II. Novoship (UK) Ltd. v Nikitin

Novoship arose from the fraudulent conduct of M, a senior employee of the first claimant, who was responsible for negotiating the charter of the claimants' vessels. In that capacity, he solicited and received bribes. Of particular relevance to the present proceedings was an arrangement whereby five vessels were ostensibly chartered to Petroleos de Venezuela SA (hereinafter “PDVSA”), but were in fact chartered to companies owned and controlled by R. R in turn sub-chartered the vessels to PDVSA for a substantial gain. As a condition to facilitating this arrangement, M required R to make secret payments not only to himself, but also to Amon International (“Amon”), a company owned and controlled by N. N and M were contemporaneously negotiating the charter of the claimants' vessels to N's company, Henriot Finance Ltd. While M's motive for instigating secret commissions by R to N was unclear, the arrangement was manifestly corrupt and a breach of M's fiduciary duty to his employer.

At first instance,Footnote ⁷ the claimants recovered the proceeds of bribery and other improper gains from M and various parties who participated in his corrupt schemes. With regard to the Henriot charters, Christopher Clarke J. found that N had dishonestly assisted M in the breach of the latter's fiduciary duty by negotiating the Henriot charters when he knew that Amon, his alter ego, had dishonestly received secret commissions at M's direction. Both N and Amon were liable to account for the profits made from the charters (which were informally estimated as exceeding US$100 million).

The basic position adopted by the Court of Appeal was that, although not sued as a fiduciary, a stranger can be liable in equity as if he was a trustee.Footnote ⁸ On this broad principle, an accessory can be required to disgorge profits. In line with the primary duty of a fiduciary, there was no requirement that the beneficiary sustained a loss.Footnote ⁹ This is consistent with the orthodox view that damages and an account of profits are mutually inconsistent and that a claimant must ultimately exercise an election between the two.Footnote ¹⁰ The Court of Appeal added that misuse of trust property was not a prerequisite to liability for dishonest assistance for breach of fiduciary duty.Footnote ¹¹ Given the diverse range of fiduciary obligations, both proprietary and non-proprietary, to have ruled otherwise would have constrained secondary liability to a limited class of wrongs irrespective of the nature and gravity of the accessory's conduct.

III. Primary and Secondary Liability

The central premise that a knowing recipient or a dishonest assistant has the same responsibility as an express trustee is not without difficulty. In Novoship, the Court of Appeal considered that both forms of liability could be approached in a similar manner, rendering a knowing recipient or a dishonest assistant liable to account for profits.Footnote ¹² The expansive liability of a trustee, both personal and proprietary, can be readily accepted. He or she has either expressly assumed the onerous office of trusteeship or the obligation has been constructively imposed by the Court. Breach of trust, particularly the unauthorised use of trust assets, is at the apex of equitable wrongs. It is unnecessary to make a case for the surrender of illicit gains through an account of profits. However, the scope of secondary liability requires more caution.

A knowing recipient has, by definition, intermeddled with trust property. The act of knowingly receiving trust property does not render the recipient a trustee.Footnote ¹³ Nevertheless, the recipient is treated as if he was.Footnote ¹⁴ It is considered that knowing receipt is a distinct equitable liability imposing “trustee-like” custodial duties on the recipient.Footnote ¹⁵ This conduct correspondingly attracts remedies associated with a breach of trust.Footnote ¹⁶ In this regard, disgorgement is consistent with equity's rigorous response to the abuse of trust property by third parties, as reflected in its tracing rules and treatment of property in the hands of transferees.

Turning to dishonest assistance, the case for disgorgement falters. It is questionable whether an accessory can be fully equated with a knowing recipient or a trustee. Unlike a knowing recipient, there is no proprietary link with the subject matter of the wrong. This has drawn the comment that it is harder to characterise dishonest assistants as “trustees” than knowing recipients, not least because the former do not take possession of the disputed assets.Footnote ¹⁷ The comprehensive personal and proprietary remedies for knowing receipt may also be spurred by the view that “[r]ecipient liability is restitution-based; accessory liability is not”.Footnote ¹⁸ From this perspective, disgorgement serves to reverse an unjust enrichment arising from the receipt of property.

The analogy between an accessory and a fiduciary is even more strained. The assistant has assumed no duty to the principal and it cannot be said that an account of profits is a proxy for enforcing a performance interest. Moreover, a fiduciary has disavowed the opportunity to make a personal gain, whereas an accessory has not. This reinforces – or re-expresses – the argument that an accessory cannot be treated as an express trustee for the purpose of liability or remedy.

