Duty of care (business associations)

In United States corporation and business association law (particularly Delaware law and the Revised Model Business Corporation Act), a duty of care is part of the fiduciary duty owed to a corporation by its directors. The other aspects of fiduciary duty are a director's Duty of Loyalty and (possibly) duty of good faith.

Put simply, a director owes a duty to exercise good business judgment and to use ordinary care and prudence in the operation of the business. They must discharge their actions in good faith and in the best interest of the corporation, exercising the care an ordinary person would use under similar circumstances.

Directors' decisions are typically protected under the business judgment rule, unless they breach one of these duties or unless the decision constitutes waste. A breach of fiduciary duty will typically remove a director's decision from business judgment protection and require that the director show entire fairness.

Directors have a duty not to waste corporate assets by overpaying for property or employment services. Thus the definition of waste is an exchange so one-sided that no business person of ordinary, sound judgment could conclude the corporation has received adequate consideration. This is difficult to prove in a court of law.

The duty of care has been set out or clarified in a number of decisions. Among the important duty of care cases are:

Smith v. Van Gorkom (setting out duty to be reasonably informed in decision-making).

Caremark, Unocal Corp. v. Mesa Petroleum Co., Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. (setting out duty of supervision and knowledge of company finances).

The Duty of Care is set out in the Model Business Corporation act sections 8.30 and 8.31. There is no statutory codification of the Duty of Care in the Delaware General Corporation Law.

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