fiduciary duties. Fiduciary duties fall into two broad categories: the duty of loyalty and the duty of care. These duties vary with different types of relationships between fiduciaries and their counter-parties ('entrustors'). … Recently, courts have imposed fiduciary duties on union officers, physicians and clergymen.

Fiduciary relationships appear in many legal contexts: contracts, wills, trusts and elections (e.g. of corporate directors). However, fiduciary duties and remedies draw on a common source – equity. Thus, in addition to damages – a remedy in common law – fiduciaries must account for ill-gotten profits even if their entrustors suffered no injury – a remedy in equity. The similarities and differences among fiduciary relationships explain why law regulates fiduciaries in the first place, and why the regulation varies with different classes of fiduciaries. Therefore, before discussion fiduciary duties we discuss the features by which fiduciary relationships can be recognized.

Features of Fiduciary Relationships. (1) Fiduciary relationships are service relationships, in which fiduciaries provide to entrustors services that public policy encourages. Bailees, escrow agents, agents, brokers, corporate directors and officers, partners, co-venturers, lawyers and trustees all render service to entrustors. Some fiduciaries, such as partners, may be both fiduciaries and entrustors of each other.

(2) To perform their services effectively, fiduciaries must be entrusted with power over the entrustors or their property ('power'). The extent of entrusted power varies with the parties' desires and terms of their arrangements. … Arrangements in which entrustors are precluded from controlling their fiduciaries in the performance of their services, categorized in law as 'trust', vest far more power in the fiduciaries than arrangements, categorized in law as 'agency', in which entrustors control their fiduciaries in the performance of their services. The extent of vested power depends also on the freedom of entrustors to remove their fiduciaries and retrieve the entrusted property. … The magnitude of the powers entrusted to fiduciaries is also related to the cost of specifying the fiduciaries' future actions. Thus the services of escrowees and bailees, which do not require broad discretion, can be spelled out easily in advance, while the services of investment managers and trustees, which require broader discretion, can be described only in general terms because the details depend on future unknown circumstances.

(3) The sole purpose of entrustment is to enable fiduciaries to serve their entrustors. Entrustment enables fiduciaries to use entrusted power for other purposes – for their own use or the use of third parties. Entrustors' losses from abuse of entrusted powers can be higher than their benefits from the fiduciaries' services. therefore, and entrustor will not hand over $100 to a fiduciary if the probably loss of the $100 from the fiduciary's embezzlement, (e.g., a 50% chance) exceeds the expected gain from the relationship (e.g. $5).

(4) Entrustors' costs of monitoring fiduciaries' use of entrusted power are likely to exceed entrustors' benefits from the relationship. For example, if the adviser's interests conflict with those of the entrustors, the value of their advice, even their expert advice, is doubtful. Monitoring such conflicts of interest is costly. Similarly, the very utility of the relationship for clients would be undermined if the clients must watch over their discretionary investment managers to prevent abuse of power.

(5) Entrustors' costs of monitoring the quality of fiduciary services are likely to be very high, because most fu services involve expertise that entrustors do not possess. These monitoring costs may exceed the benefits to entrustors from the relationship. … In addition, the quality of some services cannot be determined by their results: a defendant may lose his case even if his lawyer has performed brilliantly. The quality of some services cannot be easily established at the time of performance: it may take years to discover that a will is faulty.

(6) The fiduciaries' costs of reducing the entrustors' monitoring costs may exceed the benefits to fiduciaries from the relationship. Fiduciaries can reduce entrustors' monitoring costs by 'bonding', insurance and third-party guarantees, provided their costs do not exceed their benefits from the relationship. Because of these limits, their efforts may not e enough to fully cover the entrustors' risk of loss.

(7) Alternative external controls that reduce entrustors' risks, such as market controls, either do not exist or are too weak. Courts recognize new fiduciary relations when, in their opinion, the historical protections of entrustors have eroded. For example, physicians recently joined the family of fiduciaries as they became involved in conflict of interest situations – when physicians own pharmacies that supply their patients' medicines, or when the interests of the physicians' employers conflict with the patients' optimal medical treatment.

