Court Of Appeal Considers Remedies Against Fiduciaries And Dishonest Assistants In Cases Involving Multiple Breaches

• Published date: 13 February 2024
• Subject Matter: Litigation, Mediation & Arbitration, Media, Telecoms, IT, Entertainment, Trials & Appeals & Compensation, Hotels & Hospitality
• Law Firm: Herbert Smith Freehills
• Author: Ms Heather Rankin, Jan O'neill and Derek Lee

A recent Court of Appeal decision has confirmed that, where a fiduciary has committed multiple breaches of trust, a court may have regard to their overall impact when assessing a claimant's loss, rather than viewing them on an individual basis. While every case will turn on its facts, the decision suggests that a key question will be whether the conduct can be viewed as part of one overarching transaction or scheme, so that it would be manifestly unjust to order compensation for a loss flowing from one breach without taking into account a benefit in respect another breach: Hotel Portfolio II UK Limited (in liquidation) and another v Ruhan and others [2023] EWCA Civ 1120.

A claimant who has established a breach of fiduciary duty will typically have the option to choose between two remedies: (a) an account of any profits earned by the defendant as a result of the breach or (b) equitable compensation for any loss sustained by the claimant as a result of the breach.

The present case concerned a company director's breach of fiduciary duty by failing to disclose his personal interest in a sale of the company's assets, and later failing to account to the company for profits he earned by re-selling the assets. Reversing the High Court's decision, the Court of Appeal held that the company could not claim both: (i) an account of profits from the director - as a remedy for the non-disclosure in the original sale; and (ii) equitable compensation in the same amount from another party who had dishonestly assisted the director - for the "loss" occasioned by the director's subsequent breach in failing to pay the profit to the company.

Key to that decision was the court's finding that the two breaches were inextricably connected, as elements of a single scheme aimed at earning a profit from the assets. It would be manifestly unjust to award the company compensation for being deprived of the profits without recognising the parallel claim for an account of those same profits. There was a single and uninterrupted course of conduct which, taken as a whole, caused the company no loss because the company had received full market value for the assets and could not itself have exploited the opportunity to profit.

The implications of the decision are not limited to such "self-dealing" cases and could apply to any type of fiduciary breach, particularly in claims (against a fiduciary and/or dishonest assistant) alleging a misapplication of unauthorised profits resulting from an earlier breach.

The Court of Appeal's judgment is also important for a number of obiter observations made by Lord Justice Newey in the lead judgment. He suggested that there may be a more fundamental objection to a claim for equitable compensation (as distinct from an account of profits), based on the nature of the trust that arises where a fiduciary acquires a benefit by reason of their breach of fiduciary duty. That analysis is likely to be explored in detail in future cases.

Background

The breaches

The claimant company (HPII) owned three hotels around Hyde Park with substantial development potential, but was not in a position to undertake that...