The Tort Foundation of Duty of Care and Business Judgment
55 Pages Posted: 30 Apr 2012 Last revised: 22 Sep 2015
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The Tort Foundation of Duty of Care and Business Judgment
Date Written: April 29, 2012
Abstract
This article corrects a misconception in corporation law — the belief that principles of tort law do not apply to the liability scheme of fiduciary duty. A board’s duty of care implies exposure to liability, but the business judgment rule precludes it. Tort law finds fault; corporation law excuses it. The conventional wisdom says that the tort analogy fails. This casual dismissal of tort principles is wrong. Although shareholder derivative suits and ordinary tort cases properly yield systemically antipodal outcomes, they are bound by a common analytical framework. The principles of board liability are rooted in tort doctrines governing duty, customs, and pure economic loss. Properly applied, they produce a duty to care based on good faith undertaking of care, but upon such undertaking no liability for negligently inflicted economic loss — the exact result achieved by the fiduciary duty of care and the business judgment rule. A sound tort analysis can not only theorize the enigmatic relationship between the duty of care and the business judgment rule, but it can also explain Delaware’s puzzling procedural-substantive divide. Fiduciary duty in corporation law rests on a tort foundation.
Lastly, the thesis of this article has a broader implication. The contractarian view of corporation law seeks to relegate the role of courts to passive custodians of the corporate contractual terms provided by the legislature and the corporation’s constituents. However, this view is constrained by a tort framework wherein courts do and should play a robust, albeit reserved, role in regulating important aspects of corporate governance through continued common law process of doctrinal development of the idea of a wrong.
Keywords: business judgment rule, fiduciary duty, duty of care
JEL Classification: K22
Suggested Citation: Suggested Citation