The Supreme Court’s recent decision in Rukhadze and others v Recovery Partners GP Ltd and another ([2025] UKSC 10) provides a significant restatement of fiduciary duties and, in particular, the ‘profit rule.’ The ruling, handed down on 19 March 2025, unanimously rejects any attempt to introduce a ‘but for’ causation test when determining whether a fiduciary must account to its principal for profits made during or as a result of the relationship giving rise to fiduciary duties.
This decision is particularly pertinent as we approach the hearing of the Supreme Court appeals in Johnson v Firstrand Bank Limited, Wrench v Firstrand Bank Limited, and Hopcraft v Close Brothers Plc listed on 1-3 April 2025 regarding personal contract purchase (PCP) finance arrangements, where similar fiduciary duty arguments could have substantial financial implications for motor dealers and lenders alike (“PCP appeals”).
The Supreme Court’s Ruling on the Profit Rule
At its core, the Supreme Court’s judgment reaffirms the principle that fiduciaries who derive profits from their position must account for those profits to their principal, irrespective of whether the same profit could have been obtained through legitimate means. The appellants in Rukhadze had sought to argue for a departure from well-established case law, contending that they should not be required to account for profits unless it could be shown that those profits could not have been made ‘but for’ the breach of fiduciary duty.. The Court rejected this argument outright, emphasising that such a change would undermine the deterrent effect that comes with the imposition of fiduciary obligations.
Lord Briggs, delivering the leading judgment, emphasised that the profit rule reflects the way the law (or more specifically, equity) views the profits made by a fiduciary as belonging to the fiduciary’s principal. Lord Briggs was of the view that the ‘profit rule’ reflected a duty in itself (and not merely a remedy for wrongdoing) and serves to ensure that fiduciaries remain steadfast in their duty of loyalty. The introduction of a ‘but for’ test would undermine the essense of the duty and water down the chief disincentive to fiduciaries who might otherwise be tempted to be disloyal. The Court declined to overrule the landmark cases of Regal (Hastings) Ltd v Gulliver[1967] 2 AC 134 and Boardman v Phipps [1967] 2 AC 46, which established that fiduciaries must disgorge profits unless the principal had given fully informed consent.
Lord Leggatt, Lord Burrows, and Lady Rose all gave concurring judgments agreeing with the outcome but for their own reasons.
Lord Leggatt considered that reference to the ‘profit rule’ was misleading, and the true rule is that a fiduciary must not use any property or information or opportunity belonging to the principal for the fiduciaries own benefit. If the fiduciary does, he or she is liable to compensate the principal for any loss caused, or to account to the principal for any profit made. His view was that a ‘but for’ test was inherent in the requirement to show a causal link between the breach of duty and a recoverable loss or profit, but the ‘but for’ test was satisfied. Lord Leggatt also disagreed with Lord Briggs characterisation of an account of profits as a duty rather than just a remedy.
Lord Burrows considered that an account of profits is a remedy for the wrong of breach of fiduciary duty (not a duty in itself), but the leading cases of Regal (Hastings) and Boardman v Phipps do not apply a ‘but for’ test to link the profits which might otherwise have been lawfully obtained, and it could not be said that they had been wrong in failing to do so. On the contrary, the two cases readily justify the reasons of principal and policy.
Lady Rose considered that changing business practices within the UK did not mean that the ‘profit rule’ was out of date, and the proposed change in law would have far reaching effects. Therefore, any reconsideration was properly a matter of Parliament.
Implications for the PCP Appeals
The forthcoming PCP appeals will examine whether motor dealers selling finance acted as fiduciaries in their dealings with consumers. If the Supreme Court upholds the Court of Appeal’s decision that a fiduciary relationship between the motor dealers and the consumers did exist in those cases, the Rukhadze ruling will carry major consequences.
Under fiduciary principles, a dealer found to be acting as a fiduciary would be required to account for any profits made from the transaction, including commission payments received from lenders. Crucially, if the principle of ‘disgorgement of profits’ applies, the dealer’s ability to retain commission payments may be nullified, regardless of whether the consumer would have entered into the agreement had they been fully informed of the commission structure.
Potential Liability for Lenders
The Rukhadze judgment also raises important questions regarding accessory liability, which is one of the central issue to be considered in the PCP appeals. If motor dealers are found to be fiduciaries and required to account for commissions, the next question is whether lenders – who benefitted from the dealers’ actions – will also be liable to return payments. The Court of Appeal determined that they were, but whether the Supreme Court upholds this aspect of the decision (along with other aspects of the decision under appeal) is what everyone is waiting with bated breath to find out.
Given that the Supreme Court declined to introduce a ‘but for’ test in Rukhadze, it becomes inevitable that if the decision that motor dealers are fiduciaries and that lenders are liable as accessories for procuring any breach of fiduciary duty on the part of the motor dealers, then lenders will be held responsible for returning commission payments even if they had no direct involvement in the dealer’s fiduciary breach.
In such circumstances, lenders could face significant financial exposure in PCP cases. They may be required to repay substantial sums, regardless of whether the consumer suffered actual loss. This would mark a major shift in financial accountability within the motor finance sector, and the industry is likely to closely scrutinize the Supreme Court’s reasoning in Rukhadze as a precedent.
A strong judicial signal
The Supreme Court’s unanimous decision in Rukhadze sends a clear signal that it is unwilling to dilute fiduciary duties in a way that would enable fiduciaries to retain profits obtained through questionable means. The Court has affirmed that fiduciary obligations must be strictly enforced to preserve trust and confidence in financial transactions.
For motor dealers and lenders awaiting the upcoming PCP appeals, the message is stark: if fiduciary relationships are found to exist in PCP finance transactions, the consequences could be far-reaching, and the ability to defend claims for disgorgement of commission payments may be significantly constrained.
As the Supreme Court prepares to hear the PCP appeals in April, Rukhadze stands as a crucial precedent that may shape the outcome. The decision underscores the Court’s commitment to maintaining the integrity of fiduciary obligations – a stance that may prove costly for those in the motor finance industry if fiduciary liability is extended to PCP finance arrangements..
A link to the judgment is here
