#4634 - Liability Of Strangers - GDL Equity and Trusts

A stranger is someone who was NOT appointed trustee

• Stranger de son tort – referred to as a stranger but may be treated as though he was an expressly appointed trustee

• Distinct from the de son tort strangers are strangers made personally liable to account to the beneficiary for a breach of trust because of some fault on their part

Can become liable to account in 2 ways:

1. May knowingly receive/deal with the trust property in breach of trust; “knowing receipt” – but better described as dishonest or unconscionable dealing with received trust property in nor returning it to its rightful owner; or

2. May dishonestly assist or procure a breach of trust; this is traditionally referred to as ‘knowing assistance’ – but following PC decision in Royal Brunei Airlines v Philip Tan Kok Ming – more accurately described as ‘dishonest assistance’ - (Lord Nicholls – ‘accessory liability’

• Extends to property where nay fiduciary duty exists - e.g. company directors’ duties

• Dishonesty extends beyond subjective dishonesty (criminal law) – to cover warped sense of morality

Trustee de son tort

Mara v Browne – ‘intermeddle with trust matters or to do acts characteristic of the office of trustee he may thereby make himself a trustee of his own wrong, ie a trustee de son tort … a constructive trustee’ – per Smith LJ

• Assumption of the office of trustee

• Intermeddling itself doesn’t amount to a breach – but will be personally liable for any subsequent breach in the same way as an expressly appointed trustee

“Knowing receipt” and “Dishonest assistance”

Personal liability of recipients and accessories

• Recipient of misappropriated funds (unless bona fide purchaser for value without notice) will be obliged to return property as soon as he becomes aware of the position

• Liability to proprietary claim arises even if there is no notice – innocent volunteer

• Doctrine of notice – for proprietary claims – binds everyone apart from bona fide purchaser of a legal interest – must return the property

• IF however – you are going to be made personally liable in equity to pay compensation - your conscience must be at fault – you must have some knowledge of the C’s equitable interest

• If the recipient dissipates the property (or it proceeds) where he lacks the prerequisite knowledge - his proprietary liability ceases – Indpendent Trustee Services Ltd v GP Noble Trustees Ltd – he cannot be made personally liable for his innocent actions

• But will be personally liable if he dissipates the trust property after becoming aware that it was trust property – AND – a person who is liable for dishonestly assisting a breach of trust will be under a personal liability to account for losses

• Defendants here are NOT trustees – (sometimes described as constructive trustee) – but should be treated as though they are – i.e. liable to make good any losses to the beneficiaries resulting from the trustee’s breach of trust

Lionel Smith ‘to say that a defendant is ‘liable as a constructive trustee’ is just to say that he is liable even though he is not actually a trustee’

Background

Barnes v Addy – Lord Selborne LC – ‘Strangers are not to be made constructive trustees…unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest or fraudulent design on the part of the trustee’

Levels of ‘knowledge’

• Peter Gibson J in Baden, Delvaux and Lecuit v Societe Generale – 5 types of knowledge

1. Actual knowledge

2. Wilfully shutting one’s eyes to the obvious

3. Wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make;

4. Knowledge of circumstances which would indicate the facts to an honest and reasonable man (but not a morally obtuse man); and

5. Knowledge of circumstances which would put an honest and reasonable man on inquiry

• According to Baden case and Agip – a person with knowledge in categories (ii) and (iii) will be taken to have actual knowledge – while a person in categories (iv) or (v) has constructive notice only

• (iv) and (v) can suffice for the protection of proprietary interests – but should they apply to personal claims reliant upon the D’s faulty conscience

  • Millett in Agip – in relation to Baden classification of knowledge that if a person ‘did suspect wrongdoing yet failed to make inquiries because ‘he did not want to know’ (category ii) or because he regarded it as none of his business (category iii), that is dishonest, and he will be treated as if he had actual knowledge’

  • Contrast – not making obvious inferences or inquiries – because he foolishly didn’t suspect wrongdoing (iv) or (v) – he is not guilty of dishonesty

• BUT - in the light of Royal Brunei Airlines v Tan – Millett has changed his mind – treating (iv) knowledge as sufficient for liability for dishonest assistance in a breach of fiduciary duty – in his dissent in Twinsectra Ltd v Yardley

