The purpose of this Article is to inquire into the nature of fiduciary relations and the policies, principles, and rules that govern them. Part I discusses status, contract, and fiduciary relations. It shows that fiduciary relations are sufficiently distinct and important in our society to warrant treating the law applicable to them as a separate area of the law.

I

THE IMPORTANCE OF FIDUCIARY RELATIONS AND FIDUCIARY LAW

A. The Rise of the Fiduciary Society

Societies may be distinguished by the predominant social and legal relations through which their members interact. This is not to suggest that only one kind of relation exists in any given society, but merely that in each society one type of relation is paramount, and that, as social trends change, relations tend to shift and merge. Although it is probably incorrect to say that societies have evolved in a linear manner according to their predominant social relation, i.e., from status to contract to fiduciary relations, one can observe changes in a society's basic relations.

Law should reflect the changes in societal structure. Thus, a major reason for recognizing and developing a separate body of fiduciary law is that our society is evolving into one based predominantly on fiduciary relations. The body of law governing fiduciary relations can affect and be affected by this social trend.

Fiduciary relations and the rules that govern them can be better understood when compared to two other important relations: status and contract relations and the laws that govern them. The comparison involves three features. The first deals with the contribution of each type of relation to each party's needs and desires. The comparison deals, second, with the effect of the relation on the balance of power between the parties. The two are interrelated. While a relation with others is essential to each party's survival, n11 such a relation may also create a dependence of one party on another, that can in turn limit the freedom of choice of the person who is dependent. The third feature with which this comparison deals is the role of law in the relation, and its effect on the provision of each party's needs, on each party's freedom from coercion by the other, and on the structure and promotion of the relation.

1. Primary Social Relations

a. Status

The parties to a status relation must rely on each other to satisfy their needs and desires. In a status relation, such as that of parent and child, one party (the Power Bearer) usually has a partial or full monopoly over the means for satisfying the needs of the other party (the Dependent). The Power Bearer can coerce the Dependent into service and obedience by manipulating, increasing, or decreasing the satisfaction of the Dependent's needs. As a result of the Power Bearer's monopoly, the Dependent generally defers to the will of the Power Bearer in order to ensure the means for his n12 own survival.

Although the Power Bearer may attempt to minimize the care he gives and maximize the service he extracts, the Power Bearer takes care of the Dependent in order to ensure the Dependent's services or other benefits from the relation for himself. In other words, the Power Bearer furthers his own interest by avoiding gross abuse of his power over the Dependent. n13 In sum, in status relations the Power Bearer dominates the Dependent and the Dependent's freedom is limited in order to ensure the means for his survival, but the Power Bearer must also limit abuse in the exercise of his power in order to meet his own needs.

The law plays a crucial role in the establishment of a status relation. To a substantial extent, the law rather than the parties determines the entry and exit from the relation. n14 Moreover, the law vests power in the Power Bearer and even supports a monopoly on the power. The law rarely interferes in the exercise of the power, setting only broad outer limits and leaving the Dependent with few or no alternatives for satisfying his needs. n15 In most status relations, the law gives higher priority to the security of both parties than to freedom for the Dependent. n16

b. Contract

The parties to a contract relation must also rely on each other to satisfy their needs or desires. Unlike the parties in a status relation, however, neither can use force or monopoly to achieve his purpose. Instead of asserting personal dominance over the other party, each party must persuade the other to exchange. Nevertheless, the parties are in conflict, as each party must protect himself from the other's self-interested behavior.

Unlike the parties in status relations, contract parties have many options for satisfying their needs. They determine their own needs, they bargain to obtain them, and they can enforce their bargains. The law provides each party to a contract with equal legal freedom to make independent decisions as to what to bargain for, and what to give in exchange. Contract frees each party from domination by the other, making them more independent than in a status relation; but its price is [*800] the absence of security. No party to a contract has a general obligation to take care of the other, and neither has the right to be taken care of.

