications for the rule of law.”Footnote ⁷⁶ Yet, these discussions do not focus on the connection between the general literature about rules and standards and the difficulties involved in the development of the duty of loyalty.Footnote ⁷⁷ As this literature reveals, the pertinent questions do not only regard the prominent disadvantages of legal standards, such as uncertainty; the location on the continuum is also of importance. Firstly, as mentioned above, while criticizing fiduciary law, it is easy to overlook the fact that the actual location of the duty of loyalty on the continuum of rules and standards is different than what might be initially assumed. Secondly, in order to determine whether the actual location of the duty is desirable, the disadvantage of both edges of the continuum should be taken into account.

Alternatively, one could suggest forsaking the standard of loyalty altogether and settling for the more specific rules developed in the case law. However, in reality, as many courts and commentators have clarified, the current design of the duty of loyalty as ‘open-ended’ is necessary and may even derive from the nature of fiduciary law. It allows fiduciary law to handle new situations, given the characteristics of the fiduciary relationship. ^{Footnote 78} Loyalty as an open norm enables the law to be flexible and allows the court to develop the law and adapt it to changing circumstances and new needs. This is an important aspect of fiduciary law, specifically from a commercial perspective, which requires that it be able to take into account the latest business practices.Footnote ⁷⁹ Another important consideration is that in situations of inequality between the parties, as in fiduciary relationships, standards might perform a role in preventing opportunism,Footnote ⁸⁰ that is, restraining the stronger party from taking advantage of the intrinsic imperfections of legal rules. The existence of loyalty as a standard allows judges to shape the law according to contemporary human problems and social context.

Moreover, as already explained, the frequency of the conduct governed by the law affects the design of the legal rules. Considering the vast range of situations fiduciary law governs, it would be extremely complicated to draft proper legal rules. The capability of rules to reduce uncertainty depends on having relatively few and simple rules, immutable, clear both in statements and applications.Footnote ⁸¹ If the rules that govern certain activities are numerous, people subject to them cannot satisfactorily learn them. At the same time, standards that capture lay intuitions about the right behavior, and hence are easy to learn, could produce more certainty than non-intuitive technical rules.Footnote ⁸² Hence, developing fiduciary law by “‘testing it against life-wisdom,’ benefitting from ‘the sense and reason of some significantly seen type of life-situation,’”Footnote ⁸³ is almost inevitable. Indeed, while general critique regarding the inconsistency of fiduciary law is not rare, it is hard to find supporters of an abundance of the standard of loyalty altogether. This suggests that the importance of ‘loyalty’ as a standard is hard to dispute.Footnote ⁸⁴

However, this does not lead to the conclusion that there is no solution to the difficulties mentioned, including some of the often-heard criticism regarding uncertainty in fiduciary law. An answer could be found by more closely examining the possible ways to apply legal standards. As noted by Hanoch Dagan, an often-overlooked consideration is that the use of standards does not necessarily imply ad hoc decision making. Legal standards could be used as a basis for future guidance, as long as their content is clear, and it is possible to estimate the expected results in new cases not yet resolved.Footnote ⁸⁵ Indeed, if ‘standard’ stands for open-ended references to justice, fairness, or reasonableness—as the current applier of the law understands these terms in a specific case—it would limit the ability to anticipate the legal result and could be criticized as providing unconstrained discretion.Footnote ⁸⁶ An application of standards that is not consistent could harm fairness and equal treatment by the law.Footnote ⁸⁷ However, this is not the sole possible alternative for the operation of standards. A vague standard may still fulfill its purpose if the margin of discretion it provides is constrained by a careful delineation of the relevant factors on which the exercise of this discretion must be based.Footnote ⁸⁸

As Dagan explains, there are situations where commitment to the rule of law “implies allowing, or even preferring the social practice of a legal topic to be formed around a vague but informative standard.”Footnote ⁸⁹ These insights are extremely relevant to the duty of loyalty. Since the duty of loyalty governs a very wide range of conduct, relying solely on rules would be extremely complex. This technical non-intuitive complexity both may “undermine the guidance value of rules and may not necessarily constrain the discretion of law-appliers.”Footnote ⁹⁰ On the other hand, calibrated properly,

Indeed, situating the discussion around the design of ‘loyalty’ as a standard does reveal some possible difficulties with this legal norm, as was explored above. However, it also sheds light on two available paths for the court when facing a need to implement the standard of loyalty—namely, the choice between an ad hoc implementation of the duty of loyalty based on the circumstances of the case and the development of legal rules based on the general standard, which could and would provide guidance for future behavior. Both concerns—that the subjects of the duty of loyalty will not understand their obligations in advance and that the discretion given to the judge would be used to promote their own personal values—could be answered if, in practice, the application of the duty of loyalty in concrete cases were done according to these guidelines. Moreover, while, as already mentioned, standards could in certain cases prevent opportunism, in other cases their limitation on private power might be inadequate. If a standard is extremely vague, the party with more social power might attempt to use the vagueness to their advantage, e.g., through lengthy legal proceedings. This concern would be reduced if in the process of implementing the duty of loyalty, the court would draft more specific rules regarding the meaning of the standard in circumstances similar to the current case.