In Novoship, the Court of Appeal cited Cook v Deeks Footnote ¹⁹ as an example of trusteeship being imposed on a party implicated in a breach of fiduciary duty. In Cook v Deeks, the directors of the Toronto Construction Company (“TCC”) negotiated a construction contract with the Canadian Pacific Railway Company (“CPR”) but entered into the contract personally. The directors incorporated a new company, the Dominion Construction Company (“Dominion”), to carry out and receive payment for the work. Dominion therefore received the profits under the contract. The Privy Council held that the directors were in breach of their duties to TCC and an account of profits was directed against all defendants including Dominion. In Novoship, the Court of Appeal opined that the order against Dominion was an instance of an account of profits being granted against a non-fiduciary who had become mixed up in a breach of fiduciary duty.Footnote ²⁰ However, it is submitted that Cook v Deeks is not entirely convincing in rationalising disgorgement against accessories. The status of Dominion is equivocal. As the entity which generated and received the contractual benefits, the company was akin to a principal. Moreover, the company was formed as a vehicle for the personal defendants' breach of duty to TCC. The directors were the guiding minds of Dominion. As the Board recorded, “the Dominion Construction Company acquired the rights of these defendants with full knowledge of all the facts”.Footnote ²¹ The affairs of the company were sufficiently connected with its principals that it can be more closely identified as a knowing recipient than an accessory.Footnote ²²

IV. Causation and Limiting Principles

If dishonest assistance has the same remedial consequences as the misconduct of an express trustee, this begs the question whether an account of profits fulfils the same function in both cases. This will principally depend on the role of causation and limiting principles such as remoteness, foreseeability, and intervening cause. In the case of a fiduciary, equity imposes a strict duty to disgorge illicit gains. This reflects a prophylactic design to discourage temptation and enforce the highest ethical standards. Accordingly, the role of causation and limiting principles is curtailed in relation to both compensatory and gain-based relief. The test for the former is that a fiduciary is liable if the loss would not have occurred but for the breach. This is assessed with the full benefit of hindsight.Footnote ²³ With respect to an account of profits, this narrow enquiry is largely irrelevant in determining liability to surrender gains.Footnote ²⁴ The Court of Appeal's approach in Novoship is consistent with this position to the extent that it recognised that a fiduciary's liability to account for secret profits does not depend on causation and arises if the profits fall within the scope of the duty of loyalty.Footnote ²⁵

In Novoship, the defendant, N, was in a contractual relationship with the claimants, but he was not a fiduciary. This raises the pivotal question whether the strict view on causation in respect of fiduciaries is tenable in the case of dishonest assistants. The issue arose in Fyffes Group Ltd. v Templeman,Footnote ²⁶ a case having factual similarities with Novoship. In Fyffes, the claimant employed T as its chartering manager. In negotiating shipping services on behalf of his employer, T received secret commissions from S. Toulson J. (as he then was) held that S was liable for dishonestly assisting T's breach of fiduciary duty to his employer. The question arose as to whether S should be required to account to the claimant for the profit it had made from its service contract with the claimant. Toulson J. accepted that there were cogent grounds for holding that the briber of an agent should account to the principal for benefits obtained from the corruption of the agent. However, on the present facts, he declined to do so. His Lordship found that it was highly probable that the claimant would have entered into the service agreement with S if T had not been dishonest. He further held that the profit was not caused by the bribery of T but was an ordinary profit element arising from the provision of S's services to the claimant, which would have been earned irrespective of the breach of duty.

In Novoship, the Court of Appeal considered that Fyffes applied a test of causation with respect to dishonest assistance. A distinction was drawn between the status of a fiduciary and an assistant. The fiduciary's undertaking is one of single-minded loyalty, breach of which attracts vigorous sanctions including an account of profits. A dishonest assistant, however, has not entered into direct relations with the principal and does not occupy a fiduciary position. Accordingly, the Court could see “no reason in principle why the common law rules of causation, remoteness and measure of damages should not be applied by analogy”.Footnote ²⁷ On this basis, the judgment below was reversed. Notwithstanding N's corrupt dealings with M and his arrangements in respect of the claimants' vessels, the subsequent gains were attributed to the prevailing market conditions.Footnote ²⁸

The application of a common law standard has superficial appeal in that an accessory is a stranger to the trust and has not transgressed a fiduciary duty. Even in the case of a fiduciary, it is recognised that liability for a non-fiduciary wrong should be determined by analogy to common law principles.Footnote ²⁹ Causation, foreseeability, and remoteness can be seen as a necessary brake on the scope of the remedy outside the strict realm of equitable duty.Footnote ³⁰ However, this sidesteps the taxonomy of the wrong, the capacity of the wrongdoer, and the implications of both to the remedy. It is argued below that common law limiting principles can appropriately be applied to accessories and that this form of secondary liability should be governed by the common law.Footnote ³¹ This would remove the anomaly of an equitable duty mediated by common law principles and sever the artificial connection between a fiduciary and a stranger to the trust.Footnote ³²

