Account of Profits available against a Dishonest Assistant

Account of Profits available against a Dishonest Assistant

In the recent case of Novoship (UK) Ltd & Ors v Nikitin & Ors, the Court of Appeal held that the remedy of an account of profits is available, in principle, against a person who dishonestly assists a fiduciary to breach his fiduciary obligations (even if that breach does not involve a misapplication of trust property), but the remedy was subject to causation principles and the Court’s discretion.

Background

The case at first instance involved various complex claims arising from dishonest dealings, including the payment of bribes. The judge made a number of findings in relation to those dealings, including that one of the defendants, Mr Nikitin, dishonestly assisted Mr Mikhaylyuk in the breach of his fiduciary duties. Mr Nikitin had made substantial profits from the various arrangements in question which were time charter contracts relating to vessels owned by Mr Mikhaylyuk’s employer, the claimant in the action. There were no allegations relating to the charter contracts themselves, which were concluded on market terms, but Mr Nikitin was aware of, and had benefited from, Mr Mikhaylyuk’s breach of fiduciary duty in connection with other contractual arrangements. Those breaches had not been cleansed by the time that the charter contracts were concluded, raising the prospect that Mr Nikitin’s profits on those contracts could be recovered by the claimants. The judge found that Mr Nikitin was liable to account for those profits.

The defendants appealed to the Court of Appeal on 12 grounds, including whether the remedy of an account of profits was available at all against a dishonest assistant.

The Court of Appeal decision

The appellants submitted that an account of profits:

1. can never be claimed against a third party who had not voluntarily assumed fiduciary obligations to the claimant; or
2. could not be ordered against a third party whose liability arose only because of his dishonest assistance in a breach of fiduciary duty; or
3. could not be ordered against a third party unless there had been some misapplication of trust property.

These arguments were not deployed before the Court below. The Court of Appeal rejected all three arguments.

First argument - an account of profits can never be claimed against a third party who had not voluntarily assumed fiduciary obligations to the claimant

The appellants submitted that although a dishonest assistant could be held liable to make good any losses resulting from dishonest assistance, this liability did not extend to an account of profits.

The Court disagreed:

• There is a body of modern case-law which at first instance recognises that the Court has the power to order an account of profits against a dishonest assistant (even where no corresponding loss has been suffered by the beneficiary);
• The nature of the liability is commensurate, in principle, with the responsibility of an express trustee. This would include a liability to account for profits in appropriate cases;
• Where the equitable wrong is linked with a breach of fiduciary duty, the Court saw no reason why a court of equity should not be able to order the wrongdoer to account for his profits in so far as they were derived from the wrongdoing.

Second argument - an account of profits could not be ordered against a third party whose liability arose only because of his dishonest assistance in a breach of fiduciary duty.

The Court said that the relief was founded on fraud and it was not appropriate to require receipt of trust property in order to establish liability. Although equity gives relief against the fraud by describing the person as a ‘constructive trustee’ he is not actually a trustee and may be liable even though he has not received or handled trust property. The Court considered that it would also be inappropriate to differentiate between the availability in principle of remedies relating to profits made by a knowing recipient on the one hand and a dishonest assistant on the other.

Third argument - an account of profits could not be ordered against a third party unless there had been some misapplication of trust property.

In support of this argument, the appellants asserted that there must be trust property or traceable proceeds of trust property in order to establish third party liability for knowing receipt or dishonest assistance. The Court found that although there must be trust property in order for there to be liability for knowing receipt, the same could not be said for dishonest assistance. Dishonest assistance is an accessory liability and the requirement for there to be trust property wrongly associates accessory liability with trust concepts. The Court held that the only question was whether liability as a dishonest assistant in a breach of fiduciary duty has been established. If it had, then an account of profits was a possible remedy.

Causation and Discretion

Having dealt with the issue of whether an account of profits was a potential remedy, the Court turned to the question of whether there was a requirement for some causal connection between the dishonest assistance and the profit for which the assistant was being asked to account.

A fiduciary’s duty to account for a secret profit does not depend upon proof of causation – the conduct complained of need only fall within the scope of the fiduciary’s duty. The Court of Appeal held that this approach was not appropriate in the case of a dishonest assistant as there was no pre-existing duty by which scope could be determined. The wrongdoer’s liability must be determined by reference to some other principle.

The Court did not consider that the ‘but for’ test (which a court of equity will apply in a claim against a fiduciary for equitable compensation) was the appropriate method of determining causation. Instead, the Court said that it saw no reason why the common law rules of causation, remoteness and measure of damages should not be applied by analogy, as would be the case where a fiduciary was sued for breach of an equitable (but non-fiduciary) obligation.
The common law rules on causation distinguish between (a) actions that cause a loss; and (b) actions which permit a loss to occur. Referring back to the facts of the case, the Court found that the benefit acquired by Mr Nikitin, as a result of his dishonest assistance, was the use of vessels at market rate. Although he made a substantial profit from the use of the vessels, the ‘real or effective cause’ of the profits was an unexpected change in the market. In these circumstances, the Court considered that there was an insufficiently direct causal connection between the dishonest assistant’s breach and the resulting profits. In this particular case, causation could not be demonstrated and no account of profits was ordered.

The Court also considered whether the remedy of an account of profits would be disproportionate to the form and extent of the wrongdoing. Although such considerations would not be relevant to any breach of fiduciary duty (as the Court pointed out rather wearily), Mr Nikitin was not a fiduciary. Where a claim for an account of profits is brought against one who is not a fiduciary, the Court confirmed that the remedy was discretionary.

Commentary

Therefore, although the remedy of an account of profits is available in principle against a dishonest assistant, for an account of profits to be ordered it will be necessary to demonstrate (a) a causal connection between the dishonest assistant’s breach and the alleged profit; and (b) that the remedy is proportionate in the circumstances.

It is also worth noting that the Court of Appeal’s approach, which took account of practicalities and policy considerations, was consistent with that adopted by the Supreme Court in the recent case of FHR European Ventures v Cedar Capital Partners (click here), which finally settled the question (on grounds of principle and policy) whether a principal’s claim for recovery of a bribe or secret commission paid to a fiduciary was proprietary or only personal in nature.