To conclude, the desired location of ‘loyalty’ as a legal standard is not permanently situated on either edge of the continuum. The application of the duty in a specific case should generally be performed in a way that creates new ‘rules,’ deriving for the idea of loyalty, that could be applicable to future cases.Footnote ⁹² Hence, loyalty would be constantly moving on the continuum, from its initial location as a ‘pure’ standard towards new locations created from more specific rules. The movement toward more specific rules is not along a one-way street. As discussed in the first part of the article, the regulator could determine that a certain industry needs to supply ‘safe working conditions.’ If it is then determined that while working at a height one needs to wear a hard hat and fall-protection equipment, the application of the standard becomes clearer and relatively easier. Yet, new circumstances might still require asking whether this rule conforms to the general standard. Hence, these ‘rules’ of loyalty should not be understood as abandoning or departing from the general standard of dictating a general norm of behavior that obligates acting for the benefit of the other. On the other hand, understanding the dialectical aspect of loyalty should not lead to case-by-case decision making. The movement of ‘loyalty’ along the continuum should be understood as a pendulum-like movement, that constantly strives to reach the edge of rules and provide content to the general standard, yet does not detach completely from its original purpose, to ensure the fiduciary’s loyalty to the beneficiary. Ideally, loyalty should continue to develop as an informative standard that includes, as far as possible, content that would allow its coherent application and promote its predictability. As will be discussed in the next part of the article, this is not always the case.

III(a). Loyalty of doctors

The question of whether doctors are fiduciaries and hence subjected to the standard of loyalty has received different answers in different Common Law jurisdictions. While some have emphasized that features of the relations between a doctor and a patient, such as dependence, trust, and information gaps, correspond with characteristics of other fiduciaries,Footnote ⁹⁴ this classification has not been accepted throughout Common Law.Footnote ⁹⁵ For the purpose of this discussion, further inquiry into this debate is not needed, as our interest lies in the way the duty of loyalty is implemented.Footnote ⁹⁶ As will be shown, while the following court decisions deal with a similar question—whether the duty of loyalty obliges the doctor to provide certain information to the patient—they differ in the way in which they implemented the general standard under the circumstances of the case.

The relations between the doctor’s loyalty and disclosure duties were discussed in the Supreme Court of California ruling in Arato v. Avedon.Footnote ⁹⁷ This decision followed a long period of judicial discussions regarding the doctrine also known as ‘informed consent.’Footnote ⁹⁸ Under this doctrine, a physician holds a duty to disclose to the patient information that is material to a decision whether to undergo medical treatment. One of the postulates that laid the foundation for the doctrine, alongside the patient’s sovereignty and autonomy, was the fiduciary obligations of the doctor, stemming from the patient’s trust in the physician and their dependence on the physician for the information required for their decisional process.Footnote ⁹⁹ As the court mentioned, the “accumulated medicolegal comment on the subject of informed consent is both large and discordant,”Footnote ¹⁰⁰ and so was the legal writing on this subject.Footnote ¹⁰¹ The debate over the desirability of this legal doctrine is beyond our scope. However, the decision provides an example of the difficulties arising from an application of the standard of loyalty without proper guidance.

The question before the court was whether in recommending a course of chemotherapy treatment to a patient suffering from an aggressive form of cancer, the physicians breached their duty by failing to disclose the statistical life expectancy of the patient. The standard of disclosure, according to the trial court, is that a physician must disclose all “information which the physician knows or should know would be regarded as significant by a reasonable person in the patient’s position when deciding to accept or reject a recommended medical procedure.”Footnote ¹⁰² Yet, the trial court also accepted that the doctrine of informed consent “recognizes that the primary duty of a physician is to do what is best for his patient.”Footnote ¹⁰³ The conclusion of the court was that in this case, the claim should be denied. This decision was overruled by the Court of Appeal. The Supreme Court of California, however, held that the Court of Appeal erred in holding that the instruction given by the trial court failed to convey accurately the governing legal standard. The court explained that

Furthermore, it was explained that the fiduciary obligations prohibit misrepresenting the nature of the patient’s medical condition and that the criterion for the scope of the disclosure is “a peculiarly fact-bound assessment.”Footnote ¹⁰⁵ It was also added that “certainly this is not territory in which appellate courts can usefully issue ‘bright line’ guides.”Footnote ¹⁰⁶

The focus of the discussion is not whether informed consent is an advantageous legal norm,Footnote ¹⁰⁷ neither is the purpose to dive deeply into the facts of the case and determine whether the disclosure of the statistical life expectancy was needed under the circumstances.Footnote ¹⁰⁸ What this decision intends to demonstrate is the difficulties entailed in a vague application of the standard of loyalty. On one hand, the trial court instructs the physician to disclose all relevant information in order to protect the patient’s freedom to exercise control over their own body. On the other hand, it accepted that the physician has the discretion to decide what would be considered acting in the best interest of the patient. These two nearly contradictory instructions regarding the appropriate delivery of information seem to offer very little guidance for a doctor wishing to obey the legal standard.

