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.
Twinsectra Ltd v Yardley
Facts
Lender advanced money to Solicitor 2 subject to an undertaking that it should be retained until it was to be used by the borrower to acquire property. Solicitor 2 paid it to Solicitor 1 (acting for the borrower) who failed to ensure the borrower used it only for that purpose, honestly believing the undertaking had nothing to do with him and the money was at the free disposal of the borrower once he received it.
Ivey v Genting Casinos
Lord Hughes (with whom the other members of the SC agreed
Lord Hughes made a comment in Ivey v Genting Casinos, when referring to Ghosh saying that less people will be convicted because the combined test allows the defendant to say “I do not know what honest people think”.
What was the dissent in Twinsectra v Yardley by Lord Millett
There was a strong dissent in Twinsectra Ltd v Yardley by Lord Millett, he said Lord Nicholls clearly set out a purely objective test in Royal Brunei Airlines, but that it does allow for the defendant’s experience and intelligence to be taken into account etc. that it should not be necessary for the defendant to realise he is acting dishonestly, and he said this is not like criminal law as we are not trying to establish guilt. The court is trying to establish whether there is sufficient fault to impose civil liability.
Since Twinsectra Ltd v Yardley, in 2017, the SC in Ivy v Genting considered Ghosh in the context of criminal law and said it was wrong.
So, what has happened since Twinsectra Ltd v Yardley in context of accessory liability? The PC in Royal Brunei airlines said it was a purely objective test. But the HL in Twinsectra Ltd v Yardley saying it is instead the combined test for dishonesty.
Barlow Clowes v Eurotrust
PC The issue was taken up by PC in Barlow Clowes where the PC adopted the dissenting approach of Lord Millet in Twinsectra Ltd v Yardley. In doing this, the PC said that Lord Hutton’s view in Twinsectra Ltd v Yardley was no different than Lord Nicholl’s view in Royal Brunei Airlines and that it did not require the defendant to be conscious that he was transgressing the standards of the reasonable and honest person. This is wrong because Hutton did say something completely different from Royal Brunei airlines. The Judicial Committee, which had a membership which overlapped with that of the Lords in Twinsectra, retreated from the suggestion that Twinsectra had sought to apply a different test from that set out in Royal Brunei Airlines.
What is the law?
As a matter of precedence, HL decisions are binding, PC decisions are only percussive. Therefore, with a straight matter of precedence, it is the law in Twinsectra Ltd v Yardley that applies. But what was said in the two PC decision seems to be the better law, since then we have had comments in other cases:
Abou-Rahmah v Abacha
CA
Arden LJ endorses the Barlow Clowes interpretation of Twinsectra. Comments where Aden LJ endorsed Barlow Clowes giving guidance on the interpretation of decision in Twinsectra Ltd v Yardley. But the issue was not properly argued in the case.
- Arden LJ said that the CA might follow a decision of the PC rather than HL, as:
- Barlow Clowes did not depart from Twinsectraa but simply gave guidance as to its proper interpretation
Statek Corporation
Barlow Clowes was applied here, but no discussion of the issue
Starglade v Roland Nash
CA
dicta to the effect that the definition of dishonesty in civil and criminal law should be similar. But that the criminal law should rethink.
Barlow Clowes v Eurotrust
FACTS
Facts
Barlow Clowes International Ltd was in liquidation, after its fraudulent securities scheme was exposed. It took £140m of investors’ money, and paid it into an Isle of Man company where Mr Henwood was a director. The liquidator of Barlow Clowes argued that Mr Henwood had dishonestly assisted the dissipation of the investors’ money.
The deemster (judge on the Isle of Man) held that Mr Henwood was dishonest. The Court of Appeal held that Mr Henwood was not dishonest, and there was no evidence by which the deemster could have found this. Her disbelief at Mr Henwood’s oral testimony and her inferences were not enough.
Held:
Lord Hoffmann held Mr Henwood was liable, and the deemster had correctly applied the principles of liability for dishonest assistance. She had stated that Mr Henwood suspected the funds were misappropriated money, and (disapproving Brinks Ltd v Abu-Saleh (No 3) [1996] CLC 133) a person could know and suspect money was being misappropriated and thus be liable without knowing the money was held on trust or even knowing what a trust meant. The findings of fact could be made legitimately. With later transactions he had been informed that the director of Barlow Clowes was misappropriating clients’ money, and no inquiries were made. He held there was an element of ambiguity in Lord Hutton’s decision in Twinsectra Ltd v Yardley.
