Rukhadze and others v Recovery Partners GP Ltd and another

This appeal concerned the scope and possible reform of the equitable "profit rule" and the circumstances in which a fiduciary must account for profits, including post-termination profits. The court refused the appellants' invitation to import a general common-law "but-for" causation test that would allow a fiduciary to retain profits on the basis that he would have earned them in any event or would have obtained the principal's consent.

Key legal principles applied and confirmed:

• The fiduciary obligation not to put interest and duty in conflict and the closely related rule that a fiduciary must not make unauthorised profits remain fundamental equitable principles (see Regal (Hastings), Boardman, Keech).
• The fiduciary duty to account for profits is prophylactic in character; profits obtained by reason of the fiduciary relationship are treated in equity as belonging to the principal and may give rise to a constructive trust.
• Causation plays a role in identifying which profits fall within the duty to account, but courts will not generally admit a counterfactual enquiry that asks whether the fiduciary would have made the profit "but for" the breach in the sense of relying on hypothetical informed consent or lawful alternative conduct.
• The court retains a discretionary power to make an equitable allowance to reflect work, skill and risk undertaken by the fiduciary; that discretion mitigates potential harshness in particular cases.

Application to the facts: the Supreme Court dismissed the appeal, affirmed the liability findings below and upheld the judge's order for an account of profits subject to the equitable allowance already applied.

This was an appeal from the Court of Appeal ([2023] EWCA Civ 305) arising from a claim by entities who said that a valuable business opportunity to provide international asset recovery services belonged to them and had been appropriated by certain individuals while those individuals were in fiduciary roles. The proceedings were split into liability and quantum. At Phase 1 the High Court found breaches of fiduciary duty and breach of confidence by individual appellants who resigned and then procured contracts for themselves. At Phase 2 the High Court quantified net accountable profits at US$179m and allowed a 25% equitable allowance, producing a net award of about US$134m. The Court of Appeal dismissed the defendants’ appeal. The defendants appealed to the Supreme Court asking, among other things, that the court reform the law so that a common-law "but-for" causation test would limit liability to profits which would not have been earned absent the fiduciary breach.

Issues framed and resolved:

• The primary issue was whether English equitable jurisprudence should be changed so that, as a condition of liability to account for profits, claimants must prove by a but-for counterfactual that the profit would not have been made but for the fiduciary’s breach.
• Related issues were whether the fiduciary duty to account for profits is an independent duty or merely a remedial consequence of some other breach, whether post-termination profits can be caught, and the proper role of equitable allowance.

Court’s reasoning (concise account):

• The court emphasised the prophylactic purpose of the profit and conflict rules and the long line of authority (Keech; Regal (Hastings); Boardman) that treats unauthorised profits as held for the principal and liable to account. That strictness is deliberate to deter conflict and temptation.
• The court rejected the appellants’ invitation to import a general common-law but-for causation test as a gateway to defeat claims to disgorgement, concluding that such a reform would require weighty justification and would undermine the core equitable obligation of single-minded loyalty. The Practice Statement does not favour such a departure here.
• Nevertheless, the court acknowledged that a factual causal link between the fiduciary position or the breach and the profit is necessary to identify accountable profits; courts use a variety of descriptive formulations ("by reason of", "out of", "within the scope of") and will examine the facts closely. That enquiry does not, however, entail the speculative counterfactual that the principal would have consented or that the fiduciary could lawfully have obtained the profit by some other route.
• The court also reaffirmed that the constructive trust and duty to account arise on receipt of the profit in the relevant circumstances, and that equitable allowances remain an important discretionary safeguard to avoid disproportionate hardship.

Outcome: the Supreme Court dismissed the appeal and upheld the courts below. The court refused to alter the law to adopt the broad but-for causation test urged by the appellants.

Appeal dismissed. The Supreme Court refused the appellants' invitation to displace longstanding House of Lords authority (Keech; Regal (Hastings); Boardman) by importing a general common-law "but-for" causation test as a prerequisite to liability to account for profits. The court reaffirmed that a fiduciary must account for profits made by reason of the fiduciary relationship unless the principal gave fully informed consent, that a causal connection between the fiduciary position (or breach) and the profit is required (assessed by the facts rather than by speculative counterfactuals of hypothetical consent), and that an equitable allowance may be made in discretion to mitigate hardship.

Appeal to the Supreme Court from the Court of Appeal ([2023] EWCA Civ 305). The underlying proceedings began in the Commercial Court: Phase 1 liability judgment Cockerill J [2018] EWHC 2018 (Comm); Phase 2 account/quantum judgment [2022] EWHC 690 (Comm). The Court of Appeal dismissed the defendants’ appeal ([2023] EWCA Civ 305). Leave to appeal to the Supreme Court was granted and the Supreme Court dismissed the appeal on 19 March 2025.