Personal Liability of Third Parties Flashcards
Overview + Terminology
So it’s the potential liability of third parties who have somehow participated in a breach of trust. We are also looking at the personal liability of those who have received trust property, but no longer have it (can’t bring a proprietary claim).
Terminology:
We’re dealing with the imposition of a ‘constructive trusteeship’ (not constructive trust). We are not dealing with proprietary claims (finding property in the hands of the 3P which the beneficiaries can claim). We are dealing with where the 3P can be personally liable as if he was a trustee.
Basic Principle
Barnes v Addy
The starting point when considering liability of a stranger: someone who acts honestly as agent to the trustees will not be liable. A 3P who simply follows instructions and simply acts as the agent of the trustee will not be personally liable to the beneficiaries.
Trust funds were misapplied by a sole trustee. The defendant, a solicitor, had advised against the appointment of the sole trustee but had prepared the necessary documents. He was held not to be liable. He had acted honestly and within his scope of authority as agent.
Intermeddling
A person who intermeddles in the administration of a trust or does acts characteristic of the office of trustee will be personally liable as if he were a trustee. An agent who does more than follow instructions – who takes on the role of trustee – will be liable as if he were one.
Intermeddling
Blythe v Fladgate
Trustee gave property to a firm of solicitors to look after. He died and the solicitors decided to change the investments made with the trust fund (clearly the job of a trustee). The change in investments led to a loss and the solicitors were held personally liable for that loss.
It is irrelevant if the 3P was honest or well intentioned. The only question was did they effectively take on the role of being a trustee? Did they do acts that only a trustee should do?
Accessory Liability -
Dishonest Assistance in a BoT - a person will be personally liable to account for any loss caused to a trust fund when they can be said to have ‘dishonestly assisted’ in the BoT.
We are looking at secondary liability here – it is the trustee who commits the BoT, the accessory is liable for participating. There is no requirement at all for the accessory to have benefited.
Accessory Liability -
Ultraframe v Fielding
Liability as an accessory is joint and several with the trustee. Beneficiaries can choose who they sue.
Accessory Liability -
Novoship v Nikitin
It was held that an accessory can be held liable to account to any profits he has made as well as having to compensate the beneficiaries for any loss. He is liable as if he were a trustee.
Accessory Liability -
Justification for Liability?
Twinsectra Ltd v Yardley
“The rationale is not far to seek. Beneficiaries are entitled to expect that those who become trustees will fulfil their obligations. They are also entitled to expect, and this is only a short step further, that those who become trustees will be permitted to fulfil their obligations without deliberate intervention from third parties.
They are entitled to expect that third parties will refrain from intentionally intruding in the trustee-beneficiary relationship and thereby hindering a beneficiary from receiving his entitlement in accordance with the terms of the trust instrument.” (Lord Nichols)
Acts to compensate beneficiaries and also acts as a deterrent.
Accessory Liability -
Royal Brunei Airlines v Tan
Royal Brunei Airlines had appointed a travel company as its agent for the sale of flights. The defendant was the managing director and principal shareholder of the company. A term of the agreement was that any money received was to be held on trust by the company for the airline. The money was paid into a current bank account and used by the company for its own business purposes, in breach of trust. The company became insolvent, and the airline brought proceedings against the defendant. The company is the trustee but the defendant was the person who ran the company. Effectively the defendant and the company was the same (he was the only person involved in the company).
It was held by the PC that the defendant and the company had been dishonest and D was therefore personally liable to the airline for the loss. D had either caused or permitted the company to use the trust money in a way he knew was not authorised. This was dishonest. It was irrelevant that he hoped/expected to be able to refund the trust money.
Classic example of Accessory Liability. Shows that it can extend to companies as trustees.
Accessory Liability -
4 Requirements?
- Has to be a trust
- A breach of trust
- Accessory must have assisted in the BoT
- Accessory must have been dishonest
Accessory Liability -
4 Requirements?
“breach of trust”
Breach of trust may be strict and not require dishonesty. It had been argued that accessory liability should not arise for every BoT but only for dishonest BoTs. This was clearly rejected in Royal Brunei Airlines and Twinsectra.
Accessory Liability -
4 Requirements?
“assisted”
Brinks Ltd v Abu Saleh (No 3)
Doesn’t need to be in the original BoT, can be in some continuing use of the fund.
More than an act of minimal importance.
Always a question of fact.
Here it was argued that the defendant had assisted in the transporting of approx £3 million of the proceeds of the Brinks-Mat robbery by accompanying her husband when he drove on a number of occasions to Zurich with the money in his car. The argument was D had assisted in this continuing breach. The reason she joined was so that the trips looked like a family holiday.
The court held she simply acted as a spouse, providing her husband with company, rather than assisting in the breach. On the facts her husband alone was the courier. Always a Q of fact – what if she had driven the car? Must they do something positive?
Accessory Liability -
4 Requirements?
“dishonest”
Royal Brunei Airlines v Tan (Privy Council) - Objective Element
The PC in Brunei Airlines said we should forget the categories of knowledge, the requirement is dishonesty. We should call it dishonest assistance not knowing assistance. This move to make it clear we’re looking for dishonesty has been since adopted including by the HoL in Twinsectra.
Ultimately it is a question of fact.
“Acting dishonestly “means simply not acting as an honest person would in the circumstances.”
“Individuals are not free to set their own standards of honesty in particular circumstances.” It is irrelevant a defendant sees nothing wrong with their behaviour – it is not subjective.
Accessory Liability -
4 Requirements?
“dishonest”
Royal Brunei Airlines v Tan (Privy Council) - Subjective Element
There is a subjective element to it though. “Honesty…does have a strong subjective element in that it is a description of a type of conduct assessed in the light of what a person actually knew at the time, as distinct from what a reasonable person would have known or appreciated.” We are looking at the defendant, what he actually knew, but then saying what would an honest person with that knowledge have done in the circumstances.
Accessory Liability -
4 Requirements?
“dishonest”
Royal Brunei Airlines v Tan (Privy Council) - Reaching a Decision
“Dishonesty is mostly concerned with advertent conduct, not inadvertent conduct. Carelessness is not dishonesty.”
Nichols LJ specified what circumstances would be relevant (look at all of the circumstances):
“the nature and importance of the proposed transaction;
the nature and importance of his role;
the ordinary course of business;
the degree of doubt;
the practicability of the trustee or the third party proceeding otherwise;
and the seriousness of the adverse consequence to the beneficiaries.” Then you consider what an honest person would have done in those circumstances.
“When called upon to decide whether a person was acting dishonestly, a court will look at all the circumstances known to the third party at the time. The court will also have regard to personal attributes of the party, such as his experience and intelligence, and the reason why he acted as he did.”
Accessory Liability -
4 Requirements?
“dishonest”
A-G of Zambia v Meer Care & Desai
Convinced the court he was foolish and over-confident but NOT dishonest.
