Supreme Court upholds that fiduciaries must act with "single-minded loyalty toward their principals (or beneficiaries)"

In Rukhadze and others v Recovery Partners GP Ltd and another [2025] UKSC 10, the Supreme Court unanimously affirmed the legal test for the account of profits rule (the Profit Rule)

The Profit Rule

To summarise, the Profit Rule requires fiduciaries to account for a profit that they make out of their position as a fiduciary, unless they have fully informed consent from the principal to keep the profit. In this case, the appellants sought for the Profit Rule to be changed so that the test of causation was applied on the "but for" basis, by asking whether a fiduciary would have made the same profits if they had avoided any breach of fiduciary duty.

Facts

Following the death of Georgian businessman, Arkadi Patarkatsishvili (Badri), his family instructed an asset recovery company in the British Virgin Islands and an LLP (together the Respondents) to recover Badri's assets.

The appellants (the Appellants) were former company directors of the Respondents and were held to be fiduciaries (and note that fiduciaries can include trustees, partners and some professional advisers).

The Respondents alleged that the Appellants resigned from their fiduciary positions with the intention of taking advantage of this business opportunity, which they had been working on for the Respondents, for their own personal gains. In doing so, the Respondents alleged that the Appellants had breached their fiduciary duties and had unlawfully profited from the lucrative contract.

High Court and Court of Appeal

The High Court ruled in favour of the Respondents, finding that the Appellants had breached their fiduciary duties. The Judge found that the Appellants had made accountable net profits of $179 million, but allowed a 25% equitable allowance in recognition of their skill and effort in generating the profits, awarding $134 million plus interest. The Appellants appealed.

The Court of Appeal upheld the ruling. Throughout, the Appellants had reserved their right to seek to depart from fiduciary principles before the Supreme Court, namely that a court must always answer the question of whether a fiduciary is liable to account for profits by reference to a “but-for” test of causation. In other words, by asking whether the Appellants would have made the same profits even if they had avoided any breach of fiduciary duty.

The Appellants' grounds for proposing such a change were as follows:

1. The present basis for the remedy of the Profit Rule works as an injustice to honest fiduciaries.
2. The court's disinclination to construct counterfactuals is outdated when considering modern procedural and forensic tools that are available to the courts.
3. Equitable allowance is not fit for purpose to be a cure for any injustice, while a "but-for" condition would not contain these defects.
4. Other equitable remedies (such as equitable compensation) have been recently developed by the insertion of common law principles of causation, and so this modernisation should be extended to the remedy of account of profits.
5. In this respect, English law is lagging behind the law of other common law jurisdictions.
6. Academic criticism of the remedy of an account of profits ought to be given more weight than it has previously been given.

Supreme Court

The Supreme Court unanimously dismissed the appeal. Lord Briggs gave the leading judgment. Lord Briggs stated 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." Addressing each of the six grounds in turn, Lord Briggs:

1. Determined that the Appellants had made an error in treating the Profit Rule merely as a remedy. It is also an order for the specific enforcement of a basic duty of trustees and fiduciaries, to treat any profit arising out of their fiduciary role as belonging to their beneficiaries.
2. Rejected that anything significant has changed in terms of the court's forensic ability to construct counterfactuals.
3. Stated that courts have a broad discretion to apply equitable allowances and noted that the Appellants did not challenge the High Court's use of a 25% equitable allowance in this case.
4. Noted that equitable compensation is about compensation for loss, but loss is irrelevant to an account of profits.
5. Explained that relevant case law in other common law jurisdictions did not require the creation of a counterfactual to reach their conclusions, and that they are insufficient to command a “catch up” change in English law.
6. Concluded that the Profit Rule in its current form has not given rise to anything approaching an academic consensus that change or reform is needed.

In conclusion, Lord Briggs ruled that the grounds for appeal did not carry significant weight and did not add up to anything significant in the aggregate to justify a departure from precedent. Lord Briggs added that the principle is intentionally strict. He therefore concluded that the law regarding a fiduciary's duty to account for profits, or the means by which equity identifies profits that are subject to that duty, should neither be reformed nor changed.

Lord Leggatt, Lord Burrows and Lady Rose all concurred with the leading judgment but gave differing reasons for reaching that conclusion. In his judgment, Lord Burrows noted that "human nature being what it is" has not changed and therefore the justification for the current Profit Rule should remain in place. Lady Rose also explained that fiduciary duties were codified as recently as the Companies Act 2006.

Commentary

Fiduciaries, whether directors or trustees, should note this decision as a clear reminder that the Profit Rule will be applied to anyone who deviates from their "single-minded loyalty" owed to their principals.

The appellants in this case had sought to argue that the Profit Rule (which had been explored in some eighteenth century case law decisions) needed updating to account for the modern world of commerce where the fiduciary and the principal are both sophisticated operators, having access to the same information, who may also rely on less formality, and far less on trust, than in the traditional relationships. However, interestingly the Court noted that the introduction of the Companies Act in 2006 (which codified directors' fiduciary duties) showed that the UK Government considered that the Profit Rule was still relevant in more modern times.

To read the full judgment, please click here.