<center><span class="news-text_italic-underline">Judgment Date: 19 March 2025</span></center>
This decision maintained the existing approach and declined to depart from the precedent set by the House of Lords in earlier cases such as <span class="news-text_italic-underline">Regal (Hastings) Ltd v Gulliver (1967)</span> and <span class="news-text_italic-underline">Boardman v Phipps (1967)</span>. The Court further emphasised that while the strict application of this rule might occasionally lead to perceived injustice, the use of equitable allowances - where a fiduciary’s skill and effort might be recognised - provides a fair remedy.
The Court concluded that the existing rule, which does not permit the fiduciary to avoid liability by relying on a counterfactual argument about what profits they could have made had they not breached their duties, should remain in place. The Court also dismissed the suggestion that the law needed to be modernised to reflect current business practices, noting that any such reform should be the responsibility of the legislature rather than the judiciary.
The appellants, fiduciaries, challenged a ruling that required them to repay profits they had made by diverting a business opportunity away from the respondents, a clear breach of their fiduciary duties. The appellants argued that the court should apply a common law "but for" test of causation, which would inquire whether the fiduciaries would have made the same profits if they had not breached their duties.
The appellants contended that the long-established rule requiring them to account for profits was outdated, especially in light of the increasing complexity of modern business and fiduciary relationships. They argued that the courts should allow them to defend their retention of profits by applying the "but for" test, claiming that they would have made the same profits even if they had not acted in breach of their fiduciary obligations. This argument suggested that the law should allow fiduciaries to escape liability for profits gained in circumstances where they might have been able to make similar profits without the breach.
The Supreme Court dismissed the appeal, upholding the existing principle that fiduciaries must account for profits made through their position, even if they argue that the profit would have been made in any event. The Court highlighted that the duty to account for profits arises out of the fiduciary's role and is not contingent upon a "but for" test of causation. In this case, the Court reaffirmed that fiduciaries are required to account for profits derived from their position, regardless of whether those profits would have been made if they had not breached their fiduciary duties. The fiduciary's duty to avoid conflicts of interest and to act with single-minded loyalty is the core principle underpinning this rule.
The Court pointed out that the duty to account for profits is an equitable remedy that does not depend on the fiduciary having committed a prior breach of duty. Even if a fiduciary generates profits without breaching their duties, they are still required to account for those profits as part of their fiduciary obligations.
The Court explained that the law does not require a "but for" causation test in the context of fiduciary duties. The principle that fiduciaries must account for profits is rooted in equity, not merely as a remedy for breach of duty. The duty exists because fiduciaries have an inherent obligation to act in the best interests of their principals, which includes not retaining any profit derived from their fiduciary role.
The Court further clarified that the “but for” test is not appropriate in fiduciary cases because it would undermine the deterrent effect of the rule that prohibits fiduciaries from benefiting from their positions. This test would allow fiduciaries to escape liability for profits simply by arguing that they could have made the profits without the breach, which would reduce the impact of the fiduciary duty to act with undivided loyalty.
The Court also addressed the argument that the law should be reformed to reflect modern business practices. While acknowledging that fiduciary relationships have become more complex, the Court noted that the fundamental principles governing fiduciary duties - including the duty to account for profits - remain critical in maintaining trust and fairness in business relationships. The Court concluded that any changes to the law should be made by the legislature, not by judicial reform.
<span class="news-text_medium">Lord Leggatt’s Judgment:</span> Lord Leggatt affirmed that the fiduciary’s duty to account for profits was not a remedy for breach of duty but an inherent part of the fiduciary's obligation to their principal. He noted that fiduciaries must not use any property or profits for their own benefit outside the scope of their authority.
<span class="news-text_medium">Lord Burrows’ Judgment:</span> Lord Burrows discussed how the fiduciary’s breach gives rise to two types of equitable remedies: compensatory and disgorgement. He agreed that a “but for” test should not be applied in fiduciary cases, as it would undermine the duty of loyalty.
<span class="news-text_medium">Lady Rose’s Judgment:</span> Lady Rose reflected on the application of fiduciary duties in modern business and the codification of directors' duties under the <span class="news-text_italic-underline">Companies Act 2006</span>. She argued that the high standards expected of fiduciaries should be upheld and that the legislature should address any potential updates to the law regarding directors' duties.
This case reinforces the enduring principles of fiduciary law and confirms the continued necessity of fiduciaries being held to account for any profits made through their position. It highlights the importance of the duty of loyalty and the need for judicial adherence to established principles, while also noting that changes to the law should be left to legislative bodies.