Ivey v Genting Casinos
SC
Lord Hughes
The SC did look at the definition of dishonesty in the criminal law and took the view that Ghosh was wrong and that if the law changed in the criminal law then consistently, we ought to have an objective test in the civil law.
Lord Hughes in this case discussed accessory liability and concluded that the test is objective.
Comes back to strictly Twinsectra Ltd v Yardley is authority but there is little chance a court will follow it, the indications are because there are 2 PC decisions and a SC (although in context of the criminal law) taking the view that it is an objective test. Arguably if it ever got to the SC again, that is what would be decided: that it is an objective test.
We look for dishonesty on part of accessory and looking to test dishonesty objectively (likely) but with a subjective element of looking at defendant’s knowledge.
Verwaltung
2019
CA
A recent decision of the Court of Appeal has commented on the test for dishonesty in the context of accessory liability.
The case confirms the application of the objective test of dishonesty. See especially para 57:
In the light of Ivey, it must in our view now be treated as settled law that the touchstone of accessory liability for breach of trust or fiduciary duty is indeed dishonesty, as Lord Nicholls so clearly explained in Tan, and that there is no room in the application of that test for the now discredited subjective second limb of the Ghosh test. That is not to say, of course, that the subjective knowledge and state of mind of the defendant are unimportant. On the contrary, the defendant’s actual state of knowledge and belief as to relevant facts forms a crucial part of the first stage of the test of dishonesty set out in Tan. But once the relevant facts have been ascertained, including the defendant’s state of knowledge or belief as to the facts, the standard of appraisal which must then be applied to those facts is a purely objective one. The court has to ask itself what is essentially a jury question, namely whether the defendant’s conduct was honest or dishonest according to the standards of ordinary decent people.
What is The continuing relevance of knowledge with accessory liability?
These cases predate the PC case in Royal Brunei Airlines, but although at the time the courts talked about knowing assistance, they were still looking at dishonesty, so the cases are useful on their facts as illustration of what might amount to dishonesty.
No doubt if someone has actual knowledge of the trust and breach, if they in any way participate, they will be dishonest. What is less clear is where there might be suspicions or maybe the defendant should have made further enquiries.
Agip v Jackson
Suspicion/ making enquiries - accessory liability
Millett J
“if they were honest, they would have made further enquiries. “
This case illustrations: a defendant does not need actual knowledge to be regarded as dishonest, if a person ought to have known that there was a breach of trust, then that person an also be regarded as dishonest.
The true distinction is between honesty and dishonesty. It is essentially a jury question. If a man does not draw the obvious inferences or make the obvious enquiries, the question is: why not? If it is because, however, foolishly.
On the facts, Millett was prepared the INFER the dishonesty. He was prepared to look at all the circumstances, and to infer that the defendants has the requisite degree of knowledge, that they should have made enquiries. They could, if they had given evidence, possibly have rebutted that, but they refused to give evidence and explain their behaviour and consequently they were held liable.
Polly Peck
CA
SUspiciouns/make enquiries - accessory liability
This was an interlocutory decision: an appeal against grant of a Mareva injunction. Director of a company was in dishonest breach of duty. Company funds were diverted to Cyprus. This claim was against a Cypriot Bank which was paid substantial sums in sterling in London in return for the payment of Turkish lire in Northern Cyprus. It was a preliminary decision: was there anything on the facts which it could be argued that the bank acted dishonestly? And the preliminary view of the CA was that there was nothing in the circumstances which would make the bank suspicious.
- The company had businesses in Cyprus,
- the director of that company at the time had an unblemished reputation,
so because there was nothing suspicious, there was no need to make enquiries. Consequently, no knowledge to make the banks actions such that it was dishonest.
Agip (Africa) Ltd v Jackson
Content of knowledge.
There was some evidence that the defendants thought that the scheme was actually aimed at avoiding Tunisian exchange control regulations. First point to make (held in Agip v Jackson) that it is not necessary that the defendant knows precisely the nature of the fraud or the precise nature of any duty or any identity of the victim. Held: They suspects A fraud, not the actual fraud but this was held to be irrelevant.
