S2.4 Flashcards
Paragon Finance v Thackerar.
Millett LJ
the terminology has to be treated with care, the courts refer to liability as a constructive trustee, we are not dealing with imposition of a constructive trust, we are not dealing with proprietary liability, but concerned with constructive trusteeship, the courts say the third party is liable as if he were a trustee. We are only concerned with the personal liability to account and this means that the terminology is misleading, as pointed out by Millett LJ
What is the startong point with liability to third party?
Starting point when considering potential third liability is that: A person who simply acts honestly in the capacity of agent to trustees will not be liable.
When will a stranger be held liable as a ‘constructive trustee’?
The circumstances in which a stranger might be held liable as a ‘constructive trustee’ were identified in Barnes v Addy.
Barnes v Addy (1874) LR 9 Ch App 244.
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. Question of liability of solicitor. He had advised against appointing sole trustee, acted honestly, simply did what he was told. He was not liable.
More modern terminology is now used to describe the 3 circumstances in which a stranger will be held liable.
But there are three situations where a third party will be liable.
- Intermeddling; “trustee de son tort” (Barnes v Addy)
- Accessory liability; Dishonest assistance in a breach of trust
- Recipient liability; unconscionable receipt of trust property
Apart from the category of trustees de son tort, the other two situations in which a stranger can be held liable as a constructive trustee are based upon fault. The strange is held liable to the trust for acting wrongful.
Paragon Finance v Thakerar
Constructive trustee
Liability of a stranger to a trust has been termed “liability to account as a constructive trustee”, the language of constructive trusteeship has been subject to criticism on the grounds of artificiality.
Millett LJ considered the use of the phrase unfortunate. He said that: “the expressions ‘constructive trust’ and ‘constructive trustee’ are misleading, for there is no trust and usually no possibility of a proprietary remedy; there is nothing more than a formula for equitable relief’”.
Blyth v Fladgate
INTERMEDDLING; TRUSTEE DE SON TORT
We are talking about someone who acts outside the scope of his authority, someone who should simply be an agent to the trustees but goes too far.
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.
Facts:
Trustee gave trust property to a firm of solicitors. After Trustee’s death the solicitors took it upon themselves to change the investments. This is not something they should have done, they should have followed instructions of trustee, instead they acted as if they were trustees, doing the job of trustees, so liable to the beneficiaries for the loss caused by the change of investments. Important was:
- They did not act merely as agents; they went beyond the responsibilities of an agent.
It is totally irrelevant if the intermeddles honest or well- intentioned, it is if they acted as if they were trustee. It arises where the intermeddle has control over the trust property.
The principle that an intermeddling stranger may become a trustee de son tort is an application to the law of trusts of the principle that anyone who takes it upon himself to act in a fiduciary capacity will be treated and held accountable as if he in fact held the fiduciary position he assumed.
What force of liability is accessory liability?
This is an example of secondary liability: breach of trust is by the trustee; the accessory is liable because the accessory participates in the trustee’s breach of trust. The accessory need not have benefited in any way for breach of trust, he does not have to have received any of the trust property but equally he can be liable if he has received trust property, if he has also assisted in the breach of trust.
What is the personal remedy of accessory liability?
Personal remedy: the remedy is compensatory, not restitutionary. Since the stranger did not receive any trust property he was not enriched at the expense of the beneficiaries by his assistance.
PC in Royal Brunei Airlines v Tan
“liability as an accessory is not dependent upon receipt of trust property, it arises even though no trust property has reached the hands of the accessory.”
Ultraframe v Fielding
The accessory is jointly and severally liable along with the trustee (as with co-trustee, and the beneficiary can sue either the trustee or the accessory) for any loss caused.
Novoship v Nikitin
CA
the accessory can be liable for not only any loss caused by the breach but also any profits the accessory makes, but liability to profits is at the discretion of the courts.
Royal Brunei Airlines
The justification for liability on an accessory
PRIVY COUNSEL DECISION
Lord Nicholls,
PC decision, it has been accepted as establishing the law in this area in Twinsectra Ltd v Yardley. The PC judgment was given by Lord Nicholls.
