In Rukhadze & Ors v Recovery Partners GP Ltd & Anr [2025] UKSC 10, the UK Supreme Court has delivered an important reminder and warning for company directors, trustees, agents and anyone else who owes fiduciary duties.
In the decision, the Supreme Court decided against introducing a "but for" test of causation when assessing a fiduciary's liability to account to a principal for any personal profits they make out of the fiduciary relationship. As a result, it was irrelevant that the fiduciary would have made the same profit if they had not breached their fiduciary duties – in the absence of informed consent, they were still required to pay the full amount of profits over to the principal.
As well as clarifying the approach to be taken to accounting for profits, the judgment shows that English courts are not prepared to soften the strict duties owed by a fiduciary, even in circumstances where the individual has no idea they are a fiduciary.
What are fiduciary duties?
A fiduciary is a person who acts on behalf of another (the principal) in circumstances that give rise to a special relationship of trust. Classic examples of fiduciary relationships include trustees and beneficiaries, or company directors and companies.
The defining feature of the fiduciary relationship is the fiduciary's obligation of single-minded loyalty towards the principal. This gives rise to specific legal duties for fiduciaries, including that the fiduciary must not act in a way that conflicts with the interests of the principal and, relevantly for this case, that the fiduciary must account to the principal for any profits made from the fiduciary relationship (unless the principal has given fully informed consent to the fiduciary keeping those profits).
Another key point is that fiduciary duties can arise automatically under English law where one person undertakes and is entrusted with authority to manage the property or affairs of another and to make discretionary decisions on their behalf. This means parties who put in place a particular group structure for tax or other reasons can end up inadvertently owing fiduciary duties.
The facts
The claimants (a BVI company and UK LLP) provided asset recovery services to the family of a deceased Georgian billionaire. The defendants originally worked for the claimants but later resigned to set up a competing business. The defendants ultimately concluded a contract with the family to provide the recovery services themselves, from which they made a substantial profit. The claimants challenged this profit as, among other things, a breach of the defendants' fiduciary duties.
The trial judge accepted that the defendants owed the claimants fiduciary duties and had breached those duties (as well as duties of confidentiality) in taking the claimants' business opportunity. As a result, the defendants were liable to pay all the profits they had earned from the asset recovery to the claimants, minus a 25% discount to reflect the defendants' work and skill in providing the services. The defendants appealed unsuccessfully to the Court of Appeal and then brought a further appeal to the Supreme Court.
The judgment
The key question for the Supreme Court was whether a "but for" causation test in the assessment of profits earned by a fiduciary should be introduced, asking "could the same profit have been made but for the breach of fiduciary duty"? This would have been a new development in the law, involving a departure from two previous House of Lords decisions, Regal (Hastings) Ltd v Gulliver (1967) and Boardman v Phipps (1967), as well as a 300 year old authority, Keech v Sandford (1726).
The defendants raised a number of arguments in favour of the change, most notably contending that it is unfair and unprincipled for remedies for breach of fiduciary duties to operate differently to remedies for breach of contractual or tortious duties (where a "but for" test is already applied to determine whether one party's loss has been caused by the other party's breach). The defendants argued that the requirement to account for all profits was "outdated" and "draconian" where it may be "happenstance" that a commercial relationship was structured so as to give rise to fiduciary duties rather than, for example, contractual duties.
A panel of seven Supreme Court justices unanimously rejected that proposal, though for differing reasons. The leading judgment, given by Lord Briggs, held that accounting for profits is not just a remedy for a breach of duty, but a freestanding duty in and of itself and an inherent aspect of a fiduciary's obligation of single-minded loyalty. In practical terms, this meant that if a fiduciary makes a profit as a result of the fiduciary relationship, those profits are held on behalf of the principal under a constructive trust.
Introducing a "but for" test could allow a fiduciary to profit from their role but escape any financial consequences by arguing that they would have made the same profits anyway. At present, the "inevitability" of having to account for all profits, subject only to a discretionary allowance by the court for the fiduciary's hard work and skill, serves as a crucial deterrent to fiduciaries who otherwise might be tempted by "human frailty" to be disloyal. Although it may be harsh for a fiduciary to be the only person prohibited from profiting from a particular opportunity, the consequences of permitting profits would undermine the very purpose of the fiduciary relationship.
Both Lord Briggs and Lady Rose also disagreed that fiduciary duties were out of place in modern business relationships. Lord Briggs noted that fiduciary duties are treated as foundational by modern financial services regulation, and Lady Rose noted that the Companies Act 2006 recently codified a number of rules around fiduciary duties and neither Parliament nor professional regulators considered these rules to produce serious anomalies or injustice at the time. Lord Briggs was also unconvinced that the approach by other common law jurisdictions compelled the radical change proposed by the defendants.
It is worth noting that Lord Leggatt disagreed with Lord Briggs that accounting for profit was not a remedy for breach of other fiduciary duties, and considered that a "but for" test was already inherent in assessing the profits made from the breach. However, even applying a "but for" analysis, he found that the defendants would not have earned the profit they did but for their breaches and therefore agreed that the appeal should be dismissed.
Key takeaways
As the judgment notes, many modern fiduciaries do not realise they are in a fiduciary relationship. Business structures are often created for tax efficiency or other reasons, and participants may not be aware these give rise to strict fiduciary duties.
However, the court has made clear that English law will not "water down the long-standing principles" of single-minded loyalty where fiduciary duties properly arise, noting that fiduciary duties have been "an important part of what makes business distinguishable from an uncontrolled free for all". The answer to perceived ignorance of fiduciary obligations is "better public legal education, and better education and training for those embarking upon a fiduciary undertaking", rather than a change in the legal test.
This means that, more than ever, parties who owe (or risk owing) fiduciary duties need to understand what they can and cannot do, and approach any opportunities to make personal profit with real caution. If a fiduciary does want to make a personal gain in connection with their fiduciary role, they must seek the informed consent of the principal first.