Fiduciaries must act with single-minded loyalty toward their principals. To this end, fiduciaries have to account to their principal for any profits made from the fiduciary relationship unless they have the fully informed consent of the principal to keep the profit.¹ This strict equitable principle — known as the profit rule — has governed fiduciary relationships for many years. 

In Rukhadze and others v Recovery Partners GP Ltd and another [2025] UKSC 10, the UK Supreme Court was asked to reconsider this principle. The appellants contended that a fiduciary should only be liable to account for profits where there is a causal link between the profit and a breach of duty —specifically, that the profit would not have arisen ‘but for’ the breach.

This required the Court to consider departing from the established authorities of Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 and Boardman v Phipps [1967] 2 AC 46, where the House of Lords held that liability under the profit rule arises irrespective of dishonesty, bad faith, or actual loss to the principal. Those decisions drew upon the venerable judgment of Keech v Sandford (1726) Sel Cas Ch 61. 

The Supreme Court, in a unanimous decision comprising four separate but concurring judgments, declined to depart from precedent. In this article, the authors summarise the decision in Rukhadze and explore the key issues raised in the judgments.

Background

Following the death of a wealthy Georgian businessman Arkadi Patarkatsishvili (Badri) in 2008, his family sought assistance recovering his vast, dispersed assets. This gave rise to a highly lucrative business opportunity for asset recovery services. The appellants were initially involved in developing and delivering these services through a British Virgin Islands company called Salford Capital Partners Inc. (SCPI) and its UK affiliate, Revoker LPP. The appellants then fell out with SCPI’s owner and formed their own company, taking on the recovery services job themselves. They made $179 million in net profits.

The respondents, successors to SCPI and Revoker, claimed an account of profits, alleging the appellants had diverted a ‘maturing business opportunity’ and committed breaches of fiduciary duty owed to their former companies. The High Court held the appellants liable to account for their profits to the respondents pursuant to the profit rule, but allowed for a 25% reduction in consideration of their time and skill in providing the recovery services. A subsequent appeal to the Court of Appeal was dismissed.

The appellant’s argument

The appellants argued that liability to account should only arise where the profit would not have been made ‘but for’ the breach of fiduciary duty. This would entail a counterfactual analysis of whether the profit would still have accrued had the fiduciary acted in accordance with their duties. This issue was relevant because of the High Court’s finding that, ‘but for’ the breach of fiduciary duty, the parties would likely have entered into a 50/50 profit sharing agreement.² The appellants argued that they should not be required to account for the profits that they would have made in the absence of their breach.

Six justifications were advanced for this proposed change.³

1. The current profit rule is unduly harsh and captures honest fiduciaries who act loyally and in good faith.
2. Modern forensic tools make it easier for courts to engage and evaluate a counterfactual scenario.
3. Equitable allowance for time and skill on the fiduciary’s part in creating the profit was too uncertain.
4. Common law principles of causation have improved other equitable remedies.
5. English law should follow the lead of other common law jurisdictions on this principle.
6. Greater credence should be given to the academic criticism of this principle.

Decision

Two key issues were considered:

1. Whether the profit rule is a freestanding fiduciary duty or a discretionary remedy.
2. Whether a ‘but for’ causation test should apply in determining liability under the rule.

The majority concluded that the profit rule constitutes a distinct fiduciary duty and that the ‘but for’ test has no role to play in its application. The strictness of the rule was viewed as essential for its deterrent effect; the virtual certainty that it will apply to profits made ensures that fiduciaries remain loyal to their principals.⁴ The equitable allowance was considered a sufficient and flexible means of recognising the fiduciary’s own contribution to any profits made.⁵

Lord Briggs (for the majority)

Delivering the majority judgment, Lord Briggs (with whom Lord Reed, Lord Hodge, and Lord Richards agreed) held that the profit rule is not merely remedial but amounts to a substantive fiduciary duty in its own right. It is closely related to the conflict rule, which prohibits fiduciaries from placing themselves in a position where personal interest conflicts with their duty, and arises from the fundamental obligation of loyalty.⁶