The rationale for the imposition of accessory liability against strangers to a trust:
. 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.”
So, the view of the courts is that any intentional interference in the relationship between trustee and the beneficiary is unacceptable behaviour.
What is it important to emphase with accessory liability?
with the reference to intentionally, we are not looking for the mere fact of interference, it must be intentional. Liability is fault based, not because of the mere fact of having assisted but because the third party was at fault at assisting.
The PC dismissed the possibility of strict liability, they said if a third party could be liable even if he did not know he was dealing with a trustee (even if he did not know that the transaction was unauthorised) everyday business would be impossible and that the beneficiary could not reasonably expect such a remedy in such circumstances.
The reason, according to the PC for giving a remedy against a third party is twofold:
- To ensure the beneficiaries receive compensation for loss if the trustee does not have the funds available.
- Aim behind the law is: to deter deliberate interference with the trustee/beneficiary relationship.
Royal Brunei Airlines v Tan.
bFacts
Accessory liability
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 between RBA and the travel company 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. This was clearly a breach of trust by the company. The company became insolvent, and the airline brought proceedings against the defendant. The company was the trustee, the company became insolvent. It was held: the defendant had been dishonest and he was liable. The defendant had caused or permitted the company to use the money in a way he knew was not authorised and this was dishonest. It was irrelevant that he hoped to be able to repay the airline.
- The requirements for liability for accessory liability
- The existence of a trust or fiduciary relationship
- A breach of trust
- The assistance of the stranger in the breach of trust
- Dishonesty by the stranger
Brinks Ltd v Abu Saleh
- The assistance of the stranger in the breach of trust
This is a question of fact,
Facts:
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 defendant accompanied him so the trips looks like a family holiday. Question: did she assist in moving this money to Zurich? Held: she did not, she merely acted as a spouse rather than as an assistance. The view of the court was that the husband alone was the courier. Rimer J seems to have held that a stranger will only be liable as an accessory if he participates in the breach by performing positive acts of assistance.
So what if she had driven part of the route, would this make a difference? could you then say that she had done more than simply act as a spouse? Does the case mean you need some kind of positive act to be seen as assisting in a breach of a trust?
Pearce and Barr have rejected Rimer J’s proposition in Brinks v Abu Saleh. They think that the reasoning was unduly narrow, and that a person should be liable as an accessory whenever his or her conduct passively encourages the commission of a breach of trust, provided that it was dishonest. Support for the view that passive assistance will be sufficient is given by Adelaide v Danison.
What was the approach before Royal Brunei Airlines with dishonesty?
The approach before Royal Brunei Airlines was that the accessory had to have knowledge of the other three requirements: trust, breach, knowledge. And the cases were all concerned with what degree of knowledge on the facts equates to dishonesty. The doctrine was known as “knowing assistance” and the courts made use of 5 categories of knowledge (Dealt with later in recipient liability) and the judgments were not always that clear. Therefore, the PC decision in Royal Brunei Airlines was welcomed because the PC scrapped looking at the categories of knowledge, instead imposed solely a requirement of dishonesty and this has been adopted since, especially by the HL in Twinsectra Ltd v Yardley
Lord Nicholls thought dishonesty was better than the categories because a meaningful answer can be given, unlike knowledge.
In Twinsecrta v Yardley, the HL confirmed that dishonesty was the necessary condition for the imposition of accessory liability, thus affirming the decision in Royal Brunei Airlines v Tan.
Royal Brunei Airlines v Tan
Objective standard of dishonesty
It is a question of fact as to what dishonest is.
Dishonesty = acting dishonestly or with a lack of probity, which is synonymous, means simply not acting as an honest person would in the circumstances. This is an objective standard… 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.
- Carelessness is not dishonesty
- Dishoenst is conscious impropriety
The standard of what constitutes honest conduct is not subjective. Honesty is not an optional scale, with higher or lower values according to the moral standards of each individual.