V. Taxonomy of Secondary Wrongs

The analogy between a fiduciary and an accessory is unsound and this is evident when propounded as a rationale for gain-based relief for accessory liability. A fiduciary is usually accountable for gains attributable to the misuse of trust property or a breach of duty, such as the profit rule or the conflict rule. These forms of liability do not apply to an accessory. An accessory is not the custodian of another's property nor has he entered into a relationship with the principal which would engender proscriptive fiduciary duties. It follows that the prophylactic principle which prevents a trustee from asserting a personal interest in unauthorised gains cannot apply to an accessory. This is sometimes explained in terms of a fiduciary being disabled from acquiring rights inconsistent with his duty to the principal. Equity insists on due performance.Footnote ³³ This finds modern expression in the “good person” fiction which is invoked to reverse the effects of wrongdoingFootnote ³⁴ by a fiduciary.Footnote ³⁵ As Professor Finn (as he then was) expresses the point: “The fiduciary is not usually permitted to say that the benefit derived was derived other than for his beneficiary, even though this is transparently contrary to his real intentions when deriving it.”Footnote ³⁶

The good person fiction and related evidential rules impose what is essentially an irrebutable presumption of probity on conduct that is clearly tainted. In this regard, in the landmark case of Attorney General for Hong Kong v Reid, Lord Templeman was emphatic in stating that:

This stringent policy, which strips a wrongdoer of unauthorised gains, is strictly status-driven. It is animated by the unique constraints of trusteeship. It does not extend beyond the immediate fiduciary relationship and, it is submitted, has no application to strangers to that relationship.Footnote ³⁸

An account of profits is a remedy that responds to the breach of a particular dutyFootnote ³⁹ and reflects the imperatives which underlie that duty. This is not, as Novoship implies, a question of degree, where an account of profits may be granted if the wrong is not too remote from the breach.Footnote ⁴⁰ An account of profits reinforces a duty and a more principled position is to confine the remedy to the immediate and obvious context of those who owe direct fiduciary obligations to the principal.Footnote ⁴¹

This can be supported from another perspective. Accessory liability, as defined in Barnes v Addy, is founded in fraud.Footnote ⁴² Dishonest assistance is constituted by knowledge of, and participation in, a “dishonest and fraudulent design on the part of the trustees”.Footnote ⁴³ Much scholarly and judicial attention has been directed to the precise level of knowledge, but the general view is that dishonesty or lack of probity is a touchstone of liability.Footnote ⁴⁴

Although an account of profits applies to an equitable wrong which is premised on dishonesty or fraud, the remedy does not apply to comparable common law wrongs, such as intentional torts. Thus, defendants in common law proceedings are in a more favourable position than a dishonest assistant, even though the latter is not the primary wrongdoer.Footnote ⁴⁵

It is submitted that an account of profits falls outside the conceptual framework of accessory liability and that this particular wrong should be governed by the common law.Footnote ⁴⁶ In the absence of an equitable duty or abuse of trust property, a third party is not in breach of any positive duty to the principal. At best, he or she is party to harm caused by another. The underlying cause of action should be cast as a common law wrong,Footnote ⁴⁷ which may be variously classed as fraud, deceit, negligence, interference with contractual relations, and so on.Footnote ⁴⁸

It can be objected that, in this scenario, a claimant may face significant evidential hurdles in establishing a cause of action at law.Footnote ⁴⁹ However, relinquishing an equitable standard for dishonest assistance may be less prejudicial than first appears. Even as an equitable wrong, accessory liability has a high threshold, requiring proof of dishonesty.Footnote ⁵⁰ Moreover, the common law grants concessions for the recovery of damages for intentional wrongs. For example, remoteness of damage for the tort of deceit differs from negligence in that the defendant is liable for all losses flowing directly from the tort, whether foreseeable or not.Footnote ⁵¹ Liability in this context extends to consequential losses.Footnote ⁵²

VI. Procuring or Inducing a Breach

The argument for treating accessory liability as a common law wrong should be qualified in one respect. There are different forms of fiduciary duty, engendering different intensities of obligation. Secondary liability must be conditioned by that fact. For example, at one extreme, a third party may facilitate the misappropriation of trust property and, at the other, a third party may assist a fiduciary in respect of conduct that marginally infringes the conflict rule. A nuanced response is required. It is submitted that a distinction should be drawn between two forms of participation in the fiduciary's breach: (1) dishonest assistance in furtherance of a fiduciary's breach and (2) procuring or inducing the fiduciary's breach (hereinafter Category 1 and Category 2, respectively).Footnote ⁵³

