A fiduciary, including a trustee, is under a duty not to profit from their office. Where a fiduciary is in default, equity requires them to account to their principal for any profit made.

A recent decision of the UK Supreme Court has considered whether the non-profit rule and the duty to account are due for a change. This is a particularly important issue for professionals, such as lawyers and accountants, who regularly act as trustees and provide other services as fiduciaries.

Rukhadze v Recovery Partners GP Ltd

Rukhadze v Recovery Partners GP Ltd concerned the estate of a Georgian billionaire, Arkadi “Badri” Patarkatsishvili, who died without a will in February 2008.[1] Salford Capital Partners Inc was initially engaged by Badri’s family to manage the recovery of his significant assets, which were dispersed globally. Mr Rukhadze (among others) was principally responsible at Salford Capital for carrying out the lucrative recovery work. However, following a falling out of key personnel within Salford Capital, Mr Rukhadze and his co-appellants resigned and then provided services to recover Badri’s sprawling estate directly, through a newly established company.

Salford Capital sued Rukhadze, alleging a breach of fiduciary duty and seeking an account of profits. There was a split trial of liability and quantum. On liability, the Court found that prior to his resignation, Rukhadze had taken preparatory steps to take advantage of the recovery opportunity. Given this, Rukhadze’s resignation was essentially in bad faith, and in breach of his fiduciary duty to Salford Capital.

On quantum, the Court accepted that, because of his breach, Rukhadze had a duty to account for the profits made. The Court found that Rukhadze had earned an eye-watering net profit of US$179m. An ‘equitable allowance’ discount was applied to account for Rukhadze’s work and skill in carrying out the recovery work. The trial judge therefore reduced the award in damages by 25%, to US$134m.

On appeal to the Supreme Court, Rukhadze argued against the requirement to account for profits and that instead, a ‘but for’ test should apply. Namely, what profit would Rukhadze have earnt, but for the alleged breach? Rukhadze argued that he would have earnt the profits even if there were no breach.

As against the duty to account, Rukhadze argued that:

The remedy of an account of profits is draconian and serves an objective which is no longer proportionate in modern society.
Courts of equity in the past may have been discouraged from constructing ‘but for’ counterfactuals given the degree of speculation involved. However, modern forensic tools mean that this approach is outdated.
Affording an ‘equitable allowance’ to reduce an award for account of profits (as occurred at trial) to recognise the fiduciary’s time and skill in obtaining the profits is uncertain, unpredictable, and unprincipled. A ‘but for’ test applying across the board would replace the equitable allowance without any of those defects.
Other equitable remedies (in particular, equitable compensation) have been recently improved by the insertion of common law principles of causation. It is time for the same to be extended to the remedy of an account of profits.

The Court’s judgment was delivered by Lord Briggs. He emphasised that the ‘no profit rule’ stands as an independent duty, “not just a discretionary equitable remedy for the breach of some other duty”.[2] He further stated that a departure from the long-standing duty to account for profits, without being subject to the ‘but for’ test, “would require very serious justification”.[3] Ultimately, he considered that the duty to account did not require reform, stating that “the rigour of the profit rule, together with the conflict rule to which it is closely related, continues to underpin adherence by fiduciaries to their undertaking of single-minded loyalty to their principals and beneficiaries”.[4] Rukhadze’s appeal was accordingly dismissed.

The New Zealand position

The duty to account for profit following a breach of fiduciary duty remains good law in New Zealand.

In Chirnside v Fay, for instance, the parties were partners in a joint venture to develop property. Mr Chirnside subsequently continued with the development project alone. Mr Fay sued, alleging a breach of fiduciary duty and seeking an account of the profits made. The Supreme Court found that the appropriate remedy was an account of profits, noting that whether the plaintiff has suffered loss is irrelevant.[5] Instead, the enquiry is focused on what a defaulting fiduciary has gained from the breach.[6]

The UK Supreme Court’s rejection of the adoption of a ‘but for’ test is yet to be considered by our courts. However, given the emphasis on the fiduciary’s single-minded loyalty as inconsistent with a ‘but for’ test, and the Supreme Court’s decision in Chirnside v Fay, the non-profit rule and duty to account are likely here to stay.