The purpose and effect of fiduciary duties. Fiduciary duties are imposed when public policy encourages specialization in particular services, such as money management or lawyering, and when the entrustors' costs of specifying and monitoring the fiduciaries' functions threaten to undermine the utility of the relationship to entrustors. The ultimate effect of the law is to provide entrustors with incentives to enter into fiduciary relationships, by reducing entrustors' risks and costs of preventing abuse of entrusted power, and of ensuring quality fiduciary services. Judicial enforcement of fiduciary duties shifts entrustors' costs to taxpayers. The law imposes on fiduciaries duties that limit their freedoms but increases their marketability by endowing them with a reputation for honesty backed by reputation.

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."

This Article examines the status of fiduciary rules as default rules: whether, and how, entrustors can waive fiduciary duties owed to them. n6 Contractarians argue that fiduciary rules constitute default rules around which the parties can bargain. n7 Anti-contractarians argue that at least some rules are mandatory and cannot be waived. n8 In my opinion, most fiduciary rules consti- [*1212] tute default rules. However, entrustors may only waive fiduciary duties owed to them if they follow a two-step procedure.

First, entrustors must be put on clear notice that, with respect to the particular duties that they waive, they can no longer rely on their fiduciaries; instead, the entrustors must fend for themselves. Second, the fiduciaries must provide entrustors with information acquired by virtue of their position as fiduciaries to enable entrustors to make an informed independent decision regarding the waiver.

The reasons for this procedure stem from the unique nature of fiduciary relationships and the law governing them. In varying degrees the relationships expose entrustors to extraordinary risks. Entrustors must entrust power or property to the fiduciaries because the fiduciaries could not perform their services effectively otherwise, n9 yet this exposes entrustors to the risk that the fiduciaries will appropriate the entrusted property or interest, or misuse the power entrusted to them. The appropriation or abuse of power can result in a loss that far exceeds the potential gain from the fiduciaries' services.

In addition, entrustors become dependent on their fiduciaries and may not be able to monitor the quality of their services because: (1) the skills involved are not easily acquired or understood; (2) the cost to entrustors of monitoring and evaluating such services would undermine the utility of the arrangement; and (3) there exists no other effective alternative monitoring mechanism. In sum, fiduciary rules reflect a consensual arrangement covering special situations in which fiduciaries promise to perform services for entrustors and receive substantial power to effectuate the performance of the services, while entrustors cannot efficiently monitor the fiduciaries' performance. n10

Fiduciary law addresses the unique aspects of this relationship. First, the law vests in entrustors the legal right to receive quality fiduciary services. It imposes on fiduciaries a duty to exercise care and skill, akin to the tort of negligence. Second, the rules vest in entrustors the legal right to rely on the honesty of their fiduciaries by imposing on fiduciaries a duty of loyalty, as well as other specific duties, in order to deter fiduciaries from misappropriating the entrusted property or interests. This part of fiduciary law is akin to the crime of embezzlement n11 and the tort of conversion. n12

The status of fiduciary rules as default rules conflicts with the fiduciaries' duties of loyalty and reliability. While bargaining with their fiduciaries on the issue of waiver, entrustors must fend for themselves as independent parties. Their right to rely on their fiduciaries must be eliminated. In fact, during the bargaining, the entire relationship must be terminated.

