UNCERTAINTY over when a person is liable in equity for involvement in a fiduciary's breach of fiduciary obligations subsided over the last decade. Now, uncertainty over what relief the principal (e.g. a trust beneficiary) can recover from an involved third party is rising. Third parties’ liability and the relief available against them are significant matters in cases of fraudulent combinations, and wherever third parties are likelier than the assisted fiduciary to satisfy a judgment. What relief is available from a third party who profits by dishonest or knowing assistance in the fiduciary's default or by knowing or unconscionable receipt of property which the fiduciary is obliged to hold for others? A mist surrounds this matter, as a Privy Council appeal (Akita Holdings Ltd. v Attorney General of the Turks and Caicos Islands [2017] UKPC 7, [2017] A.C. 590 (Trinidad and Tobago)) and an Australian appellate decision (Lifeplan Australia Friendly Society Ltd. v Ancient Order of Foresters in Victoria Friendly Society Ltd. [2017] FCAFC 74, (2017) 250 F.C.R. 1) show.
Until Novoship (UK) Ltd. v Mikhaylyuk [2014] EWCA Civ 908, [2015] Q.B. 499 (noted Gummow [2015] C.L.J. 405), it was generally thought that courts of equity will be approximately as strict when granting relief against such third parties as they are against the defaulting fiduciary. Novoship occasioned surprise. The Court of Appeal held that the principles as to what profits are recoverable from dishonest assistants and knowing recipients differ from the principles as to what profits are recoverable from a defaulting fiduciary as such. Whereas knowing recipients will generally be ordered to account for all profits they make by means of the knowing receipt, a court of equity may limit recovery from knowing assistants by applying “common law rules” of causation by analogy: the relief may be limited to profits of which the third party's assistance was the “real or effective cause” (at [107], [114]). Nevertheless (the Court held) dishonest assistants are accountable for all profits they make by their interference if a court in its discretion so decides.
Much of the Privy Council's recent decision in Akita conflicts with Novoship. A company (Akita) acquired from its controller (Mr. Hanchell) a contractual right to buy Crown land. Akita knew that Hanchell had obtained that right in breach of his fiduciary duties to the Crown as a government minister. The Privy Council upheld an order that Akita account for all profits it thereby derived. Their Lordships tacitly held that, rather than differing according to whether the third party assisted or received, the accounting liability of both assistants and recipients is like fiduciaries’ liability to account for profits. They explicitly held that all profits derived “by reason of” a third party's knowing assistance or knowing receipt are recoverable by the principal where the third party also owes fiduciary obligations to the principal, and that the third party's accounting liability stems from “the nature of the liability to account”, not judicial discretion (at [16]–[17]).
Lifeplan conflicts with Novoship differently. A company (Foresters) knowingly assisted two men, who became its employees, in breaching fiduciary duties they owed their former employer (Lifeplan). Foresters adopted the men's business plan, which contained information confidential to Lifeplan and involved diverting existing clients of Lifeplan's to Foresters. The Full Court of the Federal Court of Australia held that knowing assistants’ liability to account for profits is like fiduciaries’ liability to account for profits. All profits derived “by reason of” a third party's knowing assistance are recoverable by the principal in a proper case (e.g. Warman International Ltd. v Dwyer (1995) 182 C.L.R. 544). However, Lifeplan should only recover profits which Foresters would not have made but for its knowing assistance during the five year period of the business plan. The Court held that knowing assistants’ liability to account for profits depends on what the court thinks the proper causal criterion in a given case, “bearing in mind the relevant rule of responsibility, the nature and purpose of the rule, the particular facts and the character of the wrong” (at [62]–[68], [85]–[89]).
The resulting conflict of judicial opinion reflects confusion as to the hierarchy between equitable principles. Such confusion has affected the understanding of third parties’ liability for the past half century.
