Supreme Court upholds no profit rule

Certain professional and legal relationships are governed by fiduciary duties.  These relationships normally revolve around situations where an individual has been put in a position of trust and is expected to act in the best interests of their principals. Examples of relationships involving fiduciary duties are:

1.            trustees to beneficiaries

2.            company directors to their company and its shareholders

3.            financial advisers to their clients

4.            executors of a will to the beneficiaries

5.            partners in a business partnership to one another

6.            solicitors to their clients

One can soon see why the above roles need to be held to the high standards that fiduciary duties impose.  The individual is effectively acting on behalf of their principal and are able to make decisions on their behalf and, as such, it is important that the principal is protected.

Fiduciary duties are complex but essentially they can be summarised as:

Duty of care

The fiduciary is expected to act with competence, diligence and good judgment when making decisions.  If they are a professional, they are expected to exercise the necessary standard of skill and care.

Duty of loyalty

The fiduciary must always act solely in the best interests of the principal that they serve.  They must avoid conflicts of interest and anything that may draw them into a situation where their impartiality is compromised.

Duty of good faith

Fiduciaries must act with good faith and fairly in all dealings.

Duty of confidentiality

A fiduciary that has access to sensitive information is expected to protect this information and not misuse it for their own personal gain or share it without authority to do so.

Duty to disclose

A fiduciary is expected to provide their principal with accurate and complete information and not withhold anything that may influence their ability to make a decision.

The no profit rule

Given the above, it will not come as a surprise that there is a strict ‘no profit’ rule in regard to those in fiduciary positions. A fiduciary must account to their principal for any profits made by them from their role and not make a profit. It is always up to the principal to give its informed consent that the fiduciary may keep these profits.  However, the Courts have been clear that it is in principle wrong for a fiduciary to benefit from their position.  However, they can charge for their services. Usually, the majority of cases around this involve a trustee or director discovering information, as part of their role, that enables them to have/gain a financial advantage.  Often, they will resign their position and then set up a rival business or entity to compete to enable them to exploit this advantage.

The strict no profit rule is a set out in the case of Boardman v Phipps [1967] 2 AC 46.

In the recent case of Rukhadze and others v Recovery Partners GP Ltd and others [2025] UKSC 10, the Supreme Court was asked to re-examine the position around the no profit rule.

Case summary The appellants in this case had been fiduciaries of the respondents.  The individual appellants had resigned from their fiduciary relationships to compete with the respondents.  The respondents claimed breach of fiduciary duty arguing that the appellants had taken advantage of a business opportunity that they had previously been working on for the respondents,  in regard to the recovery of assets of a deceased businessman for his family.  They had made considerable profit in doing so.

At first instance, the High Court ordered the appellants to account for their profits to the respondents in line with the no profit rule, albeit they allowed a 25% discount to take account of the appellants’ time and skill.  The matter was then appealed to the Supreme Court.  An appeal to the Court of Appeal was dismissed as the rule in Boardman v Phipps was a House of Lords decision and so could only be overturned by the Supreme Court.

The appellants argued that a ‘but for’ test of causation should be applied.  They said that in this case, they should not have to account for any profits, as even if they had resigned from their positions before they committed any breaches of fiduciary duty, they would still have proceeded to carry out the recovery work for the deceased’s family.  They put forward reasons why the law should be changed, which broadly were:

1.            The current rule was draconian and disproportionate in modern times.

2.            In the past, constructing counterfactuals was forensically more difficult and uncertain, but that in modern times, this was no longer the case.

3.            The equitable allowance for the fiduciary’s time and skill in generating the profit was uncertain and had been wrongly classified as exceptional.  A ‘but for’ test was better and more predictable.

4.            Other equitable remedies had been the subject of common-law principles of causation.  These common-law principles should be applied in this situation to profit.

5.            English law was out of step with other common-law jurisdictions on this point.

6.            The principal had been subjected to academic criticism, which should be afforded judicial weight.

The Supreme Court examined all of the above points.

The Supreme Court’s ruling

The leading judgment was given by Lord Briggs, who made the following points:

The profit rule was not merely a remedy, it was a deterrent.  He explained that ‘the simple duty not to go there at all without the principal’s informed consent’ was there for a purpose and that anything less would be watering down the rules.

–              He went on to say that he did not believe the justifications put forward by the appellants came anywhere close to the high bar set to justify a departure from the precedent.  The principal was deliberately very strict.

–              He felt that the application of the equitable allowance for the fiduciary’s skill and time was adequate protection against any injustice and more appropriate than a test on causation.

–              It is a principle of fiduciary duties that a fiduciary owes their principal an obligation to treat all profit arising from the rule as belonging to the principal.  The profit rule was not significantly out of step with other jurisdictions and had not been subjected to a consensus of negative academic opinion.

Conclusion

In the circumstances, the no profit rule continues, and it is important for all fiduciaries to bear this in mind when exercising their role.

If you are a fiduciary and you have any questions in regard to the above case, please do not hesitate to contact Graham Mead on 01473 298234 or email him at gmead@prettys.co.uk.

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