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Published online by Cambridge University Press: 15 May 2015
In Novoship (UK) Ltd. v Nikitin, a unanimous Court of Appeal held that an account of profits can be granted against a third party who dishonestly assists a breach of fiduciary duty. This raises fundamental questions as to the status of gain-based relief in relation to secondary wrongs. An account of profits reflects the imperatives of fiduciary duty and it is questionable whether the remedy should be extended to a stranger to that relationship. This article will analyse the spectrum of secondary liability and suggest an appropriate demarcation of compensation and disgorgement.
1 Barnes v Addy (1874) L.R. 9 Ch. App. 244.
2 It is argued below that equitable liability for dishonest assistance in a breach of trust or fiduciary duty should be recast as a common law wrong and governed by existing forms of liability in tort.
3 Novoship (UK) Ltd. v Nikitin  EWCA Civ 908, permission to appeal to UK Supreme Court refused on 10 November 2014.
4 Consul Development Pty Ltd. v DPC Estates Pty Ltd. (1975) 132 C.L.R. 373.
5 Fyffes Group Ltd. v Templeman  2 Lloyd's Rep. 643 (Q.B. Com Ct); Ultraframe (UK) Ltd. v Fielding  EWHC 1638 (Ch); Tajik Aluminium Plant v Ermatov  EWHC 7 (Ch); OJSC Oil Co Yugraneft v Abramovich  EWHC 2613 (Comm); Fiona Trust & Holding Corporation v Privalov  EWHC 3199 (Comm); Otkritie International Investment Management Ltd. v Urumov  EWHC 191 (Comm).
6 Longmore, Moore-Bick, and Lewison L.JJ.
7 Novoship (UK) Ltd. v Mikhaylyuk  EWHC 3586 (Comm).
8 This language is adopted in preference to the term “constructive trustee”. See Paragon Finance plc v D.B. Thakerar & Co.  1 All E.R. 400 (CA), 409; Dubai Aluminium Co Ltd. v Salaam  UKHL 48;  2 A.C. 366, at –.
9 Boardman v Phipps  2 A.C. 46 (HL).
10 Tang Man Sit v Capacious Investments Ltd.  1 A.C. 514 (PC).
11 Novoship (UK) Ltd.  EWCA Civ 908, at  et seq.
13 Williams v Central Bank of Nigeria  UKSC 10;  A.C. 1189, at , , .
14 Selangor United Rubber Estates Ltd. v Cradock (No 3)  1 W.L.R. 1555 (Ch), 1579; Paragon Finance plc  1 All E.R. 400 (CA), 409.
15 Mitchell, C., Mitchell, P. and Watterson, S. (eds.), Goff & Jones: The Law of Unjust Enrichment, 8th ed. (London 2011), [8–123]–[8–130]Google Scholar; Mitchell, C. and Watterson, S., “Remedies for Knowing Receipt” in Mitchell, C. (ed.), Constructive and Resulting Trusts (Oxford 2010), 115Google Scholar.
16 Paragon Finance plc  1 All E.R. 400 (CA), 409; Selangor United Rubber Estates Ltd.  1 W.L.R. 1555 (Ch), 1582.
17 C. Mitchell, “Dishonest Assistance, Knowing Receipt and the Law of Limitation”  Conv. 226.
18 Royal Brunei Airlines Sdn Bhd v Tan  2 A.C. 378 (PC) at 386. See also Twinsectra Ltd. v Yardley  UKHL 12;  2 A.C. 164 (HL), at –, per Lord Millett.
19 Cook v Deeks  A.C. 554 (PC).
20 Novoship (UK) Ltd.  EWCA Civ 908, at .
21 Cook  A.C. 554 (PC), 565.
22 The Court will only seek an alternative analysis by piercing the corporate veil in strictly limited circumstances and when other remedial options are unavailable. See further Prest v Petrodel Resources Ltd.  UKSC 34;  2 A.C. 415.
23 Target Holdings Ltd. v Redferns  1 A.C. 421 (HL), 434; Swindle v Harrison  4 All E.R. 705 (CA), 717; Bank of New Zealand v NZ Guardian Trust Co Ltd.  1 N.Z.L.R. 664 (CA), 681, 686–88. For recent discussion, see AIB Group (UK) plc v Mark Redler & Co  UKSC 58;  3 W.L.R. 1367.
24 Bray v Ford  A.C. 44 (HL), 51–52; Industrial Development Consultants Ltd. v Cooley  1 W.L.R. 443 (HC), 453; Gwembe Valley Development Co Ltd. v Koshy  EWCA Civ 1048;  B.C.L.C. 131, at ; Stevens v Premium Real Estate Ltd.  NZSC 15;  2 N.Z.L.R 384, at .