It is an objective standard but, going back to the beginning of the para third line, it does have a subjective element because as lord Nicholls said:
“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.”
Lord Nicholls went on to say that: Carelessness is not dishonesty. So we are looking at conscious deliberateness. Not carelessness.
Lord Nicholls pointed out that in many situations, it is obvious what should have been done:
“In most situations there is little difficulty in identifying how an honest person would behave.
What did Lord Nicholls say when he referred to Knox LJ
Lord Nicholls, he refers to Knox LJ speaking about the commercial setting and he refers to someone who is guilty of commercially unacceptable conduct. He says we look at circumstances known to defendant, then consider what an honest person would have done.
- An honest person would have regard to the circumstances known to him, including 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.
DROPT C
- Nature and importance of the transaction
- the nature and importance of his role
- the ordinary course of business
- degree of doubt
- the practicability of the trustee or the third party proceeding
- seriousness or adverse consequences of the beneficiaries.
- He might, for instance, flatly decline to become involved. He might ask further questions. He might seek advice, or insist on further advice being obtained. He might advise the trustee of the risks but then proceed with his role in the transaction. He might do many things.
Taking these into consideration, you consider what an honest person have done, and Lord Nicholls identified the possible courses of action for the honest person:
- Flatly decline to become involved
- Ask further questions
- Seek advice
- Advise trustee of the risks
In most cases, an honest person will have little difficulty.
What personal attributes of the defendant are important for Lord Nicholls?
Relevant to the issue of dishonesty are the personal attributes of the defendant. This last para of the judgment, the court will also have regard too:
- Experience
- Intelligence
- The reason.
In addition, in Royal Brunei Airlines v Tan, Lord Nicholls stated that strangers should not generally be liable as assistors if they had acted negligently.
A-G of Zambia v Meer Care
Personal attributes of the defendant
The CA was concerned with the potential liability of the solicitor. He avoided liability on the basis that he was foolish and incompetent. Therefore, not dishonest, he just was incompetent. Contrast this with the CA in Twinsectra Ltd v Yardley.
Twinsectra Ltd v Yardley CA said it is probably easier to establish liability against who?
(b) Personal attributes of the defendant
CA suggested that it is probably easier to establish liability against persons such as solicitors than it is against business people because we expect a higher standard of conduct from solicitors
Twinsectra v Yardley
The combined test
The HL in Twinsectra v Yardley subjected the comments of Lord Nicholls to careful scrutiny in order to identify the essential elements of dishonesty, and made comments that appeared to require a subjective awareness of wrongdoing on the part of the defendant.
This case accepted the test for liability was dishonesty, but (where it causes confusion is) in its definition for what amounts to dishonesty for this purpose, Lord Hutton in analysing Royal Brunei Airlines set out 3 possible standards of dishonesty.
In Twinsectra v Yardley, the HL majority opted for the combined test for the test of dishonesty in accessory liability. So that the requirements are that it cannot purely be objective but there must be an element of consciousness that he is transgressing ordinary standards of dishonest.
Lord Hutton giving leading judgement was influenced by 2 points:
- He was of the view that under the purely objective test, you cannot take into account the defendant’s knowledge, experience or intelligence. But you can because as the exert from Royal Brunei Airlines shows, this was specifically referred to by Lord Nicholls so this is a misreading of the airline case
- Hutton also seemed to be concerned about labelling a defendant as dishonest where that person had no consciousness of that.
Twinsectra v Yardley
Facts
The claimant lenders advanced £1m to a firm of solicitors’ subject to an undertaking that the money would be retained until it was applied in the acquisition of property by the borrower. Yardley, in breach of this undertaken subsequently paid the money to X. X then failed to ensure that the money was utilised solely for the acquisition of property in accordance with the undertaking. HL held: X did not act dishonestly. Lord Millett dissented in favour of the adoption of a purely objective test which does not require the defendant to have realised that he was acting dishonest. In Lord Millett’s view, the only subjective elements were findings of fact as to the defendant’s experience, intelligence and actual state of knowledge.
The combined test provides less protection for beneficiaries than the objective test.