Good Faith Duty as Alternative to Fiduciary Duty

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The draft model contract includes a fiduciary duty provision we recommend access-to-justice plaintiffs bargain for. The fiduciary duty supplements the conflict of interest disclosures the contract requires. However corporate finance plaintiffs do not need such protection, and may not be as concerned about potential conflicts of interest. Moreover, access-to-justice plaintiffs may not be able to negotiate successfully for the fiduciary duty or even some of the conflict disclosures. An alternate approach is for the parties to commit to act in good faith, or for the funder to commit to avoiding certain actions, like coercing plaintiffs with regard to settlement.

Thus we propose this provision as an alternate for imposing a fiduciary duty on the funder:

3.2.2 Good Faith Dealings

The Funder agrees it will act reasonably and in good faith toward the Plaintiff in every action Funder takes in relation to the Claim and Funders’ performance under this Agreement. For the avoidance of doubt, and without limiting the foregoing, pressuring  Plaintiff to negotiate or accept a settlement that Plaintiff believes is not in its best interest shall violate this covenant. Notwithstanding the previous sentence, Funder’s mere exercise of its right to terminate without cause, including Funder’s refusal to invest Committed Capital at a Milestone, shall not constitute breach of this covenant.

The goal with this provision is to give the Plaintiff the maximum comfort possible, short of a fiduciary duty, that conflicts of interest will be resolved in the Plaintiff’s favor. We propose imposing it on the Funder only for three reasons. First, the Plaintiff is already under several specific duties that cover the kinds of bad faith actions a Funder should be concerned about, such as failure to disclose material information or impairing the Claim. Second, the Plaintiff is motivated to act in good faith to increase the chances that Funder will continue to invest in the Claim at Milestones. Third, the Plaintiff is subject to the implied duty of good faith and fair dealing.

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