Also made clear in Twinsectra v Yardley, that it is sufficient that the defendant knows of the misappropriation of money, that they assist in the diversion of funds to someone who is not entitled. The defendant does not need to know that it is trust money or what a trust is.
Carl Zeiss Stiftung v Herbert Smith (No.2)
CA
Content of knowledge - accesory liability
Finally, there must be knowledge of facts, it is not enough to know of “mere claims or allegations”. It was held in Carl Zeiss that knowledge of a doubtful equity is not sufficient.
The defendants were solicitors to a West German foundation from which they received money for fees and disbursements. The East German claimants alleged in legal proceedings that all the assets of the West German foundation belonged to them and that therefore the solicitors should not have received them. Held: no liability, merely knowing someone else is claiming rights to property is not enough, it has to be known that the claim is well founded. The solicitors did not know if the claim was justifiable or not so they did not know whether it was trust property. This case concerned recipient liability, not accessory liability but it is said to be equally applicable in context of accessory liability. This concerned the Royal Brunei Airlines case to say if there is a “genuine doubt” then there is no liability.
Is liability in accessory liability fault based?
We saw that, liability is fault based, that the PC in Royal Bruni Airlines made it very clear that strict liability in this situation would be inappropriate, that the law would not impose liability on somebody because in fact they assisted in a breach of trust because it would make day to day business impossible and beneficiaries should not realistically expect there to be liability in such a situation.
Should liability be only imposed on the dishonest accessory or an accessory who was negligent?
The PC in Royal Brunei Airlines rejected negligence as being sufficient for liability and the reasoning put forward by the PC is basically as follows:
- One cannot expect all third parties to owe a duty of care to the beneficiaries to check that there has been no breach of trust.
- According to the PC, liability should only be imposed upon third parties if they have voluntarily undertaken a duty of care and any third party which has voluntarily undertaken a duty of care will be liable in contract or tort so there is no need for equitable liability.
- The underlying premise of what the PC said is: we do not want to discourage third parties from acting, do not want to discourage people from taking steps which in effect amount to assistance.
However, there are strong arguments put forward by academics that there ought to be liability imposed upon the negligent accessory, at least in the case of professionals. Simon Gardiner “knowing assistance and knowing receipt”, he said in favour of imposing liability on the negligent accessory:
- Many professionals (banks, accountants, solicitors) hold themselves out as having high standards of expertise, and they should be liable if they fail to perform as promise. Acting negligently is not performing to a high expertise.
- A good practical point he makes about imposing liability more readily is that professionals would then basically become insurers against the default of trustees or other fiduciaries because the professionals would take out insurance against being found liable. The beneficiaries could sue them and therefore receive compensation and although the professionals would then increase their fees, it does make sure that there is ultimately insurance against loss caused by such breach.
- Simon Gardiner then says that it would mean that professional such as solicitors and banks would therefore be under an obligation to look out for breaches of duty. Effectively they would be policing trusts, policing fiduciary relationships and this is not unknown in the law. For example, and auditor’s jobs is to look out for fraudulent or inaccurate parts of the accounts, there is an obligation upon anyone to look out for possible money laundering so it would just extend this obligation.
Novoship
Remedies
where a claimant successfully proves dishonest assistance, the remedies available are either equitable compensation for any loss suffered, or an account of profits made by the assister. The claimant can normally elect between these two said the CA.
Akita Holdings Ltd v Attorney General
Recipient liability
As with accessory liability, this is an example of the court imposing a constructive trusteeship on the recipient, he is liable as if he were a trustee. Therefore, one can be liable for the value of the trust property he originally acquired. It was recently said by PC in Akita Holdings that he could be liable for any profit he makes as if he were a trustee.
Requirements for recipient liability
- The existence of a trust or fiduciary relationship
- Defendant’s beneficial receipt by the defendant of trust property
- Knowledge by the defendant that the property is trust property
- Dealing by the defendant with the property in a manner that is inconsistent with the trust
BCCI v Akindele
Nourse LJ
The judgment of the CA given by Nourse LJ and he introduced a new test of unconscionability or to be precise:
“The recipient’s state of knowledge must be such as to make it unconscionable for him to retain the benefit of the receipt.”
So he justified the introduction of this new test by the analogy of what was happening in accessory liability, saying just as the court there adopted the single test of dishonesty (getting rid of categories of knowledge), the same should happen here, but here the single test of knowledge is that it would be unconscionable.