In the view of the majority, the obligation to account for profits is not discretionary and does not require a demand from the principal. It is automatically triggered when a profit is received that is causally connected to the fiduciary position — even if there has been no breach of duty or loss to the principal.⁷ This extends to post-termination profits, obtained after the fiduciary relationship has formally ended but which are nonetheless traceable to information, opportunities, or influence derived from that relationship.⁸

Lord Briggs rejected the appellants’ proposed ‘but for’ test. While a factual connection between the profit and the fiduciary position is necessary, the relevant inquiry is what actually happened — not what might have happened. If the profit can be fairly attributed to the fiduciary’s position or actions in that role, it belongs to the principal.⁹ For instance, a company director may retain profits from horse-racing bets made on their own time, unless the betting was informed by confidential information acquired through their fiduciary role.¹⁰

Lord Leggatt

While agreeing in outcome, Lord Leggatt disagreed with the majority’s view that the profit rule constituted a standalone duty. In his view, an account of profits is a remedy for a breach of a different fiduciary duty — namely, the duty not to use a principal’s property (including information and business opportunities) for personal benefit without authority.¹¹ This duty lasts beyond termination of the fiduciary relationship.¹²

He also endorsed a causation analysis: an account of profits should only be required where the profit would not have arisen ‘but for’ the breach of duty.¹³ However, he accepted that applying this analysis in Rukhadze would not have altered the result.

Lord Burrows

Lord Burrows also saw an account of profits as remedial in nature, following a ‘remedy for wrong’ analysis. However, on the causation question, he sided with the majority in rejecting the need for a ‘but for’ analysis. No counterfactual analysis was required (where, for instance, the fiduciary potentially obtained consent from the principal).¹⁴ It is simply enough to say that unauthorised profit was made out of a fiduciary position.

Lady Rose

Lady Rose focused on whether the profit rule as a traditional equitable doctrine remained appropriate in the context of modern commercial relationships. On the appellants’ argument that many parties in fiduciary cases are sophisticated business entities who operate differently from people in the nineteenth century (for which the rules were originally created for), she concluded that there was no principled basis from departing from the established fiduciary rules.¹⁵ Particularly, the codification of these rules in the UK’s Companies Act 2006 in terms of directors duties served as a strong indication that rules like the profit rule still serve a valuable purpose in modern times.¹⁶

Comment

It remains to be seen whether the New Zealand courts will take a different approach, should they revisit the issue in light of Rukhadze.

In New Zealand, the Trust Acts 2019 characterises the profit rule as a duty. Section 36 imposes a default duty not to profit from a trust, suggesting that the legislature regards the profit rule as a primary fiduciary obligation, not merely a remedial measure. This aligns with the approach adopted by the majority in Rukhadze.

Whether the rule is best viewed as a standalone duty or a remedy may have little practical consequence in many cases. Lord Briggs was adamant that the profit rule constituted a standalone duty to the extent that he saw it as a ‘fundamental conceptual error’ to think otherwise.¹⁷ In response, Lord Leggatt acknowledged that he was ‘guilty of this alleged error’ as he was ‘unable to understand why an account of profits should be regarded as anything other than an equitable remedy’.¹⁸ As Rukhadze demonstrates, both approaches may ultimately lead to the same outcome.

The greater significance of the decision lies in its unequivocal reaffirmation of the profit rule’s strictness. If fiduciaries are to understand their responsibilities and avoid inadvertent liability, the rule needs to be stated in clear behavioural terms.

Accordingly, fiduciaries should always ask: Is this conduct in the principal’s interests? And when profit is involved: Is the profit connected to my fiduciary position? If it is not, the profit may be retained. If it is, the principal has a prima facie equitable interest, and the fiduciary must account.

This article was written by Jeremy Bell-Connell, Senior Associate, and Astin Monastra, Law Graduate in our Litigation and Dispute Resolution team.

1. Practically, accounting for profits means revealing their existence and paying them to the principal or otherwise treating them as the principal’s property; see Rukhadze at [2].
2. At [85].
3. At [45].
4. At [18] and [58].
5. At [58].
6. At [16].
7. At [20]-[22].
8. At [4].
9. At [36].
10. At [25].
11. At [111].
12. At [95] and [136].
13. At [172].
14. At [289]-[291]
15. At [319] and [326].
16. At [325].
17. At [47].
18. At [210].

This article will be published in the forthcoming edition of the New Zealand Law Journal