25 Novoship (UK) Ltd.  EWCA Civ 908, at . See also United Pan-Europe Ltd. v Deutsche Bank AG  2 B.C.L.C. 461 (CA), at .
26 Fyffes Group Ltd.  2 Lloyd's Rep. 643 (Q.B. Com Ct).
27 Novoship (UK) Ltd.  EWCA Civ 908, at .
29 Bristol & West Building Society v Mothew  Ch. 1 (CA).
30 This can potentially produce anomalies. Unlike the fiduciary, an accessory who is complicit in a breach of fiduciary duty may escape a full measure of accountability in respect of gains that are deemed causally remote.
31 There is no single set of common law principles for quantification in tort. The rules for determining common law damages vary significantly, for example, as between negligence and the tort of deceit. See further text at footnotes 49–52.
32 It can be argued that one anomaly is substituted for another in that common law liability is responding to breach of a wholly equitable duty. However, it is argued below that it is preferable to focus on the nature of the wrong committed by an accessory than the obligations of the primary wrongdoer to the principal. See text below at footnotes 45–48.
33 As exemplified by the well-known maxim “Equity regards as done that which ought to be done”.
34 From one perspective, in the eyes of equity, the impugned conduct is not a wrong in that equity refuses to countenance it as a wrongful act or allow the errant fiduciary to cite his own misconduct. To that extent, equity is not reversing a wrong, but refusing to accept its status as a wrong.
37 Attorney General for Hong Kong v Reid  1 A.C. 324 (PC), 337, citing Sir Millett, Peter, “Bribes and Secret Commissions”  R.L.R. 7Google Scholar. The reasoning in Attorney General for Hong Kong v Reid was endorsed by the UK Supreme Court in FHR European Ventures LLP v Cedar Capital Partners LLC  UKSC 45;  3 W.L.R. 535.
38 Subject to limited exceptions, such as knowing receipt and procuring or inducing a breach of trust. See discussion below.
39 An account of profits can be applied in different settings but, for present purposes, discussion of the remedy is confined to trust obligations and fiduciary relationships.
40 This approach is, however, relevant in other areas, most notably in respect of intellectual property infringement. Decisions in this field are not regulated by the more rigid principles governing defaulting fiduciaries. See further Devonshire, P., Account of Profits (Wellington 2013), Chapter 6Google Scholar, “Intellectual Property Infringement”.
41 As discussed above, knowing receipt is treated as a distinct equitable wrong, and attracts similar remedies, including an account of profits.
42 A view noted in Novoship (UK) Ltd.  EWCA Civ 908, at .
43 Barnes (1874) L.R. 9 Ch. App. 244, 251–52.
44 Royal Brunei Airlines Sdn Bhd  2 A.C. 378 (PC), 392. Following Royal Brunei, there was uncertainty as to the extent to which conscious impropriety was a strictly objective test. In Twinsectra Ltd.  UKHL 12;  2 A.C. 164, the majority of the House of Lords asserted a combined subjective–objective test for dishonesty. Lord Millett, dissenting, emphasised the need for an objective standard. Subsequently, in Barlow Clowes International Ltd. v Eurotrust International Ltd.  UKPC 37;  1 W.L.R. 1476, the Privy Council maintained that Twinsectra had not departed from Royal Brunei and, in line with Lord Millett's dissenting speech in Twinsectra, affirmed that, although a dishonest state of mind is a subjective mental state, the law determines dishonesty by reference to an objective standard. New Zealand similarly adopts a test of dishonesty. See Westpac New Zealand Ltd. v MAP & Associates Ltd.  NZSC 89;  3 N.Z.L.R. 751. In Australia, the High Court of Australia has emphasised the strict requirement for knowledge of a dishonest and fraudulent breach of trust or fiduciary duty, as expressed in Barnes v Addy. This test is satisfied by actual or constructive knowledge within the first four categories of knowledge postulated in Baden v Societe Generale  1 W.L.R. 509 (Ch). See Farah Constructions Pty Ltd. v Say-Dee Pty Ltd.  HCA 22; (2007) 230 C.L.R. 89, at ; Grimaldi v Chameleon Mining NL (No 2)  FCAFC 6; (2012) 200 FCR 296, at .
45 It is not suggested that an account of profits is entirely absent in common law proceedings: (1) in Attorney General v Blake  1 A.C. 268 (HL), the House of Lords held that, in exceptional cases where orthodox remedies are inadequate, a defendant may be required to account to the claimant for the benefits received from a breach of contract; (2) in proceedings for interference with property, damages may be awarded based in part on the defendant's gain, although the quantum usually falls short of full profit stripping (Wrotham Park Estate Co. Ltd. v Parkside Homes Ltd.  1 W.L.R. 798 (Ch)); and (3) by statute, an account of profits is available in respect of intellectual property infringement.
