Rukhadze and others v Recovery Partners GP Ltd and another

A fiduciary must account for an unauthorised profit made from, or sufficiently connected with, the fiduciary relationship. The obligation can extend to profits made after the relationship ends.

Factual causation may help identify whether the profit arose from the fiduciary position. English law does not, however, permit the fiduciary to retain the profit by showing that it could have been made without a breach, through earlier resignation, or with consent that might have been obtained. Only actual, fully informed consent provides a defence.

The court declined to depart from longstanding authority. The strict rule protects single-minded loyalty and deters conflicts. Any disproportionate effect may be moderated by a discretionary equitable allowance for the fiduciary’s work, skill and risk.

The individual appellants learned of and worked on a lucrative asset-recovery opportunity while acting in fiduciary roles for entities whose claims were later held by the respondents. Before leaving those roles, they took disloyal preparatory steps to obtain the opportunity for themselves. After resigning, they supplied the recovery services through a new structure and earned substantial profits.

Cockerill J found breaches of fiduciary duty and ordered an account of net profits of US$179 million, subject to a 25% equitable allowance, producing an award of approximately US$134 million plus interest. The Court of Appeal dismissed the appeal in [2023] EWCA Civ 305.

The Supreme Court considered whether to depart from Regal (Hastings) Ltd v Gulliver and Boardman v Phipps by introducing a common-law “but for” test under which a fiduciary could retain profits that would hypothetically have been earned without a breach.

1. The appeal was dismissed unanimously. Lord Briggs gave the leading judgment, with which Lord Reed, Lord Hodge and Lord Richards agreed. Lord Leggatt, Lord Burrows and Lady Rose delivered separate concurring judgments.

2. The majority declined to depart from Regal (Hastings) Ltd v Gulliver and Boardman v Phipps. A fiduciary’s undertaking of single-minded loyalty entails a strict obligation to account for unauthorised profits made from, out of, or sufficiently connected with the fiduciary relationship. Fully informed consent is the relevant defence. Knowledge of the profit without consent is insufficient.

3. The necessary connection can survive termination of the relationship. A former fiduciary will ordinarily be accountable where post-termination profits owe their existence to a significant extent to fiduciary property, information, an opportunity or another advantage, or to conflicting activity begun while the relationship continued. The inquiry examines what actually occurred. It does not construct a hypothetical world in which the fiduciary resigned earlier, sought consent, or otherwise avoided the breach.

4. Lord Briggs held that factual causation in the broad sense may assist in identifying the connection between the fiduciary position and the profit. This differs from the common-law “but for” test. The latter would undermine the prophylactic purpose of the profit and conflict rules by permitting the fiduciary to rely on hypothetical lawful alternatives.

5. The strict rule was neither obsolete nor unjustified. Its purpose remains to deter fiduciaries from entering conflicting activities without prior informed consent. Equitable compensation was not an appropriate analogy because it responds to loss, whereas an account strips unauthorised gain. A discretionary equitable allowance for work, skill and risk provides the appropriate means of avoiding disproportionate injustice.

6. Lord Burrows agreed that an account could be analysed as a remedy for breach, but concluded that its purpose still excludes a lawful-alternative counterfactual. Lady Rose considered that any relaxation for modern commercial relationships would have wide statutory and commercial consequences and was a matter for Parliament.

7. Lord Leggatt adopted a different analysis. He regarded an account as a remedy for misuse of property, information or opportunity and considered that ordinary “but for” causation applies. On his formulation, however, the relevant non-breach scenario excluded the appellants’ exploitation of the opportunity. They would consequently have made none of the disputed profits, so the appeal still failed.

1. United Kingdom Supreme Court: The appeal was dismissed unanimously. The court declined to depart from the governing House of Lords authorities.
2. Court of Appeal: In [2023] EWCA Civ 305 , reported at [2023] Bus LR 646, the court dismissed the appellants’ appeal from the liability and accounting decisions.
3. High Court, Commercial Court: Cockerill J found breaches of fiduciary duty at the liability trial and subsequently ordered an account of US$179 million in net profits, subject to a 25% equitable allowance, producing an award of approximately US$134 million plus interest.