Fiduciary law allows such termination of the relationship with respect to specified transactions only if the parties follow a specific procedure. This procedure is designed to ensure an effective transition from the fiduciary mode in which entrustors rely on their fiduciary, to a contract mode in which parties rely on themselves. That is why fiduciaries must put entrustors on notice that, in connection with the specified transaction, entrustors cannot [*1214] rely on their fiduciaries. n13 That is why entrustors must be capable of bargaining independently with their fiduciaries and have the capacity to enter into bargains. That is also why, to allow entrustors to make informed decisions, fiduciaries must provide them with information regarding the transaction, especially when the fiduciaries acquired this information in connection with the performance of their services to the entrustors. This procedure is, and should remain, mandatory. n14

In addition, circumstances exist where fiduciary duties are not waivable for reasons such as doubts about the quality of the entrustors' consent (especially when given by public entrustors such as shareholders), and the need to preserve institutions in society that are based on trust. Further, non-waivable duties can be viewed as arising from the parties' agreement ex ante to limit their ability to contract around the fiduciaries' duties. n15 Under these circumstances fiduciary rules should generally be mandatory and non-waivable.

Ever since Ronald Coase published "The Problem of Social Cost," it has been understood tha tlegal rules can promote the benefits of contractual endeavors in a world of scarce information and high transactions costs by prescribing the outcomes the parties themselves would have reached had information been plentiful and negotiations costless. [FN3] Legal rules cannot transfer wealth from agents to principals –not so long as the price agents collect for their services is unregulated. Acting on moral belief that agents ought to be selfless will not make principals better off; it will instead lead to fewer agents, or higher costs of hiring agents. With powers hedged in by competition and the price system, judges must choose between promoting the parties' contracting (and thus increasing both private and social wealth) and frustrating it (injuring the parties and society). That is not a hard choice. Providing, as a public service, the rules the parties themselves would have chosen in a transaction-cost-free world fosters instrumental and ethical objectives at the same time.

So, we concluded, a "fiduciary" relation is a contractual one characterized by unusually high costs of specification and monitoring. The duty of loyalty replaces detailed contractual terms, and courts flesh out the duty of loyalty by prescribing the actions the parties themselves would have preferred if bargaining were cheap and all promises fully enforced. The usual economic assessments of contractual terms and remedies the apply. Fiduciary duties are not special duties; they have no moral footing; they are the same sort of obligations, derived and enforced in the same way, as other contractual undertakings.[FN4] Actual contracts always prevail over implied ones. Obligations implied to maximize value in high-transactions-costs cases may have some things in common, but differences in the underlying transactions will call for different "fiduciary" obligations, just as actual contracts differ across markets.

II

Objections to a contractual understanding of fiduciary duties take several forms. [FN7] One is that judges simply do not talk like Ronal Coase. No, they don't; but we seek knowledge of when fiduciary duties arise and what form they take, not theories of rhetoric – a theory of what judges do, not of explanations they give. Another is that the contractual perspective cannot explain the structure of the legal rules. Such an objection is compelling, if true. Is it true?

I. INTRODUCTION

We are accustomed to think of the trust as a branch of property law. The Restatement(Second) of Trusts defines the trust as "a fiduciary relationship with respect to property," [FN1] and the codes [FN2] and treatises [FN3] say similar things. This way of speaking about the trust omits an important dimension.

The contractarian claim. In truth, the trust is a deal, a bargain about how the trust assets are to be managed and distributed. To be sure, the trust originates exactly where convention says it does, with property. The Restatement says, "A trust cannot be created unless there is trust property." [FN4] The owner, called the settlor, transfers the trust property to an intermediary, the trustee, to hold it for the beneficiaries. We treat the trustee as the new owner for the purpose of managing the property, while the trust deal strips the trustee of the benefits of ownership.

The distinguishing feature of the trust is not the background event, not the transfer of property to the trustee, but the trust deal that defines the powers and responsibilities of the trustee in managing the property. Sometimes the trust deal also confers significant discretion upon the trustee over dispositive provisions, that is, in allocating the beneficial interests among the beneficiaries. The settlor and the trustee may express their deal in detailed terms drafted for the particular trust, or they may be content to adopt the default rules of trust law. Either way, the deal between settlor and trustee is functionally indistinguishable from the modern third-party- beneficiary contract. Trusts are contracts.