In fact, even the Supreme Court of California, while refusing to determine that these instructions misled the jurors, agreed that saying that the primary duty of a physician is to do what is best for their patient was a “misstatement of governing law.”Footnote ¹⁰⁹ Yet the Supreme Court did not explain what the right balance between the doctor’s loyalty and their disclosure duties are—should their commitment to the patient be taken into account at all, and if so, in what way? Not only was the duty of disclosure drafted as an extremely fact-based standard, but it was also not clarified whether the doctor’s opinion as to what is best for the patient could or should, at least in certain cases, limit the duty of disclosure. Moreover, it should be noted that the controversial declaration, according to which the physician’s primary duty is “to do what is best for his patient,” was added as an instruction for the jurors at the physician’s request. This fact strengthens the conclusion that the doctrine developed by the court was obscured, and the subjects of the law did not understand its content.

It is interesting to compare and contrast this example with the circumstances of the well-known decision of the Canadian Supreme Court in McInerney v. MacDonald.Footnote ¹¹⁰ This case concerned the refusal of a doctor to provide access to medical documents that were held by her but written by the patient’s previous physicians. The court concluded that the relations between the doctor and the patient should be characterized as ‘fiduciary,’ and clarified that this does not suggest that “a fixed set of rules and principles apply in all circumstances or to all obligations arising out of the doctor-patient relationship.”Footnote ¹¹¹ Hence, the court needed to explain what loyalty, according to this characterization, demands of doctors in the context of the case.

The court concluded that this nature of the relationship gives rise to the physician’s duty to make proper disclosure of information to the patient. To clarify the nature of the duty to provide information, the court explained that the information is held by the doctor “in a fashion somewhat akin to a trust.”Footnote ¹¹² The doctor is the owner of the actual record, yet the information in it “is to be used by the physician for the benefit of the patient.”Footnote ¹¹³ The patient’s trust-like “beneficial interest” in the information indicates that “as a general rule, he or she should have a right of access to the information and that the physician should have a corresponding obligation to provide it.”Footnote ¹¹⁴ The court also elucidated that without access to the information, it would be hard to ensure that the doctor is fulfilling their primary duty: that is, to act with the utmost good faith and loyalty.Footnote ¹¹⁵

While determining that the patient’s right to information is almost absolute, the court also added that there could be exceptional reasons to override it.Footnote ¹¹⁶ Yet, when the doctor chooses to exercise this discretion and refuses to grant access, the onus lies on them to justify an exception from the “general rule of access.”Footnote ¹¹⁷ Furthermore, while the court did not provide an exhaustive list of circumstances in which access could be denied, it did review the main possible claims for denying access and determined that the only persuasive grounds for refusal would be if there were a real potential for harm to the patient or to a third party.Footnote ¹¹⁸ Other possible reasons, such as that disclosure would lead to an increase in unfounded lawsuits, that the medical record might be misinterpreted by the patient, or that disclosure might have a negative effect on the quality of medical records, were rejected.Footnote ¹¹⁹ Even with regards to the acceptable grounds for refusal, the court emphasized that the physical well-being of the patient must be balanced with their right to self-determination. Hence, “[i]n short, patients should have access to their medical records in all but a small number of circumstances … unless there is a significant likelihood of a substantial adverse effect on the physical, mental or emotional health of the patient or harm to a third party.”Footnote ¹²⁰

As this decision illustrates, the application on the standard of loyalty could be performed in a way that is compatible with clarity and predictability. Indeed, it is still not possible to classify the outcome of the case as creating a ‘pure’ rule, yet the content of loyalty is relatively very clear and easy to implement in future cases. That is, the doctor should always provide access to the patient’s medical records, unless the case is an exceptional one in which the doctor believes in good faith that their loyalty toward promoting the best interest of the patient requires denial of access. The starting point is that essentially, the information belongs to the patient and is held by the doctor in a ‘semi-trust.’ The patient has a right to make an autonomous decision about their best interest, and hence denial would be warranted only if there is a “significant likelihood of a substantial adverse effect” to the patient. Other considerations, relating to the interest of the doctor themself, could not be taken into account. Hence, it seems that while the decision in McInerney does sketch general guidelines for future cases, it is not clear from the decision in Arato what ‘loyalty’ requires from the doctor.

