Facts
A business opportunity arose when a wealthy businessman passed away (“the Opportunity”).
The Opportunity was to provide services to recover assets from around the world, and to resist government claims to those assets (“the Recovery Services”).
Three key individuals were involved in the Recovery Services.
The first owned and managed a company that was entitled to the Opportunity (“the First Company”). The second was a director of the First Company for a period of time, and then worked for or on behalf of the First Company for a further period. He was also the First Appellant. The third became a partner in another company (“the Second Company”). He was the Second Appellant. The Second Company was also the Second Respondent.
Another individual was a solicitor, employed by the Second Respondent, and the Third Appellant.
The First Appellant fell out with the Second and Third Appellant. All decided to contract for the Recovery Services in place of the First and the Second Company. Following their resignation from the First and the Second Company, the Appellants continued to provide the Recovery Services.
The Appellants were paid by the family of the businessman who passed away.
The Respondents were successors to the First Company’s entitlement to the Opportunity. They sued the Appellants for an account of profits. This was represented by the payments made by the family of the businessman who had passed away.
The trial judge found that each Appellant committed breaches of fiduciary duty owed to the First Company, and the Second Respondent. In particular, disloyalty.
At trial, and on first appeal, the Appellants reserved their right to pursue a “but-for” causation submission on second appeal to the Supreme Court.
Discussion
Lord Briggs (with whom Lords Reed, Hodge and Richards agreed) gave the leading judgment:
“The essential purpose of the rule that a fiduciary must not without his principal’s consent keep for himself a profit from his position as such, and the related rule that a fiduciary must avoid placing himself in a position where his interest and his duty may conflict (usually called the conflict rule), is to protect or deter those who have undertaken an obligation of single-minded loyalty to someone else from being tempted by human frailty to fall short of that obligation.”
Lord Briggs continued by confirming that “the fiduciary duty to account for profits is a rule governing the conduct of fiduciaries which exists in its own right. It is a duty or obligation imposed by equity on all fiduciaries, as an inherent aspect of their undertaking of single-minded loyalty to their principals. It is not just a discretionary equitable remedy for the breach of some other duty, such as the conflict rule, nor is it necessarily triggered by some other breach, although it very often is.”
Moreover: “A fiduciary may come to generate a profit out of his role as such without committing any breach of trust. It may be an authorised use of the trust property, or of his fiduciary powers. But he must then account for that profit if it has been made from or out of his fiduciary position, not keep it for himself. The wrong which may lead to a court order for an account of profits is, in such a case, no more or less than the failure to account itself, by a fiduciary who wishes to keep the profit for himself.”
Finally: “The duty to account for profits does not depend upon a demand for an account by the principal, or upon an order of the court. There is simply not the relationship between breach and damages for loss caused by the breach which has to be filled by rules as to causation and remoteness which are routinely applied by the common law, and which almost always involve the erection of a counterfactual.”
The Appellants’ grounds of appeal asserted that there should be a change in the law from this long-established principle that the duty to account for profits is not subject to a “but for” condition that the profit would not still have been made without any breach of fiduciary duty. Lord Briggs said that this would require “very serious justification”.
Disposal
The grounds of appeal did not carry “significant weight”. Nor did they add up to “anything significant”.
“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, and the discretion to make allowance for their application of work, skill and risk in the taking of the account is a typically equitable answer to the occasional danger that the rigour of the rule will cause disproportionate injustice.”
The appeal was dismissed.
Lord Leggatt, Lord Burrows and Lady Rose wrote separate, concurring judgments.
Written by Dominic Bright.
Commercial. Construction. Property.