Supreme Court Confirms Fiduciary Must Account Even For Profits That Would Have Been Made Without The Breach Of Duty

The Supreme Court has confirmed that a fiduciary, including a company director, is liable to account for all profits made out of their position as such. They cannot circumvent liability by arguing that "but for" the breach they would have made the profits in any event – for example because, if asked, the principal would have consented. The court may, however, award an equitable allowance to reduce the amount of accountable profits where the fiduciary has devoted hard work and skill, and potentially put their own capital at risk in obtaining such profits: Rukhadze v Recovery Partners GP Ltd and another [2025] UKSC 10.

In its decision, the Supreme Court unanimously declined to change the law governing a fiduciary's liability to account for profits. However, three of the seven justices disagreed with the reasoning.

The decision confirms the strictness with which the equitable principles that attach to a fiduciary relationship are to be applied. The "no profit" rule requires a fiduciary who makes a profit out of their position (such as by exploiting a business opportunity they became aware of by virtue of being a fiduciary) to account for that profit unless the principal provides informed consent to the fiduciary keeping it. It is closely linked to the "no conflict rule", which prohibits fiduciaries from placing themselves in a position where their interest and duty may conflict. The essential purpose of both rules is to deter individuals who have undertaken an obligation of undivided loyalty to someone else from being tempted to fall short of that obligation for their own gain.

The defendants in this case argued that the current approach is draconian, as well as being unjust to honest fiduciaries who have devoted time and skill, and potentially risked their own assets, in making a profit. The Supreme Court rejected that argument. Qualifying the duty to account for profits by introducing a "but for" test would, in the majority's view, strike at the essence of that duty and significantly hamper its deterrent effect. In its view, justice is better served by the court's discretion to award an equitable allowance in appropriate cases rather than applying a "but for" test across the board.

Background

The case concerned the provision of asset identification and recovery services (the '"Recovery Services") to the family of a deceased Georgian businessman (the "Badri Family").

In the early years, the Recovery Services were provided on an ad hoc basis through Recovery Partners GP Limited and Revoker LLP (together, the "Claimants"), both of which were ultimately owned by an individual, Mr Jaffe. Three individuals (together, the "Defendants") did most of the work in providing the Recovery Services on behalf of the Claimants. The Defendants alleged that they came to agree a profit share with Mr Jaffe, according to which they would receive 50% of the profits earned through providing the Recovery Services. However, the relationship deteriorated and the Defendants discussed plans to establish their own corporate structure through which they would provide the Recovery Services.

The Defendants resigned from their positions at the Claimants but continued to provide the Recovery Services on an ad hoc basis. The Badri Family then terminated its relationship with the Claimants and Mr Jaffe and subsequently entered into a formal agreement with the Defendants. The Defendants recovered substantial assets for the Badri Family and received considerable sums for doing so.

The Claimants brought proceedings alleging that the Defendants had wrongfully diverted, for their own benefit, the opportunity to provide the Recovery Services. The High Court (Cockerill J) upheld the claim, finding that the Defendants had breached fiduciary duties owed to the Claimants.

Following the liability trial, the Claimants elected to seek an account of profits. Cockerill J found that the Defendants had made accountable net profits (excluding disbursements) of around US$179 million. However, considering the "exceptional deployment of time, effort and skill", and risks taken, by the Defendants in providing the Recovery Services and securing an agreement with the Badri Family, the court applied an equitable allowance of 25%. As a result, the Defendants were ordered to pay US$134 million plus interest to the Claimants by way of an account of profits.

The Defendants appealed, and the Claimants cross-appealed against the award of an equitable allowance. The Court of Appeal dismissed both appeals.

The Defendants appealed to the Supreme Court, arguing that they should only be liable for profits which, but for the breaches of their fiduciary duty, they would not have earned. Their position was that, if they had resigned before any breach of duty was committed, they would still have negotiated a contract with the Badri Family to provide the Recovery Services, just as in fact happened, and so would have made the relevant profits in any event.

They accepted that applying a "but for" test to an account of profits would mean departing from two longstanding decisions of the House of Lords: Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 and Boardman v Phipps [1968] 2 AC 46, which they invited the Supreme Court to do. The appeal was therefore heard by a panel of seven justices.

Decision

The Supreme Court unanimously dismissed the appeal. Lord Briggs delivered the main judgment, with which Lord Reed, Lord Hodge and Lord Richards agreed. Lord Leggatt, Lord Burrows and Lady Rose delivered concurring judgments in which they agreed with the majority's conclusion to dismiss the appeal but for different reasons.

The main judgment

Lord Briggs noted that the fundamental purpose of the "no profit rule" and the "no conflict rule" is to "deter those who have undertaken an obligation of single-minded loyalty to another from being tempted by human frailty to fall short of that obligation".

He said it was important to note that the duty to account for profits is a free-standing duty, rather than a discretionary equitable remedy for the breach of some other fiduciary duty. It is not necessarily triggered by some other breach, though it often is. The duty does not depend on a demand for an account by the principal or on an order from the court. It crystallises the moment a fiduciary receives a profit made from or out of their position as such.