III(b). Loyalty of lawyers

Across the Common Law, lawyers, unlike doctors, have long been recognized as fiduciaries, and these relationships are considered an “archetype for the fiduciary obligation.”Footnote ¹²¹ A lawyer is expected to act in the best interest of their client, as “loyalty is a core value for the profession.”Footnote ¹²² The lawyer has power and authority over the practical interests of their clients, and the duty of loyalty aims to protect the client and ensure that the lawyer will not exploit the control granted to them.Footnote ¹²³ While the classification of the relations under fiduciary law is not disputed, the content and meaning of the lawyer’s loyalty are indistinct. Some have gone so far as to claim that “[t]he uniform acceptance of the proposition that lawyers owe fiduciary duties to their clients is matched only by the absence of uniformity in the application and explanation of those duties.”Footnote ¹²⁴ Without examining further possible reasons for this lack of clarity,Footnote ¹²⁵ the following discussion tries to illustrate how an unsystematic implementation of the standard of loyalty does not diminish but rather contributes to this lack of clarity.

The decisions examined have dealt with the question of conflicting duties of loyalty. Lawyers, like other fiduciaries, should not place themselves in situations where their loyalty to one beneficiary conflicts with their duty to another beneficiary. However, in some cases it was determined that the simultaneous representation of two clients would be allowed.Footnote ¹²⁶ Yet, as this exception requires full disclosure and obtaining the clients’ consent, the question remains: under what circumstances will a decision to act for more than one client not bring about a breach of the lawyer’s duty of loyalty? In other words, the question of what ‘loyalty’ to the client requires from the lawyer in these situations still stands.

One aspect of this dilemma is the offset between the contractual relationship between the lawyer and their client and the fiduciary duties of the lawyer. As will be demonstrated in the following discussion, different solutions to this tension have been adopted in different courts, some increasing and others decreasing the clarity of the lawyer’s loyalty. One significant decision on this issue was the Australian ruling in Beach Petroleum NL v. Abbott.Footnote ¹²⁷ The facts of the case were extremely complicated and are not pertinent to this discussion. Briefly, it should be mentioned that the decision dealt with a company, Beach Petroleum, that was part of a group of companies controlled by one Mr. Johnson. Financial pressure on the group and a need for liquid assets led Mr. Johnson and several directors to devise a fraudulent scheme to withdraw assets from the company. This was done primarily through a transaction in which the company acquired an asset at a gross overvalue.Footnote ¹²⁸ The company sued the attorneys who were hired by the directors of the group to advise on the process of re-planning its holdings. It argued, among other propositions, that they had breached their duty of loyalty due to their conflicting interests and hence should compensate the company for the damages caused by the fraud. The trial court denied the claim.Footnote ¹²⁹

The company sought to reverse the trial court’s decision, which determined that since the company and the law firm did not sign a retainer agreement, there was no conflict of interest caused by the simultaneous representation. The court opened by stating that “[t]he solicitor is classically a fiduciary to the client and as such owes certain duties in each particular case.”Footnote ¹³⁰ It then continued to declare that “[w]hether or not there is a duty to advise on the wisdom of a particular transaction depends on the circumstances of the case.”Footnote ¹³¹ That is, since while it has long been accepted that these are fiduciary relationships, the duty of the lawyer “is derived from what the solicitor undertakes, or is deemed to have undertaken, to do in the particular circumstances.”Footnote ¹³² The court accepted that indeed equity preserves and protects the relationship of solicitor and client, yet emphasized that “the confidence and influence are not always so pervasive as to require equitable intervention in every facet of the relationship.”Footnote ¹³³ Of course, the court acknowledged that ultimately, fiduciary responsibility “is an imposed not an accepted one, one concerned with an imposed standard of behaviour.”Footnote ¹³⁴ Nonetheless, the court concluded that “[t]he existence and scope of the duty may derive from a course of dealing.”Footnote ¹³⁵

According to these guiding propositions, the court decision was utterly fact-based and focused on a comprehensive analysis of the agreement between the parties. ^{Footnote 136} The court agreed to assume that indeed client-lawyer relationships existed between the parties, yet thought it was also “necessary to specify the scope of the retainer so that it can be determined whether a conflict of duty and duty arose relevant to an impeached transaction.”Footnote ¹³⁷ In this complex factual analysis, the court found evidence that the attorneys also worked for the specific company. Yet its final conclusion was that this was not sufficient to substantiate the company’s claims. The court analyzed the details of the various transactions and concluded that the lawyers did not breach their duties during the simultaneous representation.Footnote ¹³⁸ For example, in a particular transaction, the court held that there was no reason to impose liability because the attorneys were only required to advise on the execution of a transaction that was agreed upon.Footnote ¹³⁹ In relation to another transaction, the representation was “limited to certain clerical acts.”Footnote ¹⁴⁰ Therefore, although the attorneys represented both parties to the transaction, the court concluded that it could not be stated that this was a breach of the duty of loyalty.