Trust without contract. The contractarian account, presupposing a separate trustee, does not embrace the declaration of trust, which is a mode of trust creation that allows the transferor of property simply to declare himself or herself trustee for the transferee. [FN5] This two-party trust lacks a separate trustee. The settlor cannot contract with himself or herself, and accordingly, we see that trust can arise without contract, without the characteristic deal between settlor and third-party trustee. Because the declaration of trust dispenses with what is normally the most desirable attribute of the trust, that is, the ability to *628 have a third party manage the trust property, the declaration of trust plays a relatively peripheral role in modern practice. In order not to interrupt the main theme of this Article, I discuss the declaration of trust in an appendix. I explain that the declaration sometimes serves as a way station to the creation of a true third-party trust, and that in other settings the declaration turns out to be a doctrinal ruse for validating transfers that are not in function trusts.

The contractarian theme. This Article sets forth the grounds for understanding the conventional three-party trust as a prevailingly contractarian institution. More is at stake in this choice between contract and property formulations of the trust than mere labelling. In Part IV of this Article, I explain why the law of fiduciary administration, which is the centerpiece of the modern trust, is overwhelmingly contractarian. Especially in conflict-of-interest cases, greater attention to the contractarian character of the trust would improve outcomes. [FN6]

Sensitivity to the contractarian character of the trust can be traced to Maitland's celebrated lectures on Equity, [FN7] published posthumously in 1909. Even in the late fourteenth century, observed Maitland, when the English Chancellor first began to enforce the trust, the trust "generally ha[d] its origin in something that we can not but call an agreement." [FN8] "[The] trust was originally regarded as an obligation, in point of fact a contract though not usually so called." [FN9] F.H. Lawson, writing in 1953 in one of the central works of modern comparative law, pointed out that "the three- cornered relation of settlor, trustee, and [beneficiary] ... is easily explained in the modern law in terms of a contract for the benefit of a third party." [FN10]

Our black letter law has resisted the insight that trusts are contracts. The second Restatement of 1959, carrying forward the language of the first Restatement of 1935, [FN11] declares: "The creation of a trust is conceived of as a conveyance of the beneficial interest in the trust property rather than as a contract." [FN12]

History. There was always a component of contract in the trust relationship, but profound changes in the character and function of the trust from the second half of the nineteenth century onward have intensified the *629 contractarian basis of the trust. The trust originated as a conveyancing device for holding real property, often ancestral land. The modern trust has become a management regime for a portfolio of financial assets.

Function. Part IV of the Article develops the intrinsic functional correspondence between contract and trust. The bedrock elements of contract are consensual formation and consensual terms. Trust displays both. I follow for trust the insights of the law-and-economics literature, which has emphasized the contractarian basis of fiduciary duties in modern corporation law. I concentrate on the two central duties of trust fiduciary law, loyalty and prudence. My theme is that, despite decades of pulpit-thumping rhetoric about the sanctity of fiduciary obligations, fiduciary duties in trust law are unambiguously contractarian. The rules of trust fiduciary law mean to capture the likely understanding of the parties to the trust deal, which is why both the duty of loyalty and the duty of prudence yield to the more particularized intentions that the parties may choose to express or imply in their trust deal. I depict the default regime of trust law as a type of standardized contract, and I point to some instances in which the contractarian perspective should improve outcomes in trust law.

It is not my purpose to fold the law of trusts into the law of contract. Like other legal institutions that have been deeply influenced by modern contractarian analysis, such as the corporation or the marriage, the trust has an institutional integrity and convenience that fully justifies its independence. My purpose is simply to show that contractarian analysis illumines, and at times helps us improve upon, what we do with the trust.

I

Contrasting Approaches to Trust-Like Relationships

In a prototypical Anglo-American trust, three parties are involved: the "settlor" transfers property to the "trustee," who is charged with the duty to administer the property for the benefit of the "beneficiary." Any of these three roles may be played by more than one person. Also, the same person may play more than one of the three roles. In particular, the settlor and the beneficiary may be the same person, in which case the trust involves a simple delegation of responsibility for managing property from the settlor/beneficiary to the trustee.

