Dear all,
James Lee alerted me to a fascinating new account of profit case from the English Court of Appeal,
Recovery Partners GP Limited v Rukhadze [2023] EWCA Civ 305:
https://caselaw.nationalarchives.gov.uk/ewca/civ/2023/305 It was a breach of fiduciary duty diversion
of business opportunity case.
The family of a deceased Georgian billionaire nicknamed ‘Badri’ hired people to recover the assets of the estate, scattered in various jurisdictions, in various structures, and held by various individuals. Salford Capital Partners Inc (SCPI) was a company,
owned by Mr Jaffe, originally incorporated to provide investment advice to Badri’s family. SCPI intended to help with the recovery of assets. Mr Rukhadze became a director of SCPI, and Mr Alexeev was recruited to help with the recovery of assets.
SCPI worked from two offices, both in London: one with Mr Jaffe and the legal counsel of SCPI, Mr Marson, and one with Mr Rukhadze and Mr Alexeev. Mr Rukhadze increasingly undertook much of the work. There was a falling out between the two camps (with
Mr Rukhadze resigning as a director of SCPI) and eventually Badri’s family said that SCPI’s services was no longer needed, and Mr Rukhadze and Mr Alexeev provided those services instead (via various entities or individually). The claimants argued that the
opportunity for recovery had wholly belonged to SCPI, and that Mr Rukhadze and Mr Alexeev had stolen that opportunity.
The trial judge found that the opportunity had belonged wholly to SCPI, that Mr Rukhadze and Mr Alexeev had not diverted the opportunity away, but that they had breached fiduciary duties of loyalty by dishonestly carrying out preparatory steps to divert
the business while working for SCPI, and by resigning in bad faith from SCPI, with the intention of taking the business opportunity.
The issues considered by the English Court of Appeal (a unanimous judgment) were whether there was a contract governing the split of profits, if so, what the ramifications of that would be, secondly, whether there was unconscionable delay on the part of
the claimants, and the question of culpability and entitlement to equitable allowances for skill and effort.
The question of whether there was a contract governing the split of profits
Ultimately, the English Court of Appeal agreed with the trial judge’s finding of fact that there had been no concluded contract between the parties as to the split of profits between the two “camps” involved in the recovery. However, they did consider
what the position would have been if the parties had been governed by a contract.
At [34] - [37], the court confirmed the strict nature of the fiduciary’s requirement to account for profits gained in breach. The defendants tried to argue that they would have been entitled to some of the profits anyway if they had kept working for SCPI.
The court rejected this argument at [42]:
“It is in any event inconceivable that Arden LJ intended to suggest that fiduciaries who have a contractual right to payments from their principals for their loyal service
would be entitled to keep profits equivalent to such contractual entitlements when they disloyally ceased to provide such services. Such an outcome would be directly contrary to the stringent rule set out above and would undermine its deterrent effect for
the reasons set out in [38] above.”
Unconscionable delay
Mr Jaffe had delayed in bringing proceedings (in part because he was suffering financial trouble) but also in part, the defendants alleged, because he was waiting to see if their business was profitable. The trial judge had taken it into account in determining
liability, but not in relation to quantum. The defendants attempted to argue that it should be taken into account in relation to quantum.
The court commented on several Australian cases, including Warman v Dwyer, Grundt
and Murdoch v Mudgee, a recent NSWCA case.
At [77], the court agreed that unconscionable delay could sometimes limit relief:
“Drawing these threads together, we agree with the court in Warman that,
while relief by way of an account of profits is discretionary, the court must act in accordance with settled principles. Unconscionability is a core principle. We do not see a good reason why unreasonable delay, or indeed other unreasonable behaviour on the
part of a claimant, should not be capable in an appropriate case of limiting rather than barring relief if justice so requires, whether temporally or otherwise. As Arden LJ commented in Murad at
[81], the rule in Regal (Hastings) is an inflexible one but “historically equity has
been able skilfully to adapt remedies against defaulting trustees or fiduciaries so as to meet the justice of the case”. However, as with the defence of laches, any restriction on relief by reference to delay would need to involve not only delay that was unreasonable
in the circumstances, but factors that render it unjust to grant the relief – or in this case the full extent of the relief – sought. Those factors would typically relate to the position of the defendant, the most obvious being a material element of detriment:
see by way of analogy Spry, Principles of Equitable Remedies, 9th ed.
at p.450, which refers (in the context of laches as a defence to the grant of an injunction) to a “substantial detriment” rather than mere inconvenience.”