Again, it should be stressed that the discussion is not about whether, under the specific circumstances of the case, the lawyers should have been held responsible for a breach of duty. The aim is to focus on the ability of the decision to provide more specific content to the standard of ‘loyalty.’ The tendency toward case-by-case decision making is evident from the beginning of the discussion, as the court declares that the lawyer owes ‘certain duties’ in ‘each particular case.’ Furthermore, the propositions of the court that, on one hand, recognized that the duty of loyalty is inherent in an imposed duty, yet, on the other hand, allowed the content of the contract to determine its boundaries, cannot provide guidance or sufficient means for compliance with the legal norm. It is unclear how the ideal of ‘acting in the best interest of the client’ can be upheld, while allowing the lawyer unconstrained discretion in determining the scope of the relations.

Considering that loyalty aims to protect the weaker side in relationships—in this case, the client—allowing the content of the contract to set the limits of the duty, without a corresponding explanation of the requirement of the ‘loyalty’ standard, raises serious concerns as to the ability of the decision to convey any sensible message about the meaning of ‘loyalty.’ It is important to emphasize that the difficulty in the ruling does not arise from the mere consideration of the terms of the contract between the parties. Rather, it is caused by the fact that the relations between the contract and the fiduciary duties of the lawyer are not clear enough and that the meaning of loyalty in this context was not clearly explained, which necessarily leads to ad hoc decision making. Indeed, the result of the doctrine developed in Beach, as some commentators have already noticed, was that the content of the duty will be derived from what the solicitor is retained to do in particular circumstances, so “conduct which may fall within the fiduciary component of the relationships in one case may not fall within the fiduciary component in another.”Footnote ¹⁴¹ Hence, the ability to make use of this case in order to anticipate further decisions of the court is very limited.Footnote ¹⁴²

In contrast, the Canadian Supreme Court’s decision in Strother v. 3464920 Canada Inc Footnote ¹⁴³ took a different approach.Footnote ¹⁴⁴ Mr. Strother, a senior partner in a law firm whose field of expertise was tax law, had been advising, for many years, to a company called Monarch, which was involved in developing and marketing of investments in certain tax shelters. At some point, the retainer between the parties expressly prohibited Strother from acting on behalf of clients other than Monarch on these issues, but the provision was later cancelled.Footnote ¹⁴⁵ In 1997, following specific regulations designed to deal with these tax shelters, Monarch contacted their attorney. Strother advised that the legal structure used by the company was no longer possible, advice that was undisputedly correct at that time, and so Monarch ended its business in this field.

However, Strother was later contacted by a former employee of Monarch, the owner of a shell company named Sentinel. The former employee presented Strother with a possible solution to the new regulations. To explore the viability of this solution, the lawyer agreed to provide his legal services free of charge, in exchange for receiving half of the future revenue of Sentinel. The inquiry with the tax authorities succeeded, and Sentinel operated accordingly for a number of years, generating tens of millions of dollars in profits. Strother did not notify Monarch of the tax authorities’ position. Upon learning of the facts, Monarch sued the lawyer (and the law firm), claiming that Strother had breached his duty of loyalty by simultaneously representing Sentinel.

Strother tried to claim that since the provision that determined ‘exclusive’ representation had been cancelled, there was no duty obligating him not to advise Sentinel.Footnote ¹⁴⁶ The Canadian court agreed, of course, that when a lawyer is retained by a client, “the scope of the retainer is governed by contract.”Footnote ¹⁴⁷ However, the court also added that these relationships are “overlaid with certain fiduciary responsibilities, which are imposed as a matter of law … fiduciary duties provide a framework within which the lawyer performs the work and may include obligations that go beyond what the parties expressly bargained for.”Footnote ¹⁴⁸ The court then explained that included in these duties is the duty of loyalty, which demands avoidance of conflict of interest, and as was determined in previous decisions, “[l]oyalty includes putting the client’s business ahead of the lawyer’s business.”Footnote ¹⁴⁹ The court examined briefly the content of the retainer agreement, and emphasized that it should not, in these cases, “strain to resolve the ambiguities in favour of the lawyer over the client.”Footnote ¹⁵⁰ It concluded that the trial court erred while considering the legal effect of the factual findings on the content of the contract.Footnote ¹⁵¹ The fact that the continuing relationships “of trust and confidence”Footnote ¹⁵² between Strother and Monarch were based on his representation with regard to certain tax shelters, was enough to conclude that taking upon himself to act simultaneously for a new client on the same issues, could position him in a conflict of interest.

