Long-term trust and shared commercial success form the foundation of many professional firms, and when those relationships fracture, the consequences can extend far beyond internal governance tensions. In LK Law Pty Ltd v Karas (No 4) [2025] FCA 1461, the Federal Court illustrates how an integrated cross-border practice can unravel and how fiduciary, partnership and agency principles may reallocate rights and responsibilities when relationships break down. The Court focused on the substance of the parties’ dealings, recognising that fiduciary, partnership, agency and trust obligations may arise even where the formal structures point elsewhere. It reaffirmed the availability of equitable relief where a senior principal takes undisclosed steps toward moving the practice to a competitor.
Key Takeaways
- Legal title is not decisive – a firm’s assets and goodwill may be held beneficially for another despite formal ownership.
- Hong Kong regulatory limits on legal practice do not prevent the existence of a cross-border trust, agency relationship or overarching partnership when Hong Kong-qualified lawyers control local work.
- Accessorial liability in Australia can arise where a person knows of the wrongdoing, turns a blind eye, fails to make basic enquiries or recognises facts that clearly indicate a breach.
- Backdated commencement dates cannot retrospectively cure a fiduciary breach – duties are assessed at the time of the impugned conduct.
- A release is ineffective where the underlying breaches were undisclosed, as informed consent is essential for a release to operate.
Background
LK Law Pty Ltd (LKPL) was formed in 2004 on an equal profit-sharing basis between Mr Karas and Mr Lipman. As the practice expanded, they created Karas Lawyers in Hong Kong in 2009. Regulation required the Hong Kong practice to be in Karas’ name, yet profits were pooled with LKPL’s. After the required association period, Karas Lawyers merged with LKPL’s Foreign Firm in 2012 to form Lipman Karas Hong Kong (LKHK). That same year the partners established a UK office through LKLLP, jointly owned through LKUK. A 2016 equalisation process aligned drawings and dividends with their long-standing understanding of equal ownership, and by 2019 each continued to present themselves internally as equal co-owners of LKPL and LKHK.
The relationship later deteriorated. Between late 2020 and early 2021, Karas entered private discussions with Mishcon de Reya (MdR) about moving LKHK across. He signed a Framework Agreement with MdR on 25 March 2021, which commenced on 30 April once MdR approved his admission as a future Senior Equity Partner.
On 25 May 2021, Karas and Lipman signed a Separation Agreement effective 31 May. From 1 June they acted as though Karas had departed, and staff communications reflected that transition. By September 2021, Hong Kong regulators approved the new association between Karas’ MdR-related structure and the authorities. Karas then signed a Deed of Adherence on 28 September 2021 joining MdR as a Senior Equity Partner, backdated to 1 June. On 19 November 2021, Karas and MdR executed an Operating Agreement, also backdated to 1 June, intended to replace the Framework Agreement.
Issues Before the Court
The Court was required to determine:
- The true nature of the relationships between Karas, Lipman and LKPL, including whether LKHK was held on trust or agency for LKPL and whether an overarching partnership existed.
- Whether Karas breached duties arising from those relationships.
- Whether MdR bore accessorial liability.
- What remedies should be granted and whether the Separation Agreement or its releases limited recovery.
Relationship Findings
Trust and Agency
The Court found that LKHK’s assets, goodwill and revenue were held and managed for LKPL’s benefit, either under an express trust or an agency arrangement. The long-standing profit-pooling integrated financial reporting and shared commercial strategy showed that Karas operated LKHK for LKPL’s benefit, even though Hong Kong rules required the practice to be in his name alone.
Overarching Partnership
The Court held that Karas and Lipman were partners in a cross-border practice. Applying the test of whether parties carry on business in common with a view to profit, it relied on equal profit-sharing, unified management across the Australian and Hong Kong offices, and a consistent joint presentation to staff and clients. This partnership sat alongside the corporate entities and reflected the commercial reality.
Illegality Defence Rejected
Karas argued that Hong Kong regulation prevented LKHK from being operated for LKPL’s benefit or as part of a wider partnership. The Court rejected this. The rules restricted only who could carry out Hong Kong legal work, not who could beneficially own the practice’s assets or share its profits. The commercial arrangements, and years of integrated management, supported the existence of trust, agency and partnership relationships.
Breaches of Duty
Karas owed fiduciary duties through the trust, agency, partnership and directorship relationships. These duties required him to avoid conflicts, protect business opportunities and preserve confidentiality.
The breaches arose when Karas began undisclosed negotiations with MdR. By signing the Framework Agreement, committing LKHK to an MdR-aligned pathway and sharing confidential information for MdR’s due diligence, he placed his personal interests ahead of the firm’s. His attempts to treat 1 June 2021 as the true commencement date did not assist. The Agreement had commenced on 30 April 2021 and retrospective dates could not undo earlier breaches.
Statutory Duties, Confidentiality and Misleading Conduct
The same conduct breached Karas’ statutory duties as a director to act in LKPL’s best interests, use his position properly and avoid causing detriment. He also breached obligations of confidence by disclosing internal revenue figures, financial analyses and practice information to MdR without consent. His non-disclosure during separation negotiations amounted to misleading conduct that induced LKPL and Lipman to enter the Separation Agreement on a false premise that the parties were openly disengaging.
MdR’s Accessorial Liability
Under Australian law, a person may be liable if they know of the wrongdoing, deliberately ignore warning signs, fail to make basic enquiries or recognise facts that clearly point to a breach. The Court found that senior people at MdR reached this level. They shut their eyes to matters needing verification, ignored information indicating conflicts and understood enough about the integrated practice to recognise that Karas’ actions were inconsistent with his responsibilities. That was enough for accessorial liability.
MdR argued that Hong Kong or English law should apply because those systems focus on dishonesty as the relevant standard. The Court applied Australian law, and observed that MdR would have met the foreign standard in any event. It declined to impose statutory accessorial liability, as actual knowledge was not proven, and accepted that MdR was not carrying on business in Australia for the purposes of statutory claims.
Loss and Remedies
The Court did not unwind the Separation Agreement because reinstating the earlier relationship was no longer practical. Instead, it ordered:
- Equitable compensation from Karas, based on the market value of the Hong Kong practice at the time of breach and the revenue LKPL lost up to mid-2023.
- An account of benefits from MdR, requiring MdR to hand over the value it gained from Karas’ move.
Payments under the Separation Agreement did not reduce these remedies because they were separate from the losses caused by the breaches.
Limits of the Releases
The releases in the Separation Agreement did not protect Karas or MdR. A release can only operate where the other party knows the relevant facts when agreeing to it. Karas had not disclosed his negotiations with MdR, the Framework Agreement or the steps already taken to transition the practice. Without disclosure, Lipman and LKPL could not give informed consent and the release had no effect.
Conclusion
This decision highlights the risks that arise when legal form does not match commercial reality. Beneficial ownership can exist even where one person holds legal title. Duties remain in force during transitions, and undisclosed negotiations create immediate exposure. Acquirers also face risk if they disregard warning signs. Back-dated agreements and releases cannot cure earlier conflicts. The practical message is to document ownership clearly, disclose early, protect confidential information and treat transitions as high-risk periods.
Why Ironbridge Legal?
Clear structures, early disclosure and disciplined governance are essential in complex cross-border practices. Ironbridge Legal is experienced in managing partner transitions, resolving ownership questions and protecting confidential information. We assist clients to assess risk, preserve value and secure their position before issues escalate.
Further Information
For further information on fiduciary duties, partner exits and cross-border law firm disputes, contact the author of this article:
Trevor Withane
FOUNDER & MANAGING PARTNER