What is the problem with Nourse LJ’s test in BCCI v Akindele?
Problem with this test suggested by Nourse LJ is that there is no general understanding of unconscionability. There is a general understanding of dishonest but not unconscionability. Unconscionability is a value judgment by the court.
In fact, in Royal Brunei Airlines, Lord Nicholls rejected unconscionability for a possible test for accessory liability because in his view unconscionability was either the same as dishonesty (in which case you might as well have dishonesty as the test), or if it is not the same as dishonesty, then we do not know what it means.
Unconscionability is intrinsically vaguer than dishonesty.
In addition, in Royal Brunei Airlines, we saw Lord Nicholls adopt a test of dishonesty, then he went on to give a basic definition on what he thought was dishonesty, But Nourse LJ did not try and define unconscionability. So the test lacks clarity and meaning.
City Index Ltd v David Gawler
despite criticisms of Nouse LJ’s test, it has been accepted as the law.
two members of CA (obita) accepted Nourse’s test as now representing the law in the area.
Uzinterimpex
But despite criticisms, it has been accepted as the law:
Nourse’s test was applied. But no discussion of the issue or discussion of what might amount to unconscionability, but accepted that this was the law.
Armstrong v Winnington
Nourse’s test was applied in first instances.
- From whose perspective do we judge unconscionability.
- It would seem from what was said by Nouse LJ in Akindele that we are looking at the recipient. Look whether the recipients’ conscience is affected. Comments by Nourse LJ was to this effect (based on Belmont finance and Re Montgu settlement)
Baden, Delvaux and Lecuit v Société General
Degrees of knowledge
The categories of knowledge are by Gibson J. These are categories of knowledge used before the Royal Brunei Airlines case in accessory liability and before Akindele in recipient liability. Before they led to confusing judgments, they were intended to be replaced by dishonesty in accessory liability and unconscionability in recipient liability.
Unfortunately, they drifted back in. In one of the more recent cases, Armstrong DLW GmBH v Winnington the judge even said they were useful in deciding what type of knowledge makes it unconscionable.
Armstrong v Winnington
Degrees of knowledge
Armstrong DLW GmBH v Winnington the judge even said the categories of knowledge from Gibson J were useful in deciding what type of knowledge makes it unconscionable.
Baden types (1) to (3) knowledge renders recipt of trust property “unconscionable”.
Baden tyoes (4) and (5) knowledge also render receipt “unsconacionable” but only if, on the facts actually known to the defendant, a reasonable person wpuld have appreciated the transfer was probably in breach of trust, or would have made inquiries or sought advice which would have revealed the probability of the breach of trust.
What are the categories of knowledge?
Peter Gibson J in Baden, Delvaux and Lecuit v Société General
- actual knowledge;
- wilfully shutting one’s eyes to the obvious;
- wilfully and recklessly failing to make such enquiries as an honest and reasonable man would make in the circumstances;
Category 1 is clear, categories 2 and 3 are referred to as “equivalent to” actual knowledge, covering the person who deliberately avoids knowing something. There is no doubt that anybody with knowledge in 1,2 or 3 will be regarded as dishonest. It is 4 and 5 which causes the most problems.
- knowledge of circumstances which would indicate the facts to an honest and reasonable man (though not a morally or mentally obtuse defendant);
- knowledge of circumstances which would put an honest and reasonable man on enquiry.
These are aspects of constructive knowledge (what a person ought to know), they are not useful because judges do not agree as to what they cover. Some judges seem to treat them as covering negligence or carelessness, some judges say that the knowledge within categories 4 and 5 could simply amount to carelessness but could in some circumstances be equated with dishonesty.
Criticism with the categories
This is the big problem with categories because they are not distinct enough, not clear enough as to what is included in them.
The other main criticism of these categories of knowledge is that they are incomplete. Categories 4 and 5 both depend on the defendant knowing of circumstances which would indicates facts, putting an honest man on enquiry. What none of the categories cover is constructive notice as it arises in the context of a purchase of land, because thinking back to idea of constructive notice, this is that a purchaser should inspect title deeds and is taken to have constructive notice if he discovered anything in so doing.