Since, in what follows, we shall often be concerned with efforts to construct trust-like relationships in the absence of trust law, it will be helpful to have generic labels for the three characteristic parties to such relationships - labels that do not carry with them the legal implications of the terms "settlor," "trustee," and "beneficiary." Consequently, unless we are clearly talking about a situation in which the law of trusts applies, we shall refer to the three parties to a trust-like relationship as the "Transferor" (who performs the settlor-like role), the "Manager" (who performs the trustee-like role), and the "Recipient" (who occupies the beneficiary-like role). Likewise, we shall refer to the property that the Transferor transfers to the Manager, to be managed on behalf of the Recipient, as the "Managed Property."

A. The Common Law Approach

The Anglo-American concept of the trust, together with the equity jurisprudence of which it forms a part, is the fortuitous product of the peculiar historical path followed by English law. The writ system, around which the jurisdiction of the common law courts was organized during the reign of Henry II, became rigid toward the end of the thirteenth century, largely precluding the creation of new writs. All common law remedies had to be worked out within the structure of the existing writs. At the time, covenants were not enforceable unless made under seal, and remedies like injunctions and specific performance were unavailable. With the exception of the obsolete legal procedures of the writ of right, the pecuniary award was the only remedy available in a court of law, and it was available for only a very limited number of causes of action. n12 According to the conventional account, the writ system led to frequent acts of injustice, and when the situation became intolerable, the Chancellor began to grant relief in the form of in personam orders to the wrongfully sanctioned defendant. n13 By the fifteenth century, the Court of Chancery had formed and developed its own remedial devices. The dual common law/equity system, typical of Anglo-American law, was born. n14

Prior to the intervention of equity, an effort to create an enforceable trust-like relationship under the common law would have failed. The Manager would have become the full owner of the Managed Property and her obligation to administer that property for the advantage of the Recipient would have been purely moral: Because she was the full owner, neither the Transferor nor the Recipient could have claimed anything against the Manager in a common law court. In contrast, equity ultimately recognized that, while the Manager was the owner at law, her right was restricted by another property interest, that of the Recipient. n15 Recipients therefore were provided with equitable remedies against an unfaithful Manager. This system of rights and remedies was described by saying that the Manager (trustee) had legal ownership, while the Recipient (beneficiary) had equitable ownership. n16

This subdivision of property rights caused little conceptual difficulty in the common law system, which, from an early stage, recognized that property rights need not be concentrated in the hands of a single owner, but rather could be divided among more than one individual, either in time (estates) or in content (incidents of tenure). Since the beneficiaries were considered property owners, and not holders of mere contractual rights, it naturally followed that they could claim their interests against everybody (except against a purchaser for value without notice of the trust) and obtain proprietary remedies. On the other hand, since the trustee held legal title to the trust property, his transfers of property were not impaired by the existence of the trust. n17

Rather, when the trustee exchanged the trust property for other property, the beneficiary's interest and the trustee's duties attached to the new property received in the exchange. Moreover, if the trustee wrongfully transferred trust property to somebody other than a purchaser in good faith without notice of the trust, then, through the remedy called "tracing," the beneficiary's property interest continued to attach to the transferred property, and the transferee was considered to hold the property and all of its proceeds in trust for the beneficiary, who was the equitable or beneficial owner of the property. n18

B. The Civil Law Approach

Continental law evolved along a very different path. The development of the law was not in the hands of practitioners organized around a centralized system of justice. n19 Rather, academic lawyers in the universities were the leading force in the development of the law. The law itself was to be found not in a register of writs, but in the Justinian compilation. n20 A dual legal system never arose. A general theory of contract as a source of obligations was developed early on by scholars, and the notion of obligation remained central to continental legal theory. Consequently, in the continental legal tradition it was obligation that played the most important role in framing trust-like arrangements. n21 This was facilitated by the fact that, in the continental systems, the remedy of specific performance came to be available for the enforcement of any kind of obligation arising from contract, delict, or unjust enrichment. n22