Knowing assistants and knowing recipients are liable “as if” they were fiduciaries: Williams v Central Bank of Nigeria [2014] UKSC 10, [2014] A.C. 1189, at [9]. Are their liabilities distinct or do both knowing assistance and knowing receipt establish one overarching liability to account? The available relief might differ should the liabilities be distinct, but be the same should both actions establish one overarching liability. Novoship asserts the former. Akita and Lifeplan compellingly suggest the latter. As the Privy Council's reliance on knowing assistance and knowing receipt cases in Akita shows, the cases under both heads illustrate different aspects of the relevant liability: an overarching liability to account. The dominant question is, “Is the defendant an accounting party?” Whether the defendant became an accounting party by knowing assistance or knowing receipt is of subsidiary importance.
Once it is determined that their involvement in breaches of fiduciary duty makes third parties accounting parties, how may a court order them to account for their profits? Hierarchies of principle are again important. Three points will suffice.
First, accounts – including court-ordered accounts – record transactions as credit and debit items. In Akita the primary judge subordinated that fact to an idea – not challenged before the Privy Council – that accounts of profits only report a defendant's gains: that is, accounts of profits report only debits to the defendant's side of the account or items of account with which the defendant is charged (at [7]–[9]). The order should have included relevant credit and debit items: items of which the defendant was discharged as well as those with which the defendant was charged. Accounts of fiduciaries’ profits in particular can include discharges for input costs. Since knowing assistants and knowing recipients are liable to account as if they were fiduciaries, accounts of their profits may likewise discharge them of input costs.
Secondly, the ordinary idea of profit was subordinated in Lifeplan to an unnecessary idea of “capital profits”, which is overly wide (at [77], [88]). Profit normally means revenue minus costs. When (for example) a fiduciary receiver is accountable for profits, the account is for relevant profits minus relevant costs. “Capital profits” is a false notion because receivers are accountable for receivership assets and capital benefits that accrue to those simply because they undertook the custody of those; they can be ordered to account for them without any calculation of revenue minus costs.
An important further question is obscured by the overly wide idea of capital profits. A recent principle is that knowing assistants are liable to account for their own profits, not those of the assisted fiduciary: Ultraframe (UK) Ltd. v Fielding [2005] EWHC 1638 (Ch), at [1600]–[1601]. That principle has merit where profit means revenue minus costs. Under the idea of profit relied on in Lifeplan, the court assumed that the new principle applies also to capital items. It is arguable that a knowing assistant and the assisted fiduciary instead ought to be – and are – jointly and severally liable for some capital items at least: Eaves v Hickson (1861) 30 Beav. 136, 141–22; Bowstead & Reynolds on Agency, by P.G. Watts, 21st ed. (London 2017), Article 96. The ordinary notion of profit is the proper notion in such a case.
Thirdly, accounting parties’ responsibilities are discharged only where, for example, such parties rebut a presumption that they remain responsible for items of account, or displace a burden requiring them to show that they ceased to be responsible for some item of account. Thus fiduciaries and knowing assistants are kept to exacting standards of conduct. However, in Lifeplan that principle was subordinated to an asserted discretion empowering the court to decide on a fitting causal criterion for the accounting of profits. Such a wide judicial discretion does not exist in relation to fiduciaries (Boardman v Phipps [1967] 2 A.C. 46) or to knowing assistants and knowing recipients (Ultraframe (UK) Ltd. v Fielding [2005] EWHC 1638 (Ch), at [1579]), though discretion exists, such as to grant relief on terms. The court ordered Foresters to account for less, and for a shorter period, than the authorities allow. Akita and the English authorities discussed in Warman International Ltd. v Dwyer held fiduciaries and knowing assistants liable for all the net profits they derived by reason of their defalcation. In Lifeplan, Foresters should have been ordered to account for as long as that causal criterion required, subject only to any allowance for costs, expenses and the like to which Foresters should have proved itself justly entitled (which was not done in e.g. Warman International).
The breeze that will shift the mist surrounding what equitable relief can be obtained from third parties will come from giving uninterrupted attention to the accounting obligations that fiduciaries assume, and the rule that such third parties are liable as if they assumed such obligations.
