Court of Appeal finds there is no free-standing duty on fiduciaries to disclose wrongdoing

Last Friday, in GB Globinvestment Ltd v XY ERS UK Ltd [2006] EWCA Civ 1248, the Court of Appeal held that, whilst disclosure of information can facilitate informed consent where the fiduciary “no conflict” and/or “no profit” rules might otherwise bite, there is no discrete fiduciary duty of disclosure. The facts are far removed from the employee competition sphere (investors who claimed that an investment advisor owed a fiduciary duty to disclose all relevant information). However, the Court of Appeal expressly grappled with the previous Court of Appeal case of Item Software v Fassihi [2004] BCC, which is frequently relied upon in the employee competition sphere to argue that fiduciaries owe obligations to disclose wrongdoing to their employers. I explain at the end of this article why I think this matters in practice, both to those drafting employment contracts, and to those litigating employee competition cases.

What about Item Software?

As is well-known, Item Software established that a director’s “fundamental” duty “to act in what he considers to be the best interests of the company” could mean that a director has to disclose his own misconduct. On the facts, Mr Fassihi could not have fulfilled his duty of loyalty except by telling the company of steps he had taken to divert business to himself.

Item Software is a somewhat controversial decision. Sitting at first instance in GHLM Trading v Maroo [2012] EWHC 61 (Ch) Newey J said about the decision in Item Software “Arguably, it breaks new ground in treating a fiduciary duty as prescriptive rather than merely proscriptive. Its result can perhaps now be justified also by reference to section 172 of the Companies Act 2006, which came into force on 1 October 2007. The duty to promote the success of a company which that provision imposes can be said to be expressed in prescriptive terms (a director "must act in the way he considers, in good faith, would be most likely to promote the success of the company …" – emphasis added). Be that as it may, Item Software (UK) Ltd v Fassihi is clearly binding on me”. A question is sometimes asked whether the duty in section 172 of the Companies Act is, strictly, a fiduciary duty because it is prescriptive (i.e. it requires the individual positively to do something) rather than proscriptive (i.e. preventing the individual from doing something, such as having a conflict of interest or making a secret profit).

Now sitting in the Court of Appeal, last Friday Newey LJ had the chance to return to this theme in giving the lead judgment in Globinvestment (Asplin and Popplewell LJJ agreed with Newey LJ). He said this at §43:

“What matters for present purposes, however, is that Arden LJ, who gave the main judgment [in Item Software], did not arrive at her conclusion on the basis that there was a freestanding obligation of disclosure. Arden LJ expressly stated in paragraph 41 that she did "not consider that it is correct to infer from the cases to which I have referred that a fiduciary owes a separate and independent duty to disclose his own misconduct to his principal or more generally information of relevance and concern to it". "So to hold," she said, "would lead to a proliferation of duties and arguments about their breadth". Arden LJ "prefer[red] to base [her] conclusion … on the fundamental duty to which a director is subject, that is the duty to act in what he in good faith considers to be the best interests of his company". On the facts, as Arden LJ explained in paragraph 44, she considered there to be "no basis on which Mr Fassihi could reasonably have come to the conclusion that it was not in the interests of Item to know of his breach of duty" and so "he could not fulfil his duty of loyalty … except by telling Item about his setting up of RAMS, and his plan to acquire the Isograph contract for himself". Arden LJ had noted in paragraph 40 that "it is often said that a fiduciary must disclose a conflict of interest and duty because that is a shorthand way of stating the mechanism by which he can avoid any liability to account for secret profits".

The conclusion in Globinvestment

Newey LJ went on to find that references in other authorities to a “duty” to disclose did not establish a positive fiduciary duty of disclosure because “The references to “duty” can be explained as illustrations of the “shorthand way of stating the mechanism by which [a fiduciary] can avoid any liability to account for secret profits” which Arden LJ identified.”.

The “true position” is therefore that disclosure can facilitate informed consent where the “no conflict” and “no profit” rules might otherwise bite, but there is no discrete fiduciary duty of disclosure. However, the Court of Appeal did not go so far as to say that “all fiduciary duties are invariably proscriptive rather than prescriptive” – it was not necessary to decide that question as part of the Globinvestment appeal: “All that has to be determined in the present context is whether a fiduciary has as such a positive obligation to disclose, and I do not consider that he does …. [None of the cases, including Item Software] provide any significant support for the existence of such a duty.”