A third party is liable for dishonest assistance (Category 1) if he or she assists a trustee or fiduciary “with knowledge in a dishonest and fraudulent design on the part of the trustees”.Footnote ⁵⁴ By definition, the third party is an accessory to the misconduct of another. In contrast, liability for procuring or inducing a breach of duty (Category 2) contemplates that a third party has personally instigated the wrong. Liability is not conditional on dishonesty on the part of the fiduciary.Footnote ⁵⁵ Category 2 is directed to the unilateral conduct of a third party in procuring a breach of fiduciary duty. Arguably, this is considered more venal than Category 1, because it is expressed in more restrictive terms: “… the liability of a person who induces or procures a trustee to commit a breach of trust does not turn on the quality of the breach. There is no requirement that the breach of trust be of sufficient gravity to answer the description of ‘dishonest and fraudulent design’.”Footnote ⁵⁶

The English position effectively assimilates the two categories, which are expressed as a general principle of accessory liability. In Royal Brunei Airlines Sdn Bhd v Tan,Footnote ⁵⁷ the Privy Council stated: “A liability in equity to make good resulting loss attaches to a person who dishonestly procures or assists in a breach of trust or fiduciary obligation. It is not necessary that, in addition, the trustee or fiduciary was acting dishonestly, although this will usually be so where the third party who is assisting him is acting dishonestly.”Footnote ⁵⁸

The Australian position differs in that procuring or inducing a breach of trust or fiduciary duty is regarded as a distinct head of third-party liability which is independent from the second limb of Barnes v Addy.Footnote ⁵⁹ In Farah Constructions Pty Ltd. v Say-Dee Pty Ltd., the High Court of Australia observed that:

It is submitted that Category 1 and Category 2 provide an appropriate demarcation for the scope of an account of profits. Category 2 contemplates liability for an autonomous wrong. Particularly if a trustee or fiduciary is induced by a third party to commit an “innocent” breach,Footnote ⁶¹ the case for disgorgement of the third party's gains is compelling. This form of wrongdoing engages the deterrent principle and lends weight to accountability for consequential gains. Unlike Category 1, this is appropriately classified as an equitable wrong for which compensation is awarded on a strict “but for” test of causation and disgorgement is largely unfettered by limiting principles.Footnote ⁶² In contrast, the first category of dishonest assistance should be governed by common law and relief should be confined to damages. In drawing this distinction, it is noted that procuring or inducing a breach of duty has an affinity with intermeddling in the affairs of another, such as a constructive trustee,Footnote ⁶³ a trustee de son tort,Footnote ⁶⁴ an executor de son tort,Footnote ⁶⁵ and an unauthorised holding out as an agent.Footnote ⁶⁶ By instigating the breach, the third party is effectively a primary wrongdoer. In these circumstances, it is not anomalous to impose a full gamut of remedies for his or her participation in the substantive wrong.

Finally, to what extent is the accessory's role in the corruption of a fiduciary relationship sufficiently proximate to engage the sanction of an account of profits? It has been argued in this article that the question should only arise in respect of procuring or inducing the fiduciary's breach. Within this category, it is important to put the wrong in perspective. The third party's liability is not entirely parasitic on the fiduciary's conduct. Knowing assistants are liable for their own dishonesty irrespective of the dishonesty of the trustees.Footnote ⁶⁷ It has been pointed out that a third party would otherwise escape liability altogether if he or she deceived a trustee and caused the latter to innocently commit a breach of duty.Footnote ⁶⁸ A preferable approach is to ask, first, whether the principal has sustained a loss as a result of the third party's conduct. If so, the third party should compensate for that loss on a narrow “but for” test for causation. If the accessory has made a gain without occasioning harm to the principal (or if any gain exceeds the principal's loss), then gains which have an immediate and obvious connection with the wrong should attract disgorgement. For example, if a broker procured a breach of trust by inducing a trustee to purchase unauthorised investments for which the broker received a commission.

Cases such as Novoship should fall outside this principle entirely. The facts do not suggest that N procured the breach and his gains were the product of faithful performance of a contract with the principal. Both Fyffes and Novoship concern the disgorgement of benefits legitimately derived from transactions with the claimant. In both cases, the profits were attributable to the dishonest assistant's services to the claimant. In Novoship, there was no finding that N had received any particular advantage in entering into his agreement with the claimants. To this extent, N's gains were causally remote from his participation in the breach of fiduciary duty.