THIS subject has been considered in Novoship (UK) Ltd. v Mikhayluk [2015] 2 W.L.R. 526; [2014] Q.B. 499. The first plaintiff (“Novoship”) and the 14 other plaintiff companies (“the Novoship Group”) were indirect subsidiaries of the JSC Novorossiyak Shipping Co., incorporated in Russia. The first defendant, Mr. Mikhayluk, was an officer of Novoship and in charge of negotiating the charter of vessels owned by members of the Novoship Group. In litigation in the Commercial Court, he was held to have been in breach of his fiduciary duty to members of the Novoship Group by his corrupt conduct between 2002 and 2004 in dealings with various charterers. These included the sixth defendant, Mr. Nikitin, and the eighth defendant, Henriot Finance Ltd. (“Henriot”), a Virgin Islands company owned and controlled by him. There were connections with a number of jurisdictions but the litigation was conducted on the footing that the governing law was that of the English forum.
The trial judge (Christopher Clarke J.) held that Mr. Nikitin and Henriot were liable to account for profits made from charters to Henriot (“the Henriot charters”) of vessels of the Novoship Group, which had been arranged between Mr. Mikhayluk and Mr. Nikitin. His Lordship concluded ([2012] EWHC 3586 (Comm), at [519]–[520]) that: (1) in negotiating the Henriot charters, Mr. Mikhayluk had been in breach of his fiduciary duty and that Mr. Nikitin and Henriot had dishonestly assisted that breach; (2) the profit by Henriot and Mr. Nikitin from deployment of vessels under the Henriot charters to carry freight “resulted from” Henriot entering into those charters, the very activity which constituted their dishonest assistance, so that there was “a sufficiently direct causal connection between the assistance and the profit”; and (3) it was no answer that the charters were at commercial rates and would have been made anyway in an arm's-length transaction, or that Henriot would have made the same profits from charters of vessels from other than the Novoship Group.
The Court of Appeal (Longmore, Moore-Bick, Lewison L.JJ.) set aside the order against Mr. Nikitin and Henriot for an account of profits. It did so on the footing that (1) the “real and effective cause” of their profits had been a supervening and favourable shift in the rates for freight; (2) therefore there was “no sufficiently direct causal connection” between the entry into the Henriot charters and those profits; and (3) in any event, an account of profits was a discretionary remedy, and would have been “disproportionate” in relation to the particular form and extent of wrongdoing.
Attention will first be directed to ground (3). The cardinal principle of equitable remedies is that they be fashioned to fit the nature of the case and the particular facts. In that sense, the making of an order for an account of profits may be said to be “discretionary”. However, the discretion is not at large and, rather, entails the grant or refusal of the remedy according to settled principles. Thus, an account may be refused by reason of laches, acquiescence, delay, or estoppel. Again, it will be for the defendant to establish that to order an account of the entire profits of a business activity over a period of time would be inequitable and carry the remedy to impermissible extremes by unjustly enriching the plaintiff. And, in the circumstances of the case, it may be appropriate to allow the defendant a proportion of the profits. Authority for these propositions is supplied by the joint reasons in Warman International Ltd. v Dwyer (1995) 182 C.L.R. 545, 559–60; [1995] HCA 18, an authority which had been cited to the Court of Appeal in Novoship. But in Novoship it was going much further to deny any account where (as is assumed in ground (3) above) there is sufficient connection between the dishonest assistance and the profit and to do so because the profit appears “disproportionate” to the degree of dishonesty.
Turning to grounds (1) and (2), the concern here is with the remedy against the dishonest third parties, not the fraudulent fiduciary Mr. Mikhayluk. There is authority that the obligation to account is imposed directly upon the third party and that the term “accessorial” when used with respect to that third party “does no more than recognise that the assistant's liability depends upon establishing, among other things, that there has been a breach of fiduciary duty by another” (Michael Wilson & Partners Ltd. v Nicholls [2011] HCA 48; (2011) 244 C.L.R. 427, at [106]). This is consistent with the approach taken in Novoship with respect to the Henriot charters.
However, the Court of Appeal then (at [96]) contrasted what it saw as the absence of “any notion of causation” for the liability of a fiduciary to account for a secret profit. This view of the law led the Court to disagree (at [114]) with what it saw as the reasoning of the primary judge that the same considerations which apply to a fiduciary apply to a dishonest assistant who has no fiduciary duties.
There are several difficulties in the contrast drawn by the Court between the liability of a fiduciary and that of a dishonest assistant. The first point is that the obligation which courts of equity impose on defaulting trustees and other fiduciaries is of a more absolute nature than the common law obligation to pay damages for tort on breach of contract. The fiduciary brought to account may have occasioned no loss to the principal, the principal may have been unable or unwilling to obtain the benefit or gain for itself, and on the part of the fiduciary there may have been no lack of bona fides and no dishonesty. This stringency encourages fiduciaries to conduct themselves, as Cardozo C.J. put it in Meinhard v Salmon (1928) 164 N.E. 545, 564, “at a level higher than that trodden by the crowd”. On the other hand, as McLachlin J. stressed in Canson Enterprises Ltd. v Boughton & Co [1991] 3 S.C.R. 534, 543, while the fiduciary relationship at its core has trust, not self-interest, in negligence and contract the parties are taken to be independent actors concerned primarily with their own self-interest.