The result is that, whilst disclosure by a fiduciary may avert liability (by facilitating informed consent), a principal cannot make a free-standing claim for non-disclosure.

Does this make any difference in practice?

Whilst this issue may seem pretty esoteric, there are a number of reasons why I consider it matters in practice for employment lawyers:

1. It seems clear that the issue of whether or not a fiduciary’s obligations include a positive duty of disclosure is ripe for consideration by the Supreme Court at some point. Principled arguments are made by some judges and commentators that fiduciary duties should be purely proscriptive. If the Supreme Court were to accept that argument, it may not make much difference for statutory directors (given the prescriptive “must act” wording in section 172 of the Companies Act 2006 which could still give rise to a positive duty of disclosure). However, it could make a significant difference in relation to ‘mere’ employees who are fiduciaries but not statutory directors – such employees would not owe any free-standing obligation of disclosure. The issue of when an individual should have disclosed their own, or others’, wrongdoing can be a significant issue in any team move claim as I explain further at 3 below. Whether or not an individual has breached a fiduciary obligation by failing to disclose information can be material to the extent of his obligation to account for profits (and on the obligation of the new employer to account for profits consequent upon dishonest assistance in breach of fiduciary duty).
2. The judgment in Globinvestment (at §34) emphasises that the existence of a contract between the fiduciary and the principal modifies the extent and nature of the fiduciary duties which arise, and the fiduciary relationship “must accommodate itself to the terms of the contract so that it is consistent with, and conforms to, them”. That really underlines why, in my view, any well-drafted employment contract (particularly for a senior employee) should include express obligations on the employee to report timeously all they know about: (i) their own misconduct; (ii) the misconduct of other employees; and (iii) any nascent or actual threats to the business. That is essential if the obligation on fiduciary employees to disclose is vulnerable to an appeal to the Supreme Court. However, even if the Supreme Court were to uphold the current Item Software approach: (i) individuals may well argue that the absence of an express contractual obligation to disclose should “modify” the scope of the fiduciary duty; and (ii) such a clause would be essential for employees who did not owe fiduciary duties.
3. In Guy Carpenter v Willis [2026] EWHC 361 (KB) the Claimants argued that the Court should approach the question of whether or not to grant springboard injunctive relief by considering two different counterfactuals: (i) the first on the orthodox basis of asking what would have happened if there had been no wrongdoing at all; (ii) the second by leaving in all of the wrongdoing save that the fiduciaries would have complied with their duties of disclosure and informed Guy Carpenter of their own wrongdoing earlier. The basis on which the Claimants argued that the Court could consider two counterfactuals was not clearly explained (see e.g. §308), and ultimately the Judge found that the second counter-factual (i.e. where the fiduciaries disclosed earlier) would have led to the same result (§368). However, the issue of whether the Court can properly consider a second counterfactual based on disclosure duties alone is likely to arise again on different facts (with different evidence). There may well be circumstances in which a fiduciary employee would know information about a possible team move which would not place him in breach of the “no conflict” and “no profit” fiduciary obligations (e.g. if he were simply told information – perhaps by a more junior employee - about a lawful team move but was not mixed up in any wrongdoing and only discussed his own recruitment with the new employer). In those circumstances, if the Supreme Court were to overturn the Item Software position that the general duty to act in good faith in the best interests of the company gives rise to an obligation of disclosure, there may be no duty to disclose the existence of the team move at all. The decision in Globinvestment that there could be no freestanding claim for failure to disclose information may well have made sense on the facts of that case - in effect, the investors were found already to understand the material information which they claimed had not been disclosed. However, it may appear somewhat differently on the facts of a case where the current employer is unaware of a potential (lawful) team move. If fiduciary employees do not owe an obligation of disclosure in those circumstances, that: (i) could significantly impact upon any counterfactual relying upon the duty to disclose; and (iii) double underlines the importance of well-drafted contracts setting out express disclosure obligations.