The scope of the duty (which can extend beyond the end of the fiduciary relationship to cover profits made post-termination) covers all profits "made from, out of, or otherwise sufficiently connected with, the fiduciary relationship". This requirement for a link between the profit received and the fiduciary relationship has been described by the courts in a variety of ways over the years, eg through use of phrases such as "by reason of", "out of", "in the course of", "owing to" and "by virtue of".

Accordingly, Lord Briggs said a causation analysis is already inherent in the law concerning the identification of profits for which a fiduciary must account. Such an analysis does not, however, require consideration of a "but for" type of counterfactual, as advanced by the Defendants. Lord Briggs noted that the question is not whether the profit would have been made even if there had been no breach of fiduciary duty. Instead, the question is:

"…did the profit owe its existence to a significant extent to the application by the fiduciary of property, information or some other advantage which he enjoyed as a result of his fiduciary position, or from some other activity undertaken while he remained a fiduciary which the conflict duty required him to avoid altogether?"

In answering this question, the court must look closely at what in fact happened and not concern itself with what hypothetically might have happened.

Lord Briggs stated that a departure from the long-established principle that the duty to account is not subject to a "but for" condition would require very serious justification. He did not consider that any of the Defendants' grounds for proposing reform provided such justification.

A key argument raised by the Defendants was that the present basis for imposing an account of profits is draconian, causes injustice to honest fiduciaries who have devoted time and skill and risked their own assets, and serves an objective which is no longer proportionate in modern society. They acknowledged that the current approach played a deterrent role, but submitted that the deterrent effect would be maintained even if a fiduciary could avoid liability to account for profits through the imposition of a "but for" test, given the potential reputational damage of being found to be in breach of fiduciary duty in a public court.

Lord Briggs disagreed. He considered that the Defendants' approach revealed a fundamental conceptual error in treating an order for an account of profits as merely a remedy for some other breach of fiduciary duty, rather than a free-standing duty. Introducing a "but for" test would "strike at the essence of the duty itself". He stated:

"If such an order could be resisted by the trustee or fiduciary showing that he could have made the profit without committing a breach of fiduciary duty, then the underlying duty would be bound to be taken as attenuated by the routine constriction of the ambit of the court order for its enforcement."

In Lord Briggs's view, justice was better served by the application of an equitable allowance to reduce the amount of accountable profits for which a fiduciary is liable where they have devoted work and skill (and potentially put their own capital at risk) in obtaining such profits. This was a discretionary way of alleviating any potential injustice, without watering down the underlying principles.

As for the Defendants' argument that English law was "lagging behind" the example set by other common law jurisdictions, Lord Briggs noted that the overseas authorities relied on by the Defendants largely confirmed that causation has a part to play in identifying accountable profits – which he said had long been implicitly recognised in English law as well. However, he did not accept that they established a "but for" test based on a hypothetical counterfactual.

Similarly, while there had been much academic writing on the duty to account for profits, some of which was critical of the rigour in which the principle is applied and the potential for injustice, he said there was nothing approaching an academic consensus that change is needed.

Concurring judgments

Lord Leggatt, Lord Burrows and Lady Rose all agreed with the majority's conclusion to dismiss the appeal, but disagreed with their reasoning.

Lord Leggatt considered that a "but for" test (based on a hypothetical counterfactual) is already inherent in the requirement to show a relevant causal connection between the breach of fiduciary duty and the profits for which the defendant is liable to account. However, he disagreed with the Defendants as to the appropriate hypothetical counterfactual to be applied. In his view, the hypothetical non-breach scenario in the two House of Lords authorities was not one in which consent of the principal was sought, but one in which the fiduciaries had not entered into the relevant transaction. In the present case, it was one in which the Defendants did not breach their fiduciary duties by exploiting a business opportunity that was to be regarded as belonging to the Claimants. Consequently, even applying a "but for" analysis, the Defendants were liable to account for the profits made (minus an equitable allowance).

Lord Leggatt and Lord Burrows further disagreed with Lord Briggs' classification of an account of profits as a free-standing duty as opposed to a remedy for the breach of some other fiduciary duty. Lord Leggatt commented that imposing such a duty would be unjust given that a fiduciary often does not know without judicial determination what sum of money, if any, is payable. As such, it would be impossible for a defendant to satisfy the duty, or at least to know they had satisfied it, because the content of the duty could not be ascertained prior to a judicial decision.

Lady Rose commented that if the Supreme Court accepted the Defendants' suggestion for reform, it would have to decide whether to change the law in respect of all fiduciaries, or all company directors, or only those who are involved in companies in similar circumstances to the present. Lady Rose considered a change for all to be a "very serious step". But an attempt to define the situations in which a counterfactual analysis was required or permissible would be a difficult task, and one which it was not appropriate for the Supreme Court to undertake.

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