Fiduciary Duties and the ‘But For’ Test

In the recent Supreme Court decision of Rukhadze v Recovery Partners GP Ltd [2025] UKSC 10, the Supreme Court looked at whether a fiduciary’s duty to account for profits was subject to a ‘but for’ test of causation, asking whether a fiduciary would have made the same profits if they had avoided any breach of fiduciary duty.

Background Facts

Following the death of Arkadi Patarkatsishvili, a wealthy businessman, in 2008, a valuable opportunity arose to provide asset recovery services for his family, recovering his hidden global assets and defending against claims. Salford Capital Partners Inc. (SCPI), owned by Eugene Jaffe, initially pursued this opportunity, with key individuals Irakli Rukhadze, Igor Alexeev, and Ben Marson (associated with SCPI and later Revoker LLP) delivering services and gaining asset knowledge. SCPI began ad hoc services post-death, but no formal agreement was reached initially.

By 2011, Rukhadze, Alexeev, and Marson fell out with Jaffe, resigned from SCPI/Revoker, and took steps to secure the opportunity for themselves, including denigrating SCPI. They continued services at the family’s request, forming Hunnewell and securing a contract in 2012, earning fees and a large sum after recovering $500 million in 2016, paid out in 2018.

SCPI’s successors sued, alleging breaches of fiduciary duty. The High Court found the trio liable for disloyalty and bad-faith resignation, awarding $134 million (from $179 million profits, less 25% for their work). The Court of Appeal upheld this. The appellants reserved a “but-for” causation argument for higher appeal, unaddressed in the Court of Appeal due to precedent.

The Issue for the Supreme Court

The appeal focused on the fiduciary duty to account for profits made from a fiduciary relationship without the principal’s fully informed consent. Established law prohibits fiduciaries from retaining such profits, dismissing defences based on counterfactuals (e.g., claiming they would have made the profit absent any breach). The appellants challenged this, arguing courts should apply a “but for” causation test to determine if the fiduciary would have made the same profits without breaching their duty, regardless of whether profits were made before or after the fiduciary relationship ended. This challenge would require overturning the precedent set by two House of Lords cases: Regal (Hastings) Ltd v Gulliver [1967] 2 A.C. 134 and Boardman v Phipps [1967] 2 A.C. 46.

The Supreme Court – Dismissing the Appeal

Lord Briggs giving the leading judgment and Lord Leggatt, Lord Burrows and Lady Rose agreeing, but dissenting on reasons.

Lord Briggs

Lord Briggs held that the fiduciary duty to account for profits, tied to the rule against conflicts of interest, enforces single-minded loyalty by requiring fiduciaries to surrender profits gained from their role without the principal’s consent. He said that this equitable duty is inherent, not merely a remedy, and applies even without other breaches, potentially extending beyond the fiduciary relationship’s end. Profits must be sufficiently connected to the role, but courts consistently reject a “but for” causal test to determine accountable profits, avoiding speculative counterfactuals. He was firmly of the view that departing from this long-standing principle, as established in Regal (Hastings) and Boardman v Phipps, would require strong justification. The appellants argued that reputational consequences deter breaches and that the rule is outdated due to modern fiduciary relationships, but this, Lord Briggs found, would weaken deterrence. He believed that the increase in such relationships underscores the need for loyalty and that equitable allowances, which adjust for a fiduciary’s work and skill, better achieve justice than a rigid “but for” test. Accordingly, he found no basis to reform the duty to account for profits.

Lord Leggatt

Lord Leggatt said that the fiduciary duty not to use property for personal benefit or outside authorised purposes is separate from the duty to avoid conflicts of interest and persists after the fiduciary relationship ends. He said that an account of profits is an equitable remedy, alongside compensation for losses, and that if a fiduciary breaches this duty, the principal can choose between compensation for losses or disgorgement of profits caused by the breach. He found that a “but for” causation test applies to determine if the profit or loss resulted from the breach, asking whether the profit would have been made absent the breach, and that this aligned with existing law, which requires a causal link between the breach and the profits for which the fiduciary is accountable.

Lord Burrows

Lord Burrows found that a breach of fiduciary duty offers two equitable remedies: compensation for loss or disgorgement of profits. He said that both require a causal link between the breach and the loss or profit. For disgorgement, he said that courts have rejected a “but for” test, as it would undermine the duty of loyalty by allowing fiduciaries to speculate on lawful profits. He was of the view that strong principled and policy reasons support avoiding this test.

Lady Rose

Lady Rose said that many cited cases, setting high standards for company directors, are decades old. She said that the Companies Act 2006 codified directors’ duties without indicating that the UK legislature saw modern business developments as justifying a significant relaxation of these standards, which are analogous to trustees’ duties. She held that any need to update these rules is a broader issue for the legislature to address.