46 Whilst Novoship expounds a hybrid form of accessory liability, this contrasts with the established Australian view that dishonest assistance is an equitable wrong in respect of which an account of profits can be granted. See Consul Development Pty Ltd. (1975) 132 C.L.R. 373; Warman International Ltd. v Dwyer (1995) 182 C.L.R. 544; Michael Wilson & Partners Ltd. v Nicholls (2011) 244 C.L.R. 427.
47 Equitable liability for dishonest assistance in a breach of trust or fiduciary duty should be characterised as a common law wrong as opposed to an equitable duty subject to analogous common law rules.
48 It is questionable whether accessory liability in tort is a surrogate for dishonest assistance in equity. The essential elements are that the defendant must have assisted the commission of an act by the primary tortfeasor, the assistance must have been pursuant to a common design, and the act must constitute a tort as against the claimant. In the case of assistance in breach of fiduciary duty, there are conceptual difficulties in characterising the primary wrong as a tort. See further Sea Shepherd (UK) v Fish & Fish Ltd.  UKSC 10.
49 In contrast, equity's exacting standards are often conducive to establishing liability. For example, comparing equitable fraud and common law fraud, the former does not require moral turpitude or deception. It is sufficient if the defendant's actions are deemed unconscionable. See Kitchen v RAF Association  1 W.L.R. 563 (CA); Archer v Moss  1 All E.R. 747 (CA).
50 See text at footnotes 42–44.
51 AIB Group (UK) plc  UKSC 58;  3 W.L.R. 1367, at . See also Doyle v Olby (Ironmongers) Ltd.  2 Q.B. 158 (CA); Smith New Court Securities Ltd. v Scrimgeour Vickers (Asset Management) Ltd.  UKHL 3;  A.C. 254.
52 In the case of fraudulent misrepresentation, damages are not determined by contract principles, but are assessed on the same basis as the tort of deceit.
53 Conceptually, each is a distinct basis of liability. See discussion in text below.
54 Barnes (1874) L.R. 9 Ch. App. 244, 251–52, per Lord Selborne L.C. (commonly referred to as “the second limb of Barnes v Addy”). Australian law retains this formulation for accessory liability. It also recognises a distinct liability for procuring or inducing a breach of fiduciary duty. This is not dependent on conscious impropriety by a trustee. A third party who has not “assisted” a breach of duty has nevertheless committed an independent wrong: Hasler v Singtel Optus Pty Ltd.  NSWCA 266, at –; Farah Constructions Pty Ltd.  HCA 22; (2007) 230 C.L.R. 89, at . The English position essentially assimilates the two principles (Royal Brunei Airlines Sdn Bhd  2 A.C. 378 (PC), 392). See further text below at footnotes 56–60.
55 Royal Brunei Airlines Sdn Bhd  2 A.C. 378 (PC), 392.
56 Hasler  NSWCA 266, at , per Leeming J.A.
57 Royal Brunei Airlines Sdn Bhd  2 A.C. 378 (PC).
59 Farah Constructions Pty Ltd.  HCA 22; (2007) 230 C.L.R. 89, at .
61 For example, where the third party is a solicitor advising a trustee. See further Alleyne v Darcy (1854) 4 I.R. Ch. Rep. 199; Midgley v Midgley  3 Ch. 282 (CA).
62 See text at footnotes 22–24.
63 The term “constructive trust” is an ambulatory concept which is invoked when it is unconscionable for a person to retain property deriving from a particular relationship or course of dealings, or to enjoy the proceeds of its exploitation. For discussion of the terms “constructive trust” and “constructive trustee”, see Millett L.J. in Paragon Finance plc  1 All E.R. 400 (CA), 408 et seq.
64 Mara v Browne  1 Ch. 199 (CA), 209.
65 Peters v Leeder (1878) 47 L.J.Q.B. 573. See further the Administration of Estates Act 1925, s. 28.
66 English v Dedham Vale Properties Ltd.  1 W.L.R. 93 (Ch). For further discussion of these categories, see Harpum, C., “The Stranger as Constructive Trustee” (1986) 102 L.Q.R. 114Google Scholar.
67 Royal Brunei Airlines Sdn Bhd  2 A.C. 378 (PC); Williams  UKSC 10;  A.C. 1189.
68 Ridge, P., “Justifying the Remedies for Dishonest Assistance” (2008) 124 L.Q.R. 445Google Scholar.
69 As noted above, this conclusion does not apply to knowing receipt.
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