Aiming to explain the meaning of loyalty, the court elaborated that

Hence, his duty of loyalty obliged Strother to reveal that his previous negative advice was subject to reconsideration.Footnote ¹⁵⁴ Finally, the court explained that this does not mean that a lawyer could never represent simultaneously clients that have competing commercial conflicts. However, “[t]he thing the lawyer must not do is keep the client in the dark about matters he or she knows to be relevant to the retainer.”Footnote ¹⁵⁵

It is clear that the decision of the court still leaves the idea of ‘loyalty’ in the realm of standards. As noted, the discussion is relative, asking to locate ‘loyalty’ on a continuum between two ideal forms of legal norms. In comparison with Beach, this decision is much clearer as to the requirements of the legal norm. The lawyer could define, in the contract, the subject matters of the representation and the factual findings are relevant to determining the content of the relations. Yet this does not allow them to bypass their duties. They must notify the client of possible conflicting interests in the representation. They must not put their own business ahead of the client’s business. As loyalty is their duty by law, they must take into account that the underlining principles of the duty are to protect the trust and confidence in the relationship and act accordingly. Any situations of uncertainty would be interpreted to the benefit of the client.

III(c). Loyalty of directors

Like lawyers, officers of a company are undisputedly considered fiduciaries and hence subject to the duty of loyalty. The managerial position, which generates control of and responsibility for others’ money, entails that “the rule of undivided loyalty is relentless and supreme.”Footnote ¹⁵⁶ Loyalty requires that the officer avoid any conflict of interest between their own personal interest and their duties to the company. It emphasizes that they must not use their position to derive hidden profits.Footnote ¹⁵⁷ This classification of the relationships is far from modern;Footnote ¹⁵⁸ however, questions such as whether the duty is always mandatory, or is addressed to the company alone (and not, for example, to its shareholders), are still debated today. Over the years, different aspects of the duty have been enacted in specific corporate law legislation.Footnote ¹⁵⁹ Yet these rules are not considered a closed list and are understood as upholding the idea of ‘loyalty,’ rather than detracting from it. Hence, courts still have an important role in developing the concept of ‘loyalty.’

One example of the ongoing debate about the content of the officer’s loyalty is centered on the appropriation of a business opportunity by the officer.Footnote ¹⁶⁰ Again, the purpose here is to demonstrate, through different decisions that have dealt with this question, the difficulties that arise from the way in which the standard of loyalty has been implemented. As is noted by Andrew Gold, the “law on the taking of opportunities is generally much more standard-like, commonly involving a list of factors that must be weighed against each other.”Footnote ¹⁶¹ Gold adds that these cases show “a more flexible, open-ended style of legal reasoning,” unlike other loyalty doctrines that crystallized into a rule.Footnote ¹⁶² This observation is indeed accurate with regards to many decisions on this matter; however, as will now be illustrated, it is not a necessary development of the law.

Indeed, examples of the flexible, ad hoc decision making are not hard to find. Already the decision of the Supreme Court of Delaware in Guth v. Loft, Inc. had stated that “[t]he occasions for the determination of honesty, good faith and loyal conduct are many and varied, and no hard and fast rule can be formulated. The standard of loyalty is measured by no fixed scale.”Footnote ¹⁶³ Thenceforth, many rulings have echoed the idea that in cases concerning the taking of a business opportunity, the decision should be made on a case-by-case basis. A clear demonstration of this approach could be found in the frequently mentioned ruling in Broz v. Cellular Information Systems, Inc.Footnote ¹⁶⁴ Broz was a director in Cellular Information Systems (CIS) and the sole stockholder of RFB Cellular, Inc. (RFBC), a company engaged in providing cellular telephone services in the Midwestern United States. CIS claimed that Broz had breached his fiduciary duty, as he had acquired for RFBC a cellular telephone service license that entitled its holder to provide cellular telephone services in parts of northern Michigan, without formally introducing the opportunity to the corporation. That is, while another cellular communications company named PriCellular, which was at the time engaged in the acquisition of CIS, was also interested in this license. The Court of Chancery concluded that Broz had indeed breached his fiduciary duty.Footnote ¹⁶⁵ The Supreme Court of Delaware reversed the judgment, stating that the application of the legal standard by the court was erroneous and concluded that Broz had not breached his duties.

Considering whether to cast liability on Broz for a breach of his duty of loyalty, the court opened by stating that “[a] corporate fiduciary agrees to place the interests of the corporation before his or her own in appropriate circumstances.”Footnote ¹⁶⁶ Following this statement, the court explained that the doctrine holds that an officer may not take a business opportunity as their own if certain conditions apply, but could take it under other conditions. Claiming that “the contours of this doctrine are well established,” the court noted that these tests should be considered by a reviewing court and that “[n]o one factor is dispositive and all factors must be taken into account insofar as they are applicable.”Footnote ¹⁶⁷ It was explained that these cases involve a multitude of factual settings; hence, “[h]ard and fast rules are not easily crafted to deal with such an array of complex situations.”Footnote ¹⁶⁸ Referring to a previous ruling, the court pointed out that this is “a factual question to be decided by reasonable inference from objective facts.”Footnote ¹⁶⁹ Finally, the court concluded that this approach is needed in order to uphold “[t]he right of a director or officer to engage in business affairs outside of his or her fiduciary capacity,” since according to the court, “[a]bsent such a rule, the corporate fiduciary would be constrained to refrain from exploiting any opportunity for fear of liability based on the occurrence of subsequent events.”Footnote ¹⁷⁰

