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The High Court recently had reason to consider liability where individuals, who owe fiduciary duties to a company, divert for themselves a business opportunity.

Badri, the one-time business partner of Boris Berezovsky and a businessman of immense wealth, died suddenly in February 2008. He left no will, and his family had little idea what his assets were, where they were located and how they were held.

Mr Jaffe and Mr Rukhadze, who had known Badri well, initially worked together to assist the family to recover Badri’s assets. Mr Jaffe was the founder of Salford Capital Partners International (“SCPI”) and Mr Rukhadze was a director. The two Claimant companies (one of which was an LLP) were established with a view to their forming part of a structure for the agreement with Badri’s family. Mr Alexeev and Mr Marson joined to work on the project full-time in 2009, and were an employee of SCPI and chief legal counsel of the LLP respectively.

In 2011, there was a major falling out. The Defendants – Mr Rukhadze, Mr Alexeev and Mr Marson – resigned. Badri’s family disavowed any future connection with SCPI, and instead instructed the recovery services project to the Defendants.

The Claimants alleged that the Defendants had thereby acted in breach of fiduciary duties, by diverting for themselves the business opportunity to contract the project with Badri’s family. In this judgment on liability, Mrs Justice Cockerill agreed.

Fiduciary Duties

 The Court outlined the established position that the essential question of whether or not a person owes fiduciary duties is whether he has “undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence” (Bristol v Mothew [1998] Ch 1 at 18).

Although not every employee owes obligations as a fiduciary to an employer, employees may do so. That was relevant to whether Mr Marson, an employee of the LLP, owed fiduciary duties. He had a senior role and was acting as a solicitor. His contract of employment also contained restrictive covenants, extending for one year after termination of his employment. Cockerill J held that these factors were “sufficient to compel a conclusion that” he owed fiduciary duties ([344]).

The second issue was the duration of fiduciary duties. It was established that, in general, fiduciary duties do not extend beyond the end of a relevant relationship. Cockerill J therefore clarified that, where liability arises from post-resignation conduct, it arises not because duties persist post resignation, but because of breaches of fiduciary duties prior to resignation which manifest only post resignation ([76]).

The Defendants had argued that, on the facts, there had been a release of their fiduciary obligations – the Court rejected that: “In order to find a release, I would expect to find clear unequivocal statements embodying a consensus with a clean break” ([391]). 

Diversion of a Maturing Business Opportunity

Equity prohibits a fiduciary from making a profit out of his fiduciary position for his personal advantage. This encompasses the diversion or appropriation of the company’s current business, or of a “maturing business opportunity”.

What does this mean? Cockerill J concluded at [60] that it extends to the situation where “there is a contract between the principal and a third party with regard to future business and that contract has progressed to the stage where some outlines of future contractual relations are in play. There need not be a draft contract or any imminence of agreement”. Indeed “a fiduciary may be in breach by diverting an opportunity even if it is unlikely that the principal will be able to secure that opportunity”. The limits on the concept were that it must have come to the fiduciary by reason (and only by reason) of his position as such fiduciary ([65]), and it must be an opportunity which the company is “actively pursuing” ([66]). All of these criteria were found to be satisfied on the facts.

 Breach of Fiduciary Duties

The court then considered whether the fiduciary duties owed by the Defendants had been breached. The simplest argument was that the Defendants had resigned with an intention to compete. However, Cockerill J held that “I do not consider that the authorities to date justify a firm conclusion that a resignation with an intention to compete is necessarily by itself a breach”. The position might be different if there was a “bad faith resignation”, even if that was “unaccompanied by any preparatory steps which qualify as separate breaches” ([84]).

The Defendants argued that they had been wrongfully excluded and dismissed by Mr Jaffe, such that there could not have been a resignation with an intention to compete. They relied on the decision of In Plus Group [2003] BCC 332, where the Court of Appeal held that the director of a company’s duty had been “reduced to vanishing point by the acts … of his sole fellow director”. Cockerill J distinguished the present facts from that case: although the Defendants were suspended, that did not occur “in the context of a clear attempt to oust” them ([400]).

On these facts, the Court was satisfied that there was more than simply resigning with an intention to compete: “it is resigning once sufficient steps have been taken to enable competition to take place at once, or smoothing the path to effective competition” ([418]), together with disloyalty in failing to support the entities to whom they owed fiduciary duties, and in actively aligning themselves with Badri’s family and away from their respective companies. That gave rise to the “necessary element of disloyalty to give a liability in respect of acts done post resignation” ([424]).

 Conclusion

We might not all have “maturing business opportunities” that involve scouring for a billionaire’s assets, but the concept is broadly interpreted. In the context of employment, it is worth being aware of the substantial armoury awarded by the law where fiduciary duties are owed and have been breached. It potentially allows a cause of action that reaches far forward into post-termination competitive activity (referable to the breach while employed), with extensive relief: on the present facts, the Claimants will now be considering, among other matters, whether to elect for an account of profits or equitable compensation.

The full judgment can be read here.

Clerks

Staff