Despite its substantial generality and flexibility, however, the civil law of obligations did not evolve to fully encompass trust-like arrangements. On the contrary, the civil law developed important taboos that would be violated by trust law rules of the form that evolved in England. In particular, trust doctrine runs counter to the so called unitary theory of property rights. n23 During the French revolution, divided property rights came to be considered characteristic of feudalism. As a consequence, it was thought that the number of restricted property rights had to be strictly controlled and limited. The numerus clausus theory was developed, stating that divided interests in property must be strictly confined to a small number of well-defined types, such as servitudes on real property, mortgages, and usufructs. n24 Although this theory was largely the product of the folklore and ideology of the French revolution and lacked a well articulated general rationale, it enjoyed tremendous success and continues to have a strong influence on the civil law. Since the particular division of property rights embodied in the private trust cannot be fit within any of the limited forms of divided property rights recognized by the civil law, the trust has been considered an impermissible arrangement. n25

This is not to say that European law makes no provision for the formation of trust-like relationships. n26 To begin with, European law has various special purpose institutions that serve as substitutes for the trust in certain well-defined situations. These include, for example, special guardianship institutions to manage assets on behalf of minors or incompetents. n27 In addition, for a more general class of transactions that do not fall within the narrow confines of these special institutions, contractually based relationships can be established that have some of the attributes of a trust.

The most general of these relationships is the "romanistic fiduciary transaction," or fiducia. This device is essentially a creation of legal scholars that has found its way into the case law, rather than a relationship explicitly recognized by the civil codes. n28 It is typically created by means of a contract between the Transferor and the Manager. In the paradigmatic case, the Transferor formally transfers the property involved to the Manager, who becomes the legal owner of the property, while at the same time the two parties enter into a contract under which the Manager becomes the agent of the Transferor and promises to manage the property for the benefit of the Recipient, who becomes a third party beneficiary of the contract. Because, following the dictates of the civil law regime, the Recipient has no property rights in the Managed Property, enforcement of the Transferor's contract with the Manager is the only means of control over the Managed Property that is available to either the Transferor or the Recipient. Nevertheless, since that contract can be specifically enforced under the law of European civil law countries, the Recipient can obtain a degree of protection that is similar in some respects to the protection available in the common law trust. For example, he can regain possession of the Managed Property upon the expiration of the arrangement as long as the property still remains in the Manager's possession - that is, it has not been transferred by the Manager to a third party purchaser.

Under this arrangement, the Manager is the sole owner of the Managed Property. This means that she has the capacity to transfer it or otherwise contract for its use in any way. The natural consequence is that a third party who acquires Managed Property from an unfaithful Manager is always protected, even when he knows that the Manager is acting in bad faith. To deal with this problem, legal theory and case law have evolved in some civil law countries to provide trust-like remedies through which the Managed Property can sometimes be recovered from a third party who acquired it in bad faith from an unfaithful Manager, though the scope of this protection is generally not as broad as that afforded by the trust. n29 Another important difference between the fiducia and the common law trust involves the treatment of insolvency - a subject we shall return to in detail below.

Strong evidence that the fiducia and other civil law institutions for establishing trust-like relationships n30 do not provide completely adequate substitutes for the common law trust can be found in the fact that, despite the very peculiar institutional setting in which the law of trusts developed, the trust has come to be adopted in a number of jurisdictions beyond the core common law countries. n31 Further evidence can be found in The Hague Convention on the Law of Trusts, to which a group of civil and common law countries became parties in 1985. n32 The Convention establishes choice of law rules providing for recognition, in nontrust jurisdictions, of trusts and trust law from foreign jurisdictions. The principal rationale for the Convention, as well as the principal difficulty in its drafting and the principal source of resistance to its adoption, was the general absence in civil law countries of legal institutions analogous to the common law trust. n33