Again, the question here is not whether or not Broz was justified in taking the business opportunity. What seems clear is that the ability of this decision to provide guidance and constraint for future cases is limited. In fact, the very declaration of the content of the director’s obligation is vague, as the court states that acting for the benefit of the company is required only in ‘appropriate’ circumstances. It is also hard to accept the argument that the contours of the doctrine are well established, considering that soon after the doctrine determines that an officer would not be able to take an opportunity for himself in certain cases, the court immediately adds that the director could seize it in other situations. Moreover, it is questionable whether the list provided by the court, of situations where the taking of an opportunity would be prohibited, provides satisfying information about the expected conduct (e.g., the condition that “by taking the opportunity for his own, the corporate fiduciary will thereby be placed in a position inimicable [sic] to his duties to the corporation”).Footnote ¹⁷¹

Even assuming that some of these instructions do provide some meaningful content to the general standard, the vagueness of the decision remains. As long as the decision does not clarify what loyalty requires from the directors in similar cases, the meaning of the standard stays incomprehensible. On one hand, the director is allegedly obligated to act for the benefit of the company; yet on the other hand, he is allowed to consider his own interest and base decisions on his ‘right’ to an opportunity. If the court fails to explain how these two contradicting interests should be balanced, the conclusion seems to follow that the doctrine does not provide useful guidance or constraints. If the court lists considerations that run in the opposite direction, with no explanation as to their significance, what the officer’s ‘loyalty’ requires remains extremely obscure. Somewhat ironically, the court ends its decision by stating that “we note that certainty and predictability are values to be promoted in our corporation.”Footnote ¹⁷² In reality, it seems that the court’s effort to ‘harmonize’ the director’s duties in ‘a modern business environment’ with interests unrelated to his role, left these duties without understandable content.

It is not surprising, therefore, that an often-heard criticism of this doctrine regards its inconsistency.Footnote ¹⁷³ However, this is not the only possible implementation of loyalty in the context of business opportunities. One example of a different approach can be found in the UK. In Regal (Hastings) Ltd. V. Gulliver, ^{Footnote 174} the court determined that the law prohibits any entity in a fiduciary position from making any unauthorized profit. This prohibition does not depend on

Rather, the liability arises from the mere fact that profit has been made while occupying a fiduciary position. This strict approach, expressly explaining what loyalty demands of the officer, does not require a comprehensive factual inquiry, as responsibility arises once the opportunity was taken in the course of execution of the office.

A later important ruling in Boardman v. Phipps concluded that if profits are acquired by the fiduciary “by reason of his fiduciary position and by reason of the opportunity and the knowledge, or either, resulting from it,” and the fiduciary is not able to show that the profits were made “with the knowledge and assent of the other person,” a demand to account for these profits would be accepted.Footnote ¹⁷⁶ Evidently, this position provides much more clarity and guidance to the content of the officer’s loyalty. The meaning of ‘loyalty’ in this context is that the officer must place the interests of the company above his personal ones and, therefore, cannot take for himself a business opportunity that emerged during his service. If nonetheless he is interested in taking the business opportunity, he must first acquire the full consent of the company. Hence, this ruling places ‘loyalty’ much closer to the ‘rule’ edge of the continuum, making compliance easier.

Adopting a rigid position is one possible alternative to increase certainty, but it is not the only one. Some court decisions have tried, without committing to an absolute prohibition on the taking of business opportunities, to create a more informative standard. One prominent decision is the Supreme Court of Canada ruling in Canadian Aero Service v. O’Malley.Footnote ¹⁷⁷ The company’s main business was the performance of complicated contracts of topographical mapping and geophysical exploration in developing countries. In order to obtain such contracts, considerable investment in equipment, fieldwork, and developing contacts with the local government was needed, all before the company had any guarantee that it would indeed win the contract. The focus of the dispute was a mapping project in Guyana. For several years, through two of its employees (who served as president and senior vice president), the company had invested time and money in an attempt to win this project. The two officers later resigned from the company and shortly thereafter were involved in the establishment of another company, which eventually won the Guyana project. The company sued the employees, claiming that the two took advantage of the company’s business opportunity by submitting a proposal for the Guyana project through the new company.

