Rukhadze v Recovery Partners GP Ltd [2025] UKSC 10, decided yesterday, is a landmark decision on the liability of trustees and other fiduciaries to account for unauthorised profits. It decides that the liability is strict and does not depend on whether the principal would have made the same profit or would have consented to the fiduciary keeping all or part of the profit if he had been asked. All that is needed is a sufficient link between the fiduciary duty and the profit.
The four judgments, running to over 100 pages, raise a wealth of issues. Here, David Halpern KC offers some initial observations.
The facts are complicated, but fortunately can be summarised very briefly in order to understand the issue before the Supreme Court. The case arose out of the death of the Georgian billionaire Patarkatsishvili (known as “Badri”, a name that will be familiar to afficionados of oligarch litigation). The claimants (and associated parties) agreed with his family that they would provide services in recovering his assets worldwide. The defendants (and associated parties) originally held senior positions of responsibility within the claimant entities. The trial judge held that the defendants were in a fiduciary relationship with the claimants and that it was through this relationship that they acquired the business opportunity to work for the family.
There was a falling-out between the claimants and the defendants. The defendants resigned from their roles in working for the claimants and they bad-mouthed teirhe claimants to the family. This led to the defendants being engaged by the family in place of the claimants. The defendants received profits of $179m from this work.
The trial judge held that the defendants had committed breaches of fiduciary duty and were liable to account to the claimants for the profits, less an equitable allowance of 25% for their efforts. However, she did not consider it necessary to decide whether the claimants would have succeeded in making those profits, but for the breach. The Court of Appeal upheld her decision.
The issue on the appeal to the Supreme Court was whether “but-for” causation should apply. Because of the importance of the case, it was heard by seven Justices. They all reached the same conclusion but by different routes. Fortunately for those of us who have to advise and make submissions on unauthorised profits by a fiduciary, three Justices agreed with the analysis of Lord Briggs, with the result that there is a majority judgment which the lower courts should follow.
It may be helpful to summarise what is meant by the term “fiduciary”. The paradigm category is trustees, as well as partners and company directors. The list of fiduciaries is not closed, and it extends to at least some agents and professional advisers.
Lord Briggs gave the leading judgment, with which Lords Reed, Hodge and Richards agreed. He upheld and restated the orthodox principle which applies to all fiduciaries. The core obligation of a fiduciary is the duty of undivided loyalty to his principal. It is this duty which forms the basis of the no-conflict rule and the separate, but related, no-profit rule. The courts have justified these two rules by their important deterrent effect in ensuring that fiduciaries do not deviate from their duty of undivided loyalty.
These rules create free-standing primary duties. Hence any profit made by the fiduciary in breach of either or both rules belongs in equity to the principal from the outset, unless the principal has given his informed consent. Unlike a common-law claim for damages, it is not merely a remedy awarded by the court but is an equitable interest arising as soon as the profit is made.
There has been judicial debate about whether causation has any role to play, but it all depends on what is meant by causation. “But-for” causation has no role to play; hence there is no room for applying a “but-for” counterfactual. Nevertheless there has to be a link between the fiduciary duty and the profit. The fiduciary is not liable to account if the profit is unrelated to his duty, e.g. a company director who wins money by betting on a horse outside of working hours is not liable to account for the winnings unless he acquired inside information about the horse through his work. It is not open to a fiduciary to resign from his position in order to make an unauthorised profit, because this does not destroy the link.
Lord Briggs summarised his conclusion at [36]:
“The question is not, would the profit have been made even if there had been no antecedent breach of fiduciary duty, but 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 activity undertaken while he remained a fiduciary which the conflict duty required him to avoid altogether. For that purpose the court looks closely at the facts, ie what actually did happen, but does not concern itself with what might have happened in a hypothetical “but for” situation which did not in fact occur.”
Lord Leggatt and Lord Burrows each agreed with the outcome but by different routes, which involved treating the basis of the claim as remedial. Lord Leggatt held that the fiduciary has a duty not to use the principal’s property (including business opportunities) for his own benefit. Breach of that duty gives rise to a liability either to pay damages for loss or to account for profits. He held that “but-for” causation applies, whichever remedy is sought. The relevant counterfactual is whether the profit would have been made, but for the breach of duty. There is a very interesting and spirited rejection of Lord Briggs’s analysis which is based on rights, not remedies, but I suspect that this is unlikely to make much difference to the practical outcome in most cases.
Lord Leggatt included a helpful discussion of the relationship between the no-profit rule and the no-conflict rule. He said that the no-conflict rule depends on there being a real sensible risk of conflict and that it ceases to operate when the defendant ceases to be a fiduciary. By contrast, the no-profit rule applies to all unauthorised profits made out of property (using the term in a broad sense to include business opportunities) acquired while he was a fiduciary, even if the profits are not made until after he has ceased to be a fiduciary. However, he left open the possibility that this rigid rule might need to be modified in an appropriate case where the fiduciary had made a profit for himself whilst acting in good faith and for the benefit of the principal (as in Boardman v Phipps [1967] 2 AC 46).
Similarly, Lord Burrows held that the claim for an account of profits is a claim for a remedy. He followed AIB v Redler [2015] AC 1503 in holding that common-law causation applies, but like Lord Leggatt, he held that the relevant counterfactual is not whether the claimant would have made the profit, nor whether the claimant would have authorised the profit if asked in advance, but whether the defendant would have made the profit if he had not been in breach of fiduciary duty.
Redler has proved to be a controversial decision as to the role of common-law causation in equitable remedies, but Lord Briggs was able to side-step this controversy by using an analysis based on rights and not remedies.
Lady Rose, in her concurring judgment, focused on the issue whether the traditional equitable rules are fit for purpose in the twenty-first century in a case such as this, involving international businessmen who are far removed from the kind of trustees for whom the rules were invented in the eighteenth and nineteenth centuries. She concluded that there was no justification for departing from the established rules, not least because these rules had recently been codified in the context of directors’ duties in the Companies Act 2006.
Although the judges adopted different analyses, the overall result provides a clear answer as to what a principal has to prove in order to recover unauthorised profits from a fiduciary. It is a pity that the claimants were refused permission to appeal against the equitable allowance of 25% which the judge granted to the defendants on account of their work and skill in generating the profits. This meant that the Supreme Court did not consider this aspect in detail. It would have been interesting to see how the equitable discretion to award an allowance fits into Lord Briggs’s analysis that the profits belong to the principal as of right. It would also have been interesting to receive guidance from the Supreme Court as to the circumstances in which it is appropriate to award this allowance.
David Halpern KC of 4 New Square has a broad Chancery and commercial practice and sits part-time as a deputy High Court judge. He is listed in the Directories as a leading silk in the fields of professional liability and property litigation. Read more about David’s work here.
Disclaimer: This article is not to be relied upon as legal advice. The circumstances of each case differ and legal advice specific to the individual case should always be sought.
© David Halpern KC, March 2025
