This article addresses the high burdens under a fiduciary duty, and the consequences breaching this duty can bring.
What are fiduciary duties?
A fiduciary duty is an obligation owed to another person in a fiduciary relationship. This relationship encompasses numerous dynamics – including agents to principals, directors to the company and trustees to the beneficiary of a trust.
The duties owed by a fiduciary depend on the nature of a relationship, but ultimately, these duties are based on concepts of loyalty and being guided by the interests of the other person. The Court has been assertive in understanding that a fiduciary must not use their position for their private benefit.
No profit
A recurring element of a fiduciary duty is that a fiduciary must not make a profit from or through this relationship.
The rationale behind this rule is that it prevents the risk of a personal interest overriding the obligation to protect the interests of the other person in the fiduciary relationship.
The recent case of Recovery Partners GP Ltd and another v. Rudhadze and others
The Rudhadze and two others (‘Rudhadze’) had been appointed by their principal, Recovery Partners GP Ltd (‘Recovery Partners’), to assist them in a business opportunity. Rudhadze, therefore, owed Recovery Partners a fiduciary duty to act in their best interest in pursuit of this opportunity.
Rudhadze breached this duty as they appropriated the business opportunity from Recovery Partners. As such, Recovery Partners sued Rudhadze for breaching this duty and to account for the profits they made from exploiting this business opportunity.
The case was heard at the High Court and Court of Appeal, where both Courts ordered Rudhadze to account for all the profits made, subject to an allowance to account for their work and skill.
The Supreme Court’s take on the no-profit rule
Rudhadze appealed to the Supreme Court to argue that they should not have to account for all the profits that were made as Recovery Partners would not have made the same profit without the breach of the duty. Through this appeal, Rudhadze were asking the Supreme Court to depart from the long-standing no profit rule.
It was held that the no-profit rule and accounting for all the profits made through a breach of this duty was an essential feature of the fiduciary obligation. The Supreme Court upheld the well-established rule and were willing to robustly enforce this.
Whilst the Rudhadze tried to assert that it was likely a profit-sharing agreement could have been entered into, the Court rejected this and did not consider this argument to have any relevance, as no such agreement had been entered into. It is clear from this, the Court’s primary focus will be the breach of duty and even a binding agreement will not limit their ability to enforce this rule.
That being said, the Supreme Court were willing to make an equitable allowance to account for Rudhadze’s hard work and skill. To that end, they were entitled to 25% of the profits to reflect the work they had done to generate this profit, but the Court were clear of their intention to scrutinise how these profits were accrued.
Case comment
It is clear from this case that the law surrounding fiduciary duties is harsh. Where there has been a breach, the Court will robustly enforce the rules to protect those who are owed this fiduciary duty. This case also highlighted that it is far too common to think that you are making the most of a business opportunity, without understanding the potential legal impact this may have.
Whether you are in a fiduciary relationship and owing or being owed this duty, it is crucial to know how the court will treat a breach of duty. Seeking legal advice where you think a breach has happened or is likely to happen can help you to ascertain your legal position. As the duties owed depend on the nature of the fiduciary relationship, we appreciate that the law is not straightforward, and we can help you navigate the legal intricacies. We can clarify the law governing these relationships and assist you in coming to a pragmatic resolution when a dispute arises.
Our team of experts deal with these cases regularly and will be happy to assist you. As a top firm for client satisfaction, we have built a reputation as good listeners who can help break down complex legal jargon into words you can understand and are experts at advising on your specific situation.
