LK Law Pty Ltd v Karas (No 5)

This decision is the Federal Court's final orders and remedies judgment after earlier trial reasons in LK Law Pty Ltd v Karas (No 4) [2025] FCA 1461. Even without retelling every detail from the earlier trial, the commercial story that emerges from this decision is clear and important for business owners.

The dispute centred on a Hong Kong practice referred to as LKHK and the associated Hong Kong revenue stream. The Court found that while owing fiduciary duties to LK Law Pty Ltd, Mr Karas negotiated with a fourth respondent for the sale of that practice, entered into a Framework Agreement dated 30 March 2021, promised to conduct the practice on account of that respondent, and promised to transition LK Law's Hong Kong revenue stream to it. The Court declared that these steps were taken without LK Law's knowledge or authorisation.

The case was not only about secret negotiations. It also involved the disclosure of confidential business information during those dealings. The Court's declarations list a substantial body of information said to have been disclosed, including due diligence material, employee details, lease information, performance reports, invoice schedules, financial accounts, debtor and work-in-progress reports, active matter lists, trial balances and draft financial statements.

The turning point for many business readers is what happened next. Before a Separation Agreement dated 25 May 2021 was entered into, the Court found that Mr Karas did not disclose the negotiations with the fourth respondent or the fact that he had already entered into the Framework Agreement. The Court declared that this silence induced the applicants to enter the Separation Agreement. That finding drove not only fiduciary and confidence consequences, but also misleading and deceptive conduct findings under the Australian Consumer Law and misrepresentation by silence findings under South Australian legislation.

The applicants were LK Law Pty Ltd, Scipio John Lipman and Lipman Family Pty Ltd. The first respondent was Jason Demetrios Karas. There were also second and third respondents, and a fourth respondent referred to in the reasons as MdR. The Court's orders show that the claims did not succeed equally against all respondents. The claims against the second and third respondents were dismissed with no order as to costs, and the applicants' claims against the fourth respondent under the Corporations Act and the Australian Consumer Law were also dismissed. But that did not prevent the fourth respondent from being held liable on a knowing assistance basis.

By the time this judgment was delivered, the Court had already given substantive reasons in the earlier No 4 decision. The remaining issues were practical but highly significant. The parties could not agree on the form of declarations, the principal judgment sums, the basis and amount of interest, whether the claims against the second and third respondents should be dismissed, and costs.

That means this was not a fresh trial on liability. It was the stage where the Court translated earlier findings into formal declarations and enforceable money judgments. For business readers, that matters because remedies decisions often show what legal findings mean in dollars, contract consequences and final orders.

The Court made detailed declarations against Mr Karas. It declared that he breached equitable fiduciary duties to LK Law by negotiating with the fourth respondent for the sale of LKHK without knowledge or authorisation, entering into the Framework Agreement without knowledge or authorisation, promising to conduct LKHK on account of the fourth respondent, promising to transition LK Law's Hong Kong revenue stream to the fourth respondent, disclosing confidential information during those dealings, and failing to disclose those matters before the Separation Agreement was entered into.

The Court also declared that Mr Karas breached an equitable duty of confidence by disclosing specified confidential information, and breached duties under ss 181, 182 and 183 of the Corporations Act 2001 (Cth) by engaging in the same conduct. It further declared that he engaged in misleading and deceptive conduct contrary to s 18 of the Australian Consumer Law by failing to disclose his negotiations with the fourth respondent, including negotiations about LK Law's Hong Kong revenue stream, and by failing to disclose that he had entered into the Framework Agreement.

On top of that, the Court declared that by his silence Mr Karas induced the applicants to enter into the Separation Agreement in breach of s 7(1) of the Misrepresentation Act 1972 (SA). This is one of the most commercially significant parts of the decision. The Court was not dealing with a simple lie. It was dealing with non-disclosure in a setting where the undisclosed matters were material to the transaction being entered into.

The Court also made a declaration against the fourth respondent. It held that, because of the fourth respondent's knowledge of Mr Karas' dishonest and fraudulent design and its actions in entering into the Framework Agreement on 30 March 2021 and approving its terms on 23 April 2021, the fourth respondent knowingly assisted the fiduciary breaches.

Finally, the Court dealt with the Separation Agreement itself. It declared that the releases in clause 8 did not operate in favour of Mr Karas and ordered that clauses 8 and 12 were unenforceable under s 237 of the Australian Consumer Law. That is a major practical point. A release clause is not a magic shield if the agreement was entered into after material non-disclosure of the kind found here.

The Court entered judgment for LK Law against Mr Karas in the sum of A$36,458,048.44 inclusive of interest. That figure reflected equitable compensation of A$27,500,000 plus A$8,958,048.44 interest. The Court also entered judgment for LK Law against the fourth respondent in the sum of A$21,399,540.24 inclusive of interest. That figure reflected liability to account for the value of the benefit received in the sum of A$15,600,000 plus A$5,799,540.24 interest.