A purchaser with constructive notice may have no knowledge of circumstances, they might be taken to have constructive notice because they did not inspect the land and they would have noticed something, but they have no knowledge at all. Again, there is lack of clarity in the law because some judges talk about the difference of constructive knowledge (4 and 5) and constructive notice, which is what a purchaser of land might have. Other judges draw no such distinction and it gets unclear.
Unconscionability encompasses dishon
Nourse in Akindele was of the view it was, he was of the view that dishonest was not a requirement, it was sufficient for liability but it was not required for liability.
Aside from Nourse, the other authorities are inconsistent as to whether anything less is sufficient. The majority of cases predate Akindele, and generally it is all dicta.
So we have cases which support Nourse’s view that we do not require dishonesty: Belmont finance and Africa v Jacson. Moreover, in El Ajou, there was dicta relied upon by Nourse that dishonest is not required.
esty, is it wider?
Belmont Finance
support Nourse’s view that we do not require dishonesty
Agip (Africa) Ltd v Jackson
Do we need dishonesty?
support Nourse’s view that we do not require dishonesty.
El Ajou
Is something less than dishonesty allowed?
Millett J obiter suggested that liability could be found on something less than dishonesty.
He said that obiter actual knowledge is not a precondition of liability and that the recipient is not expected to be unduly suspicious, and will not be held liable unless he went ahead without further inquiries in which an honest and reasonable person would have realised that the money was probably trut money and was being misapplied.
The language of Millet J falls short of accepting that mere negligence would be sufficient. At the least he would have required awareness of circumstances that create a probability of wrongdoing.
Cowan de Groot v Eagle trust
it was held that dishonest was essential, at least in commercial cases.
Knox J pointed out that the duty of the directors is to buy as cheaply as they can. In Knox’s view, it would be unduly onerous to impose upon directors a positive duty to inquire into the reasons for a sale to them at a bargain price.
His view is supported by Eagle Trust v SBS Securities.
Armstrong v Winnington
Do we need dishonesty?
one case decided after Akindele where the case was discussed. This case suggests that we do not need dishonesty.
Therefore, there is lack of clarity on authorities with no binding authority.
Conclusion: dishonesty is probably not required for liability.
Re Montagu’s Settlement Trust
Megarry V-C,
Comparison with the degree of knowledge required for proprietary liability
drawn this difference between proprietary and personal liability.
Arthur v A-G
PC
Held: it is more difficult to impose personal liability on the recipient than to impose proprietary liability.
There is a difference between personal and proprietary liability
Re Montagu’s Settlemnet Trust
It required a want of probit and that carelessness does not fall into that.
He said that :
“I cannot see that carelessness involved will normally amount to a want of probity.”
This referred to a want of probit, which seems to suggest the need for dishonesty?
Credit Agricole v Papadimitriou
Lord Sumption
Then there is the most recent decision by the PC by Lord Sumption. This case concerned proprietary liability and Sumption appears to say that the same degree of knowledge is required for proprietary or personal liability.
”, the question what constitutes notice or knowledge is the same
The extract shows that he does not know what he is talking about. He requires some kind of knowledge as to facts, but if we are talking about a purchase of land, it is constructive notice which requires no knowledge of anything. So the degree of knowledge cannot be exactly the same in every circumstances, not if you follow Sumption’s reasoning.
The court did not need to address knwoing reciept so it is obiter. But Lord Sumption’s remarks, are clearly the result of careful deliberation and should not be, said Pearce and Barr, be dismissed lightly.
Is anything less than dishonesty sufficient for recipient liability?
Conclusion: dishonesty is sufficient, in fact, dishonesty is probably not required, probably something more is required for a proprietary remedy, but if we do not need dishonesty, what do we need?
- Some degree of constructive knowledge will be sufficient, so some knowledge that the recipient ought to have will be sufficient. So, it is all to do with what enquiries it is thought a recipient ought to have made.
- But it remains unclear as to whether a recipient who has failed to make any enquiries as to carelessness or negligence will be sufficient, or whether we need something more than mere carelessness and it is impossible to reach a conclusion on basis of case law - there is a lack of clarity in many judgement and inconsistent terminology in both cases and comments by academics.
- Re Montagu’s Settlement Trust*
- Is carelessness sufficient?*
If dishonesty is not required, what is?
