Rukhadze and others v Recovery Partners: The “No-Profit” Rule Revisited and Reinforced
Executive summary
In March 2025, the Supreme Court in Rukhadze and others v Recovery Partners GP Ltd [2025] UKSC 10 unanimously held that (1) a “but-for” causation test is inappropriate for an account of profits, (2) courts are not to engage in speculative counterfactual exercises about what might or might not have occurred absent the breach and (3) The “equitable allowance” consideration remains the right flexible mechanism to mitigate any excessive harshness of an account for profits. The Supreme Court upheld the existing principle established in Boardman v Phipps [1967] 2 AC 46 and Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 : that fiduciary liability for unauthorised profit is strict—even when the fiduciary acted honestly or no harm was caused. This aligns with the prophylactic rationale of fiduciary duties (Conaglen)- aiming to deter fiduciaries from breaking their duty of “single-minded loyalty” to their principals.
Key facts and issues
The Appellants had fiduciary roles owed to and within the Respondent company, holding positions of responsibility as directors. In breach of their duties, the fiduciaries diverted corporate opportunity away from the company, earning $179m in recovery fees without disclosing their conduct or seeking informed consent from the company- a breach of the no profit rule was found at the High Court. The High Court ordered a disgorgement of profits amounting to $135 million, allowing a 25% equitable allowance for the fiduciaries’ skill and work which contributed to the profit earned. The Appellants’ argument before the Supreme Court was that the question as to whether a fiduciary is liable to account for profits pre or post-termination of the fiduciary relationship must be answered by reference to the common law “but-for test”: asking whether the fiduciary would have made the same profits had he not breached the fiduciary duty, departing from the House of Lords’ approach in preceding authorities Regal (Hastings) Ltd v Gulliver and Boardman v Phipps.
The role of causation pre-Rukhadze
Causation’s ambit has always been limited in the fiduciary duty to account for profits. In Murad v Al-Saraj [2005] EWCA Civ 959, Arden LJ exposits two key principles in equitable remedies in this area: (1) the fiduciary’s liability is independent of whether the principal could have made the profit but for the breach, liability is strict “pour encourager les autres” and (2) the court does not apply common law principles of causation. The fiduciary cannot raise a defence that the profits would have been made but for the breach; there merely needs to be a “reasonable connection” between the profits and the breach.
Subsequent case law is consistent with this stance. In Boardman, the court ordered a personal remedy in the nature of an account of profits which arose from the breach, most importantly emphasising that a “but-for” causal link does not need to be established between the breach and the profits made. Rather, as Mitchell notes, the test for causation is formulated as “was the breach of fiduciary duty the legally operative cause of the gain?”, using language of attribution rather than causation, consistent with the “reasonable connection” approach in Murad. Regal (Hastings) confirms this position, and this culminates in Lord Briggs’ confirmation in Rukhadze at [60], emphasising that the main purpose of fiduciary duties is to prevent fiduciaries from being tempted to break away from their duty of single-minded loyalty, clarifying that the remedy in an account for profits is not about “compensating for loss” (this would be the core of equitable compensation), but more focused on “conscience”.
Key principles raised by Rukhadze
Although the Supreme Court in Rukhadze ultimately re-affirmed the existing law rather than changed it, the case serves as a good reminder of fundamental principles of equity in the area of accounting of profits for breach of fiduciary duties. These are threefold:
(1) “But-for” causation inappropriate in assessing the liability to account for profits
The Appellants submitted that the relevant test for establishing a liability to account for profits is the common law “but-for” test of causation. This requires the courts to question whether the same profit could have been made but for the breach of fiduciary duty. The Supreme Court rejected this argument, holding that a but-for test would undermine the essence of the fiduciary duty not to make a profit from their position by treating it as a mere remedy for a separate breach (Lord Briggs in his leading judgment). The rationale for fiduciary liability remaining as traditionally strict is chiefly prophylactic: to deter fiduciaries from breaking away from their duty of “single-minded loyalty”, to guard against “human frailty in the face of temptation” (Lady Rose). The Supreme Court compared this strict approach to other that used in other jurisdictions (e.g. Canada, Australia, Singapore, Hong Kong) which have incorporated causation-inflected profit rules, but refused to follow suit.
(2) The no-profit rule is a stand-alone equitable duty, not merely a remedy
Lord Briggs firmly held that the “no profit rule”: that a fiduciary must treat any profit accrued from the fiduciary position, regardless of whether it is gained pre- or post-termination, as belonging to the principal unless there is fully-informed consent, is an “inherent aspect of being a fiduciary”, not independently triggered by a separate breach of duty”. Furthermore, it is not a mere discretionary remedy for such a breach. Fiduciaries cannot retain benefits derived through their position, even if acquired after leaving office, or even if the principal may have lost the opportunity anyway. A breach of this principle is prohibited and not merely remedied (Lord Briggs, Lord Burrows).
(3) The role of equitable allowance
Courts retain the discretion to grant an allowance reflecting the skill and effort invested by the errant fiduciary in earning that profit. reducing their liability by a commensurate amount. Equitable allowances are calculated in a “tailored and fact-sensitive manner”, which aims to mitigate against the excessive harshness and act as a “release valve” from potential injustice in the account for profits procedure. This was accepted as a more principled alternative to hypothetical deductions.
Would a but-for test be better?
Douglas notes that a “but-for” test may be favourable, highlighting that it is used in equitable compensation. However, as noted by Lord Briggs in Rukhadze, such an analysis fails to recognise that the two remedies ought to be distinguished on the basis that equitable compensation aims to redress a loss (hence focused on compensation for loss “caused” by the breach), but an account for profits is aimed at deterring an abuse of a relationship characterised by trust and confidence, which runs to the very core of the fiduciary relationship. While the policy-limited approach proposed with reference to the Australian case Ancient Foresters could be a viable alternative, where the counterfactuals available to the defendant in establishing but-for causation were limited by policy, this would align with the English law approach and Murad can be seen as indeed applying a but-for test, but with a prohibition on the counterfactual in which the wrongful fiduciary makes a profit through honest means.
Conaglen rightly argues that this “exacting standard” serves a prophylactic rationale: it is meant to be a deterrent, intended to protect principals from the risk of fiduciaries breaking their non-fiduciary duties. Liability here is not wrong-based, but derives from a rule that disables the fiduciary from keeping unauthorised gains for themselves (Mitchell). From this, it can be gathered that the fiduciary’s duty of “single-minded loyalty” (Bristol v Mothew) means that he is not authorised to act contrary to the interests of the principal, and is thus disabled from doing; the law’s strict approach to breaches of fiduciary duty simply reflects a principled and policy-driven justification for the imposition of a constructive trust, affirmed by Lord Briggs at [291] of Rukhadze.
Furthermore, the same rationale for account for profits for claims against dishonest assistance is used as well. In Novoship, the courts adopted a more lenient test of whether the breach was a “real and effective” cause. Rukhadze confirms that showing that the profit would not have been made “but for” the dishonest assistance is “sufficient but not necessary”. It has a part to play in the identification of accountable profits, but they do not establish a common law but-for causation test to be passed by the claimant based upon the erection of a counterfactual. Therefore it can be argued that the law takes a standardised approach in the test for accounts of profits, reflecting a policy-driven approach.