A major issue in the judgment was whether interest should be simple or compound. The applicants sought equitable interest on a compound basis at yearly rests. The respondents opposed that and argued for simple interest. The Court rejected that position and held that compound interest could be awarded in equity, whether under s 23 of the Federal Court of Australia Act or independently of statute as part of equitable compensation.

The reasons explain that equitable interest exists independently of statute and that compound interest is not confined to profit claims. The Court drew on authority showing that the objective is to do what is practically just, properly compensate the innocent party, and minimise the possibility that any benefit or profit remains in the hands of the defaulting fiduciary or a knowing assistant.

The Court accepted that compound interest should not be punitive. But it also explained that serious breach findings, misuse of an asset for personal benefit, and the need to ensure proper compensation can justify compound interest. The rate applied was 4% above the relevant Reserve Bank cash rate target in accordance with the Court's practice note, compounded at yearly rests.

For business owners, this part of the case is critical. In long-running disputes, interest can transform already serious liability into a much larger judgment. A business that focuses only on the principal amount may badly underestimate its real exposure.

Although the underlying business here was a legal practice, the decision has much wider relevance. Many businesses depend on a founder, director or senior executive who controls customer relationships, knows the financial position, and can influence whether a business line is sold, transitioned or redirected. If that person starts negotiating with an outsider about a business asset or revenue stream while still owing duties to the company, the legal risk can spread quickly across several areas.

First, authority matters. The Court's declarations repeatedly emphasise that the negotiations and Framework Agreement occurred without LK Law's knowledge or authorisation. Businesses should not leave major side discussions to informal understandings. If a transaction concerns a business unit, client base, overseas office, revenue stream or strategic asset, there should be a clear approval process.

Second, confidentiality controls matter. The list of information disclosed in this case was extensive and commercially sensitive. Businesses should know exactly who can share due diligence material, under what authority, and for what purpose. If a person is in a conflicted position, access and disclosure controls become even more important.

Third, silence can be actionable. Many business people think the legal risk starts only when someone says something false. This case shows that non-disclosure can be enough where the undisclosed matters are material to the agreement being negotiated. If one side is signing a separation deed or release on the assumption that there are no undisclosed side arrangements affecting the business being divided, staying silent may create serious exposure.

Fourth, third parties need to check the conflict position of the person they are dealing with. If you are acquiring a business opportunity, practice, customer stream or revenue line from someone who may owe duties elsewhere, you should ask whether they have authority, whether their company knows, and whether confidential information is being used improperly. The fourth respondent's position in this case shows that a third party can face liability for knowing assistance even if other pleaded claims against it do not succeed.

Fifth, do not overestimate release clauses. The Court held that the relevant release and indemnity clauses were unenforceable. In practical terms, that means a settlement document may not close the door on earlier wrongdoing if the agreement itself was induced by misleading silence or related misconduct.

The judgment records that the earlier substantive reasons were delivered on 26 November 2025. After that, the parties were directed to provide draft orders and were to be heard on interest and costs. They were unable to agree on declarations, interest or costs, which led to this further judgment on 20 February 2026.

The Court held that there was utility in making declarations because they accurately reflected the matters found and publicly recorded the outcome of a long and complex action. It dismissed the cross-claim. It also dismissed the applicants' claims against the second and third respondents with no order as to costs, and dismissed the applicants' claims against the fourth respondent under the Corporations Act and the Australian Consumer Law.

On costs, the Court ordered that the respondents pay the applicants' costs on a party-party basis. The respondents had sought costs orders on issues where the applicants were unsuccessful at trial, but the Court rejected that approach, noting the legal and factual complexity of the case and that the unsuccessful claims were not without merit or otherwise minimal. The amount of costs was to be fixed as a lump sum by a Registrar unless otherwise agreed, with a timetable set for costs summaries and responses.

For business readers, this procedural history is a reminder that even after liability findings are made, there can still be major disputes about declarations, interest, costs and the final shape of the orders. Those later stages can materially affect the commercial result.

This case points to a set of practical controls that are useful well beyond the facts of this dispute. Businesses should have a documented process for approving negotiations involving a sale, transition or outsourcing of a business line. They should also have clear rules about who can share confidential information with outsiders and under what conditions.

When a founder split, management separation or buyout is being negotiated, it is worth documenting not only what each side says, but also what each side confirms has not happened. For example, parties may seek express confirmations about undisclosed negotiations, framework agreements, transition promises, use of confidential information and dealings affecting customer or revenue relationships.

Third parties should also protect themselves. If you are the proposed buyer, partner or incoming operator, ask direct questions about authority, conflicts and disclosure. If the answers are unclear, that is a legal risk issue, not just a commercial inconvenience.

Finally, businesses should remember that equitable claims can produce remedies that look different from ordinary contract damages. Compensation, accounts of benefit, declarations, unenforceability orders and compound interest can all be in play. Early legal advice is often much cheaper than trying to unwind a transaction after the fact.