The company’s claim was denied. However, the Supreme Court allowed the appeal.Footnote ¹⁷⁸ The court explained that the strict ethic in this area of the law “disqualifies a director or senior officer from usurping for himself … a maturing business opportunity which his company is actively pursuing.” ^{Footnote 179} After determining that the relationships were indeed fiduciary ones,Footnote ¹⁸⁰ the court had to determine whether the two officers had taken one of the company’s business opportunities, thereby breaching their duty of loyalty. Referring to the UK ruling in Regal as the guiding principle, the court added that this decision should not be understood “as providing a rigid measure whose literal terms must be met in assessing succeeding cases” and that “as in other branches of the law, new fact situations may require a reformulation of existing principle to maintain its vigour in the new setting.”Footnote ¹⁸¹ Accepting that some flexibility is needed, the court did not dispute the conclusion of a previous decision, that finding that the officer had behaved in “good faith” could be relevant to the decision (a position that was declined in Regal).Footnote ¹⁸² However, the court inferred that in light of the facts of the case, this had no bearing, as it was clear that the company was interested in the opportunity. Furthermore, the court needed to decide whether the duty of the directors had survived their resignation. It concluded that there were no obstructing considerations to the conclusion that their duty continued. However, the court added that liability in the specific case should not “be taken as laying down any rule of liability to be read as if it were a statute” and that “[t]he general standards of loyalty, good faith and avoidance of a conflict … must be tested in each case by many factors which it would be reckless to attempt to enumerate exhaustively.”Footnote ¹⁸³

On the face of things, these declarations position the implementation of ‘loyalty’ in this case as a vague standard, particularly in comparison with the stricter rule. However, a closer reading reveals that unlike the Delaware court, in this case allowing some flexibility did not leave the content of the duty empty. As the court emphasized, the general standard of loyalty, where the roots of the doctrine lie, reflects “the need to compel obedience by it and by its promoters, directors and managers to norms of exemplary behaviour.”Footnote ¹⁸⁴ This declaration sends a message to directors regarding the behavior expected of them. The Canadian court did not deviate from its focus on the roots of the general standard of loyalty, and the starting point of the decision remains that a director should not exploit their position for personal profits. Taking into account the good faith conduct of the officer does not significantly change the idea that ‘loyalty’ means promoting the company’s interests rather than the officer’s. If the officer failed to make full disclosure, they would be held accountable, and there would be no need to show that they caused actual loss to the company. As the general outlines of the doctrine remain clear, loyalty still contains understandable decipherable content. ‘Loyalty’ still requires that the officer avoid possible conflict of interest when considering whether to take a business opportunity for themself.

Nonetheless, it should be noted that if it is unclear at what point the duty ceases to exist, the predictability of the law is affected. The court tried to mitigate this problem by suggesting, similar to the decision in Broz, a list of different relevant considerations, such as “the factor of position or office held” or “the circumstances under which the relationship was terminated.”Footnote ¹⁸⁵ As mentioned above, a list alone will not solve the problem of vagueness. However, it is hard to say that allowing the courts some flexibility in determining the survival of the duty after the director has resigned completely undermines the coherence of the doctrine. Indeed, it would have been preferable if the court had avoided the wording that bore case-by-case implications and determined instead clearer exceptions to situations where the duty should survive a resignation. Still, this ruling is much clearer than the utterly ad hoc application of the case law in Delaware following Broz. It should also be added that similar examples of decisions that did not accept the strict rule yet tried to provide some meaning and content to director’s obligations of ‘loyalty’ in these situations can also be found in different American courts outside of Delaware.Footnote ¹⁸⁶

Finally, it is reasonable to mention that while some commentators have insisted that a rigid approach—which would prohibit any exploitation of business opportunities—is necessary,Footnote ¹⁸⁷ others have claimed that this approach is not adapted to the current corporate world and that there are good policy considerations, such as the need for business innovation, which justify a more lenient approach.Footnote ¹⁸⁸ Clearly, this discussion does not aim to reconcile these conflicting views. Rather, it tried to demonstrate again that ‘loyalty’ could be given more specific content even in these situations and that hence there is no reason to assume that ad hoc decision making is an indispensable part of this legal norm. Accordingly, it suggested that when deliberating on the appropriate doctrine for a specific context (whether the disclosure duty of doctors or the taking of a business opportunity by a director), the implications of the way the courts choose to design this legal norm must be taken into account.

To conclude, this review of the case law exemplified how the movement of loyalty along the continuum poses a continual challenge for the courts. It demonstrated how the theoretical concerns that accompany certain designs of legal norms are expressed in real factual situations. Presenting the actual and concrete ways the court can design loyalty as a legal norm that is closer to the form of a ‘rule’ illustrates why it should not be taken for granted that loyalty would or should be implemented in an ad hoc way. Hence, this comparison supports the claim that it is factually possible to compensate for the disadvantages of legal standards as discussed in the first part of the article. Indirectly, this discussion also answered the general criticism often heard about fiduciary law, by showing that the vagueness of this law could be decreased, as it is not predetermined nor intrinsic.