• Objective dishonesty will thus suffice (accepted by Slade LJ in Walker v Stones and applied in Fattal v Walbrook Trustees (Jersey) Ltd) – accepted in Barlow Closes International Ltd v Eurotrust – Lord Hoffman explained that the words used by him and Lord Hutton in Twinsectra did not have their apparent meaning of requiring D to subjectively appreciate that he was acting dishonestly – if his actions were objectively dishonest in the eyes of honest reasonable persons

• Reality now – any of the categories (i) to (iv) suffice for personal liability for dishonest assistance in a breach of fiduciary duty – held to be the case in Farah Constructions Pty Ltd v Say-Dee Pty Ltd

Dishonest or “knowing” assistance – “accessory liability”

Dishonesty

• Confusion as to what amounts to ‘dishonesty’ arising from Lord Selborne’s words in Barnes v Addy

• Generally held that knowledge in Baden categories (i)-(iii) was required

• But a few cases - 3^rd parties could be liable under this head if they had (iv)-(v) – but this approach criticised in Lipkin by CA – only 1^st 3 Baden categories would suffice

• Lord Nicholls in Royal Brunei v Tan – knowledge not the key question – dishonesty = necessary and sufficient: “knowingly” – ‘is better avoided as a defining ingredient of the principle of accessory liability and in the context of this principle the Baden scale of knowledge is best forgotten’

  • State of mind of the trustee is irrelevant – ‘what matters is the state of the mind of the third party sought to be made liable’

  • “Carelessness is not dishonesty” – dishonesty equated with ‘conscious impropriety’

  • Knowledge still relevant in determining whether someone has acted dishonestly or not – account also taken of the personal attributes of the accessory – experience/intelligence

• Subjective element discussed by HL in Twinsectra Ltd v Yardley & Others

  • Twinsectra loaned Yardley 1 million – paying it to his solicitor – Sims, who gave a written undertaking to Twinsectra’s solicitors that the money was to be used solely for acquiring property (immovables) for Yardley and for no other purposes

  • Sims transferred the money to Yardley’s other solicitor, Leach, who knew of Sims’ undertaking but yet used the money on Yardley’s instructions, for other purposes

  • Leach knew that he was using the money for an unauthorised purpose but thought that Sims was merely under contractual obligation to Twinsectra not a Quistclose purpose trust obligation

  • HL held that the money was held on trust (L Millett dissenting) but held that since Leach was not himself subjectively aware that what he was doing was dishonest – he had rightfully had the case dismissed by the trial judge

  • Lord Millett applied an objective test – Leach, a solicitor, had knowingly participated in arrangements which he knew to be unauthorised – liable whether or not he appreciated that the ordinary reasonable man would consider his knowing mishandling dishonest

  • Majority however – changed the test for dishonesty to be the more subjective criminal test – so that the D must have been aware that right-thinking people would consider his conduct dishonest

• PC – in Barlow Clowes : Lord Hoffmann claimed that there was no difference btw principles in Twinsectra and those in Brunei

  • Also said that there had been an element of ambiguity in remarks in Twinsectra by himself and Lord Hutton

  • Hoffmann stated that ‘If by ordinary standards a D’s mental state would be characterised as dishonest, it is irrelevant that the D judges by different standards’ – warped moral approach

  • PC upheld trial judge’s decision and found D liable for dishonest assistance

• Matter settled in Abou-Rahmah v Abacha

  • Arden LJ affirmed that test for dishonesty – PRIMARILY AN OBJECTIVE ONE – ‘unnecessary to show subjective dishonesty in the sense of consciousness that the transaction is dishonest. It is sufficient if the D knows of the elements of the transaction which make it dishonest according to normally accepted standards of behaviour’

  • In Eurotrust – PC had explained and corrected misconceptions about the nature of the test as set out in Twinsectra

• Test applied in Aerostar Maintenance International v Wilson and endorsed by CA in Starglade Properties Ltd v Nash

  • Clarification in Starglade – Morritt C confirmed that standard of behaviour is that or ordinary honest person – not the most scrupulous honest person

Assistance

• Need some form of causative link btw the breach and the acts of the defendant – but the causal link is not related purely to any loss suffered by the claimant

• Grupo Torras SA v Al-Sabah (No 5) – ‘requirement of dishonest assistance relates not to any loss or damage which may be suffered, but to the breach of trust or...