The second point is that, nevertheless, with respect to an account by a defaulting fiduciary, notions of sufficient connection or “cause” are critical. The task is to reflect as accurately as possible the true measure of the profit or benefit obtained by the fiduciary in breach of duty. This may involve inquiry into the source of the profit or benefit and the determination of so much of the profit or benefit attributable to that source. The order made by Romer J. in the partnership case Manley v Sartori [1927] 1 Ch. 157, 160–67, provides an example. In Phipps v Boardman [1967] 2 A.C. 46, Lord Hodson (at 105) spoke of profits the fiduciary acquired “by reason of” the opportunity and knowledge, or either, which resulted from the relationship with the principal, and, more tersely, Lord Upjohn (at 127) spoke of profits made “within the scope and ambit” of the duty. Further, the trial judge in that case, Wilberforce J. emphasised that, while the transaction which caused the profit will not generate a liability to account if “wholly separate” from the fiduciary office, it was “irrelevant” for the fiduciary to emphasise that “the making of the profit involved the taking of risks” (Phipps v Boardman [1964] 2 All E.R. 187, 203).
The above considerations indicate the false foundation (the absence of any causal requirements for fiduciary liability to account) upon which the Court of Appeal in Novoship proceeded to consider the necessary degree of connection between the dishonest assistance by the third party and the profit of that party for which the account is sought.
The Court invoked “common sense” (at [108]) and held that there was “no reason why the common law rules of causation, remoteness and measure of damages should not apply by analogy” (at [107]). The “common law rules” would appear to be those associated with the tort of negligence. But there damage is the gist of the action, whereas against the third party the remedy is for equitable compensation or an account of profits.
Observations by Sir Owen Dixon upon “causation” in the law assist here. In the 1933 paper “Science and Judicial Proceedings”, reproduced in Woinarski (ed.), Jesting Pilot (1965), he reflected that while, as a rule, lawyers know but little of the philosophical and logical analysis of the conception of cause, this had not deterred the courts from proceeding to deal with cause in various ways; “sometimes, the statement of legal criteria avowedly accepts cause as a ground of liability”, the law of negligence being a prime example, but elsewhere the criterion of liability may imply a requirement of cause, and “sometimes it disguises it”.
How, then, stands dishonest assistance? An understanding of that which animates the intervention of equity here helps in teasing out the implied or even disguised causal requirement. To adapt what was said by Lord Reed in AIB Group v Mark Redler & Co. [2014] UKSC 58; [2014] 3 W.L.R. 1367, at [92]–[93], the causal criteria have to be determined in light of the characteristics of the obligation to account.
First, intervention in such cases is based on the need to deter conduct which undermines the high standards required of fiduciaries and “on the inequitable character of permitting those [third] persons to retain benefits resulting from their conduct” (Consul Development Pty. Ltd. v DPC Estates Pty. Ltd. (1975) 132 C.L.R. 373, 397, per Gibbs J.; [1975] HCA 8, approved in Zhu v Treasurer of NSW (2004) 218 C.L.R. 53, at [121]; [2004] HCA 56). Even in the absence of dishonesty on its part, the fiduciary may fail the high standards described above. It would be an odd result if the third party whose liability is triggered by its dishonesty were relieved by some lesser degree of causality than that sufficient for the fiduciary.
Secondly, while the Court of Appeal in Novoship at [105] stressed that, unlike the fiduciary, the third party “has no pre-existing duty whose scope can be determined and enforced”, the third party must have been dishonest (or, if in substance there be a real distinction, acted with knowledge). In assessing what is sufficient connection between the profits derived and that dishonesty, why should tenderness be shown to the rogue?
Thirdly, to enter into the field of causation by a common law route is to invite further disputation and misconception. For example, references to “common sense” recall directions given in the days of jury trials of civil actions when matters of cause and consequence were said to be jury questions; “common sense” also may give insufficient weight to the educative effect of expert evidence. References to “sole” and “effective” causes initially were countenanced by judges as a means of diverting what then was the drastic operation of the unreformed defence of contributory negligence (March v Stramare (E&MH) Pty. Ltd. [1991] HCA 12; (1991) 171 C.L.R. 506, 533). On the other hand, there is high authority that it is sufficient for the plaintiff to prove that the negligence of the defendant “caused or materially contributed to the injury” (Wakelin v London & South Western Railway Co (1886) 12 App. Cas. 41, 47, per Lord Watson) and any contribution which is not de minimis must be classified as material (Bonnington Castings Ltd. v Wardlaw [1956] A.C. 613, 621, per Lord Reid) applied in the mesothelioma case Amaca Pty. Ltd. v Booth [2011] HCA 53; (2011) 246 C.L.R. 36. However, in Novoship, the Court of Appeal drew from the common law only so much as to speak of “the real and effective cause” of the profits on the Henriot charters.
In my view, it would require legislation to recast dishonest assistance as a common law wrong remediable only in damages (cf. P. Devonshire [2015] C.L.Q. 222). Further, it would not be a prudent exercise of judicial method to move in that direction by judicial fiat: see further P. Ridge (2008) 124 L.Q.R. 445, at 450–52.
Reading Novoship, one asks whether equity was so bereft of available principle to flesh out what Sir Owen Dixon may have considered the implied or even disguised criterion of causation respecting liability to account for dishonest assistance, as to necessitate recourse to a restrictive common law analogy from actions in negligence for damages. One possibility would be to ask whether the profit for which the account was sought was derived “by reason of” the dishonest assistance because that dishonesty at least materially contributed to, even if not immediately causing, the derivation of the profit on the Henriot charters, and to recognise, by adaptation of what Lord Wilberforce remarked in Phipps v Boardman, that it was irrelevant that the making of the profit had involved the taking of risks on the market. This approach would effectuate the purpose of equity in attaching liability for dishonest assistance. It would lead to dismissal of the challenge to the order of the primary judge in Novoship for an account.