At [80] - [81], the court commented on Murdoch v Mudgee as follows:
However, the law does not, and should not, require a claimant to take action as soon as they become aware of a breach of fiduciary duty, or else risk losing their ability
to obtain an account of profits. That would be inconsistent with the long-established strictness of the rule that unauthorised profits made by persons subject to fiduciary obligations must be accounted for. As with the position on the grant of an allowance,
any restriction of relief could only be justified if it would not have the effect of encouraging such persons to put themselves in positions of conflict (see below).
It may be reasonable for a claimant to “wait and see” for a number of reasons. Those might well include whether the venture proves profitable – so that there is something
to have a realistic dispute about – as well as other considerations, such as in this case the position with the Family. A lack of funds might also be relevant. To the extent that Murdoch
v Mudgee might be read as suggesting that action must be taken as soon as a breach is identified, or within a short period thereafter, we would respectfully disagree. “Standing
by” is not, as such, a defence or partial defence to a claim for an account. Relief could be only denied or restricted on account of delay when the circumstances are such that, taking full account of the strictness of the rule, it would nonetheless be inequitable
to grant the full relief sought
In any case, the delay was not unreasonable in this case.
Culpability and entitlement to equitable allowances
At trial the defendants were granted an equitable allowance of 25% for skill and effort.
The court reiterated that the obligation to account was strict (at [111]), but noted that there could be a role for unjust enrichment as a justification as to why an allowance for skill and effort was necessary at [112]:
The concept of unjust enrichment has, at best, only a subsidiary and minor role to play in limiting the duty of a fiduciary to account: Gray at
[124]-[127]. One way, however, in which the harshness of the rule may be mitigated,
and any unjust enrichment of the beneficiaries curtailed, is by the jurisdiction to grant a defaulting fiduciary who is liable to account for profits, made from his position as a fiduciary, an allowance in respect of the skill, risk and labour he has undertaken
in creating the profit, in addition to the expense he has incurred in doing so. It is well-established that such jurisdiction exists. It is less well established exactly when and in what circumstances the jurisdiction should be exercised.
The court confirmed that the culpability of the defendant would be relevant to the award of an allowance for skill and effort, but it did not entirely preclude the award of an allowance for skill and effort, unless in exceptional circumstances. At [118]
- [119] the court said:
But that is not to say that the jurisdiction to grant an allowance can only be exercised in cases where the personal conduct of the fiduciary cannot be criticised. An allowance
of some, but part only, of the remuneration which a defaulting fiduciary would have earned in generating the profit if not acting in breach of fiduciary duty may satisfy the rationale that it would act sufficiently as a deterrent, whereas a full allowance
would not. Elias J made this point and applied it in Nottingham University v Fishel [2000]
ICR 1462…
This may justify some allowance even where there is a significant degree of culpability in the behaviour of the defaulting fiduciary. O’Sullivan provides
an example.…
The court found that culpability of the defendants in this case was not sufficiently culpable to preclude the award of an allowance, and that the trial judge’s assessment of 25% was fair.
Ultimately, the trial judge’s decision was upheld and both the appeal and the cross-appeal failed. From my point of view, the particularly interesting parts were the conclusions with regard to delay and “standing by” and the conclusions regarding culpability
and its impact upon allowances for skill and effort.
Kind regards,
Katy
Katy Barnett | Professor
Melbourne Law School
Level 7, 185 Pelham Street, Carlton
The University of Melbourne, Victoria 3010 Australia
T: +61
3 9035 4699 E: k.barnett@unimelb.edu.au
SSRN |
Twitter: @drkatybarnett | Postal address: Level 2, Melbourne Law School
Barnett and Gans, Guilty Pigs: the weird
and wonderful history of animal law (Latrobe University Press, 2022)
Barnett, Damages for Breach of Contract (Sweet
& Maxwell, 2022)
Released in Jan 2023: Barnett, Yin and Allcock, Remedies
Cases and Materials in Australian Private Law (Cambridge University Press, 2023)
to accompany Barnett and Harder, Remedies
in Australian Private Law (Cambridge University Press, 2018)