Introduction
Rukhadze and others (the "Appellants") v Recovery Partners GP Ltd and another (the "Respondents") [2025] UKSC 10, decided on 19 March 2025, saw the Court dismiss an invitation from the Appellants to depart from precedent by relaxing the approach to the equitable principles governing accountability for profits made during and after fiduciary relationships. The duty to account for profits is usually called the "Profit Rule". In short, the Profit Rule requires fiduciaries (including directors and trustees) to act with unwavering loyalty towards their principals and obliges fiduciaries to account for profits derived from that relationship, unless they have informed consent from the principal to retain a profit.
A panel of seven Supreme Court justices was assembled to consider the Appellants' arguments. The Supreme Court unanimously dismissed the appeal, with the majority making it clear that the Profit Rule is a fundamental aspect of the fiduciary relationship and the severity of the law on this principle acts as a deterrent to a fiduciary's departure from their undertaking of single-minded loyalty to their principal.
Background
The case arose from a lucrative business opportunity following the death of Georgian businessman Arkadi Patarkatsishvili ("Badri") in February 2008. The opportunity involved providing asset recovery services for Badri's family, including recovering his assets from various locations worldwide and defending against claims from governments and other entities (the "Recovery Services"). Salford Capital Partners Inc. ("SCPI") was established in 2001 to provide investment management services to Badri, and after Badri's passing, the Respondents were formed in 2008 to handle the Recovery Services for SCPI.
The individual Appellants had worked for the Respondents holding positions of responsibility (including serving as directors) and playing key roles in the Recovery Services. Disagreements arose between the Appellants and SCPI's owner, which led to Badri's family terminating SCPI's services in 2011. The individual Appellants subsequently continued providing Recovery Services through a new corporate structure and received substantial profits (of $179 million) from the family for this work, without disclosing their actions or obtaining the prior consent of the Respondents.
The Respondents sued the Appellants, alleging breach of fiduciary duty as the Appellants had exploited business opportunities and confidential information acquired in their capacity as fiduciaries of SCPI, to benefit themselves by continuing to provide the Recovery Services to the Badri family following the termination of SCPI's services. The High Court ordered the Appellants to account for the profit to the Respondents in accordance with the Profit Rule, minus a 25% allowance for the application of their time and skill when providing the Recovery Services. An appeal to the Court of Appeal was dismissed.
Legal issues
The Appellants appealed to the Supreme Court, inviting the Court to depart from precedent and adopt a "but-for" causation test and counterfactual arguments in determining the accountability of fiduciaries for profits. The Appellants argued that such a test would bring clarity and predictability to the law, whereas the Profit Rule is disproportionately harsh and unpredictable in modern day society.
Such counterfactual arguments might include that: (i) the profit would have been made regardless of the breach; (ii) the principal would have consented to retention of the profit (had consent been sought); and (iii) the principal could not have made the profit themselves.
The Appellants made their arguments on six grounds:
- The current basis for imposing the remedy of an account of profits is draconian and unjust to honest fiduciaries.
- The historical reluctance of courts to construct counterfactuals due to forensic difficulties and uncertainties is outdated.
- The current equitable allowance, meant to mitigate the harshness of the Profit Rule by awarding a discretional amount of the profit to the fiduciaries for their work and skill in generating the profit, is wrongly classified as exceptional and unprincipled in its application.
- Other equitable remedies, such as equitable compensation, have been modernised by incorporating common law principles of causation – and the same should be extended to the Profit Rule.
- English law is "lagging" behind other common law jurisdictions such as Canada, Australia, Hong Kong and Singapore, which have recognised the role of causation in identifying accountable profits.
- More weight should be given to the academic criticism of the Profit Rule when considering its reform.
The Appellants argued that a fiduciary should not be liable to account for profits where it would have made those profits in a counterfactual scenario where there had been no breach of duty. If the Appellants could show that, if they had resigned from their positions before they committed any breaches of fiduciary duty, they still would have gone on to successfully negotiate a contract with the family and provide the Recovery Services, then they should not have to account for any profits.
Key takeaways from the Judgment
In a leading judgment delivered by Lord Briggs, the Supreme Court unanimously dismissed the appeal. In doing so, the Court reaffirmed that the Profit Rule is a fundamental aspect of fiduciary duty, arising from the fiduciary's obligation of undivided loyalty to their principal and emphasising that the duty to account is not merely a remedy for a breach of duty.
The judgment reinforced that the duty to account for profits is not contingent on whether the fiduciary would have made the same profits without breaching their duty. The Court emphasised that an order for an account of profits is not just a remedy, but a specific enforcement of a basic duty of fiduciaries to treat any profit arising out of their fiduciary role as belonging to their beneficiaries. Introducing a "but-for" test would undermine this duty and such a test would be inappropriate in the context of fiduciary duties.
The Court distinguished between equitable compensation, which involves compensation for loss, and an account of profits, where loss is irrelevant. The two are fundamentally different and, therefore, the transformation of equitable compensation law to include a "but-for" test does not provide a template for reforming the Profit Rule.
The Court upheld the principles established in Regal (Hastings) Ltd v Gulliver and Boardman v Phipps, which impose strict liability on fiduciaries to account for profits made from their position. The Court noted that these principles are intentionally strict - they deter fiduciaries from placing themselves in positions of conflict and departing from their loyalty to their principals.
The Court also acknowledged that the equitable allowance serves as a discretionary way of alleviating potential injustice by compensating fiduciaries, allowing a 25% allowance for the Appellants' work and skill in providing the Recovery Services. Lord Briggs found that the allowance better serves the objective of doing substantial justice than a "but-for" test, which would be a "crude" and inflexible tool.
Lord Leggatt and Lord Burrows acknowledged the Appellants' view that the order for an account of profits should be seen as a remedy for a wrong rather than a specific enforcement of a fiduciary duty, but dismissed the appeal nonetheless. Although Lord Legatt held that common law causation applies, he also held that the relevant counterfactual is not whether the Appellants would have made the profit, nor whether the Respondents would have consented to the profit if asked in advance, but whether the Appellants would have made the profit if they had not been in breach of fiduciary duty – which he held they would not have.
Lady Rose emphasised the fundamental nature of fiduciary duties and historical consistency. The expansion of business and financial services only serves to underscore the need for clear and stringent rules to ensure that fiduciaries adhere to their obligations of loyalty. Lady Rose maintained that the fundamental reason for the strictness of the Profit Rule, which she identifies as "human frailty in the fact of temptation", remains as relevant today as it has always been.
Conclusion
This decision provides significant lessons for fiduciaries:
- The strict application of the Profit Rule is a strong deterrent against exploiting a fiduciary position for personal gain. Fiduciaries must be vigilant in avoiding conflicts of interest and ensuring that profits made from their position are fully disclosed and accounted for to their principals. Fiduciaries must act with transparency and prioritise the interests of their principals above their own.
- Courts have the discretion to grant equitable allowances for a fiduciary's work and skill, providing a measure of fairness in cases where a fiduciary has contributed to the generation of profits. However, the availability and extent of such allowances remain uncertain.
- Parties involved in complex commercial arrangements must be aware of potential fiduciary duties that may arise and the strict standards of conduct required. The case underscores the need for clear agreements and informed consent to avoid disputes and potential liability.
This is an important judgment for directors or other fiduciaries who are considering resigning from a company and setting up a competing business. It also highlights that businesses must continue to be vigilant in ensuring compliance with their fiduciary obligations, implementing robust risk management practices, and seeking legal advice to navigate the more nuanced complexities of fiduciary relationships.