The main role of the law in contract relations is to prohibit the use of force and monopoly, and to enforce the rules the parties freely set for themselves. The law does not make the rules or the contract, although it may facilitate the bargaining process. In addition, the law encourages markets to offer numerous options to each individual from which to satisfy his needs by exchange.

c. The Fiduciary Relation

As in a status relation, one party to a fiduciary relation (the entrustor) n17 is dependent on the other (the fiduciary). This dependence, however, is seldom as broad and pervasive as that in status relations. By definition, the entrustor becomes dependent because he must rely on the fiduciary for a particular service. n18 The fiduciary, however, does not provide every service that the entrustor may need or desire.

Furthermore, the fiduciary himself is not independent, except perhaps in the area of his particular function. He must seek other fiduciaries for other services. For example, money managers generally rely on physicians for medical treatment, while physicians may look to managers for investment advice. Thus, in a society with many types of fiduciaries, each person may sometimes be a Power Bearer and at other times be a Dependent.

Like a prospective party to a contract, an entrustor often can choose among alternative fiduciaries and negotiate the terms of the relation. A fiduciary rarely has a monopoly over the entrustor's needs. Moreover, unless the entrustor agrees, the fiduciary cannot manipulate the terms of his performance once the relation has been established.

In contrast to contract and status relations, in which both parties seek to satisfy their own needs and desires through the relation, fiduciary relations are designed not to satisfy both parties' needs, but only those of the entrustor. Thus, a fiduciary may enter into a fiduciary relation without regard to his own needs. Moreover, an entrustor does not owe the fiduciary anything by virtue of the relation except in accordance with the agreed-upon terms or legally fixed status duties. Therefore, in a fiduciary relation, the entrustor is free from domination by the fiduciary, although he may still be coerced in parallel status relation. Thus, fiduciary relations combine the bargaining freedom inherent in contract relations with a limited form of the power and dependence of status relations.

Accordingly, the law of fiduciary relations should, if possible, preserve the best aspects of status and contract relations. It is desirable for the entrustor to depend on the fiduciary to satisfy certain needs. But it would not be desirable for fiduciary law to impose the relation on either. Law should permit the parties to enter into the relation freely and to ensure that the fiduciary will not coerce the entrustor. The model of fiduciary law that is built in the remainder of this Article seeks to achieve these goals.

2. Status, Contract, and Fiduciary Societies

One is tempted to follow in Sir Henry Maine's footsteps and state that there has been an evolution from status to contract to a fiduciary society. n19 Yet as a matter of history, Maine's thesis is subject to criticism. n20 Societies are too complex, diffuse, and many-faceted to sustain a theory of linear societal evolution. Nevertheless, a society's entire structure can be influenced by its predominant relation. I believe it is therefore safe to assert that certain societies are more suited to particular types of relations, and that an examination of these societies can demonstrate how these relations work.

A feudal society, such as the one that existed in England during the Middle Ages, is based primarily on status. Such a society is static, because the status of Power Bearers and Dependents is predetermined [*802] by law. Furthermore, in a status society Dependents have few options for taking care of themselves, making their security precarious. Finally, personal dominance of one individual over another is common and accepted in such a society.

In a contract society, individuals n21 can provide for their basic needs, and can gain by exchanging the surplus they produce. In addition, such a society offers many options for its members to satisfy their needs. A contract society values freedom and independence highly, but it provides little security for its members. An example of a society based primarily on contract is the market society of the United States during the Industrial Revolution.

I submit that we are witnessing the emergence of a society predominantly based on fiduciary relations. This type of society best reflects our contemporary social values. In our society, affluence is largely produced by interdependence, n22 but personal freedom is cherished. Society's members turn to an arbitrator, the government, to obtain protection from personal coercion by those on whom they depend for specialized services. A fiduciary society attempts to maximize both the satisfaction of needs and the protection of freedom.

Unlike status and contract societies, a fiduciary society emphasizes not personal conflict and domination among individuals, but cooperation and identity of interest pursuant to acceptable but imposed standards. It permits the government to moderate between altruistic goals and individualistic, selfish desires, as well as between the social goal of increasing the common welfare and the individual desire to appropriate more than a "fair share."