Fiduciary Duties and the liability to account: setting a proper limit

Partner Richard Cannon examines fiduciary duties, the divergence in outcomes between different jurisdictions and account of profits.

This article was published on Lexology and can be found here.

Fiduciary duties have a long history. Cicero, who wrote extensively on the broader theme, concluded: ‘There is no aspect of life, public, private, judicial, domestic, personal, or involving others to which duties or responsibilities are irrelevant. All that is honourable in life comes from duties, all that is shameful is neglecting it.’

Requiring the highest standard of care, fiduciary duties have evolved in a modern financial context to ensure that those who manage the assets and affairs of others act in their beneficiaries’ interests, rather than serving their own. Beyond a duty of care and a duty of management under English law, the fiduciary duty is perhaps the greatest responsibility that a legal person can have.

In Bristol and West Building Society v Mothew (1996), Lord Millett put it simply: ‘A fiduciary is someone who has undertaken to act for and on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence.’

It is one thing that the duty is high. Separately, however, it is questionable whether the old English authorities on the deliberately simplistic and harsh financial consequences of breach offer the most appropriate and – critically – equitable platform for applying those consequences to the myriad of circumstances in the complex and nuanced world of commercial life where breaches can arise in very different circumstances to those on which the old cases were based.

The best that can be said of the current law in England and Wales is that despite the clear definition of liability the remedy for breach is dangerously unclear, stuck in an historical impasse, and likely to do what could be seen to be an injustice in the modern world.

Whilst the development of English law on the subject has been inhibited by the straitjacket of a few high profile Victorian and Edwardian authorities, other common law jurisdictions have stepped away from the English regime and developed more nuanced and causation-based approaches in order to fashion remedies that do not over-penalise defendants and overcompensate claimants in a way that is not helpful in a modern business era where the Victorian and Edwardian single approach can produce unfair and even capricious results.

Increasingly, cases show significant divergence in outcomes between different jurisdictions. Whereas England and Wales still upholds the mantra that common law causation rules have little or no role to play, other jurisdictions, such as Australia, demonstrate that judges are attempting to harness analogous principles to common law causation by circumscribing and confining the remedy. However, causation is just one of a number of techniques which can confine the duty to account to acceptable limits which are fair and which make commercial sense. Others – which are more firmly established in English law – include the notion that the remedy should be confined by reference to what is described as “the scope of the duty” or by imposing a temporal limit, or other devices.

It is 16 years since Lady Justice Arden, now a Justice of the Supreme Court, first recognised some of English law’s deficiencies in this area, as part of her judgment in the leading Court of Appeal case, Murad v Al-Saraj (2005), in which she noted: ‘Equity imposes stringent liability on a fiduciary as a deterrent – pour encourager les autres.’ The Court of Appeal held that a fiduciary had to give up his unauthorised gains, irrespective of whether some better outcome may have transpired if he had been honest.

But on the key question of causation, and its role in identifying profits for which a corporate fiduciary may be accountable, there has been little progress since.  Two subsequent decisions of note by the Court of Appeal have held that such causal considerations should be totally disregarded: Novoship v Mikhaylyuk (2014) and Gamatronic v Hamilton (2016).

However, a different approach has since been taken by The High Court of Australia, its apex court, in Ancient Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd [2018]. Having conspired with a competitor, two of Lifeplan Australia’s senior employees brought Lifeplan Australia customers with them when they joined that competitor. In considering the availability of the account of profits remedy against a knowing participant in a dishonest and fraudulent breach of fiduciary duty, the Court decided that this pre-resignation misconduct was causative of subsequent profits gained by the competitor.

In English law, part of the problem seems to reside in the legal definition of what causation means – more particularly, how, where and when it is applied. The main challenge lies in transferring the concept of causation from a compensatory context, as is frequently applied under the common law, into an equitable context of accounts designed to strip profits from fiduciaries – exactly the point made so forcefully by Arden J in Murad v Al-Saraj.

The Lifeplan Australia case, and others like it, show what can be done. Where appropriate, the English Courts need to introduce some causation concepts – if not in form or substance then to have like effect – when calculating quantum in breach of fiduciary duty cases. One way of achieving this would be to focus on the attribution test (i.e. only profits attributable to the breach are to be included within the account).

Others include the use of flexible equitable concepts such as the equitable allowance and laches, in order to ensure that the account which is given by a defaulting fiduciary is adjusted appropriately in order to do justice to the case, achieve fairness and fit the remedy to the particular facts of the case. Some might argue that there is no real need for common law causation to be introduced into English law duty to account cases, provided the attribution principle and the more elastic equitable principles are applied appropriately, having regard to the particular facts in issue.

There is also a compelling case for English Courts to adopt a causation-based approach in cases where breaches are committed without any dishonesty. The Court’s approach to the remedy in breach of fiduciary cases should be informed by the nature and circumstances of the breach in question, and in particular, both the state of mind and the motive of the wrongdoer(s). That is no more than what equity demands.

The time may therefore have come for formal recognition by the English Courts that common law causation should be as much a part of the duty to account as it is in other remedies arising when a fiduciary is in breach, preventing the innocent party from receiving a windfall and the remedy from facilitating unjust enrichment.