Megarry V-C
On the one hand, it is possible to point to some of the views of the judges that carelessness is not enough: Megarry V-C in Re Montagu’s Settlement Trust (predated Akindele but referred to with approval in that case) said it required a want of probity and that carelessness does not fall into that. He said:
“I cannot see that carelessness involved will normally amount to a want of probity”.
If one takes the basic test of Nourse LJ, which is unconscionability, that does seem to indicate something more than carelessness. This is supported by various factors referred to as relevant in several cases, amongst those in reference to “suspicions” and “commercially unacceptable conduct” which seems to suggest something more than mere carelessness. Having said that, there are other circumstances where the courts refer to constructive notice as sufficient without excluding knowledge which would be acquired apart from negligence or carelessness. It could be difficult to draw a line between someone who is negligent in not making enquiries and someone more culpable in some way.
Armstrong v Winnington
What happens if dishonesty is not required?
(f) If dishonesty is not required, what is?
Stephen Morris QC
It does not held that we still get judgments referring to the vague categories of knowledge and formulating the test in different ways, for example: comments by Stephen Morris (one of the few cases since Akindele, where he discussed the issue in detail. He started by saying that categories 4 and 5 might be sufficient but this depends on the circumstances – he seems to bring in, as relevant, any strengths of any evidence, and the likely result of any enquiries.
Stephen Morris draws a distinction between probability, as opposed to a mere possibility. In his view, under categories 2 and 3, a mere possibility of a breach of trust is enough for liability.
Whereas, under categories 4 and 5, you need probability.
None of this helps as all we can say is that the test is unconscionability, but its application is unpredictable and will depend entirely on the facts of the case.
Re Clasper Group Services
Relevant factors: Recipient’s personal attributes
Courts indicated relevant facts in determining if there is liability. As with accessory liability, the personal attributes of the defendant will be relevant, courts take into account:
- experience
- intelligence
Authority: Re Clasper Group Services
Facts: Boy of 17 years, not very bright, worked for his father in a lowly position. He received money from father as the father transferred £2.000 of company money to his son, who paid it into his bank account. Son then lent £3,000 to another of his father’s companies. Held: not liable, taking into account age, experience, intelligence.
Eagle Trust plc v SBC Securities
Vinelott J,
If the recipient of the property knows of something suspicious, then they will have to make enquiries. They cannot then hide behind the need for speed. But a recipient in a commercial situation does not need to be unduly suspicious.
Although the cases of Eagle trust and El Ajou were decided before Akindele, Nourse LJ made it clear that these factors would remain relevant.
That the court can give common sense decisions in a commercial sphere. So a recipient has to make enquiries if something sufficient but needn’t be unduly be suspicious.
Cowan de Groot Properties Ltd v Eagle Trust
Facts
The case involved a breach of duty by the directors of a company who had sold company property at an undervalue as part of a fraudulent scheme. The claim was against the purchasers of the property. The fraud had nothing to do with investigation of title.
The fraud had nothing to do with the title of property, so inspection of title was irrelevant, the fraud was to do with the purchase price of the property. Undoubtedly a purchaser of property wants to buy cheap, and the point was made that the directors of the purchasing company were under an obligation from the company to buy as cheap as possible, the judge said that he was not prepared to impose a duty to enquire why the price was low. It would be unduly onerous to require every purchaser to enquire why they get property at a bargain price.
On the facts there was nothing to make the purchasers suspicious. The price was not ridiculously low, if price was ridiculously low, this would be suspicious, but it was not this low and the view was that the purchaser could justifiable assume that the low price was because the sellers wanted a quick sale and the sellers had asked for an exceptionally large deposit, which again could be taken as justifying an overall low price. The view of the judge was that there was, therefore, no knowledge at all on the facts and no liability.
So it does seem as long as there is nothing suspicious, and the recipient does not need to be duly suspicious, they will escape. On the facts there was nothing to make them suspicious, this would be different if it was a ridiculously low price, and the purchaser had some other relevant knowledge making them suspicious. But there was not
Therefore, in commercial cases, it would seem that it is difficult to impose liability on a recipient. By contrast, it has been suggested that it is easier to impose liability on a volunteer to whom someone has been given a gift.
Cowan de Groot Properties Ltd v Eagle Trust plc
Relevant factors: the type of transaction
(h) Relevant factors: the type of transaction
Volunteers
Easier to impose liability?
Perhaps if you are given a gift, you need to perhaps make enquiries as to where it is coming from.
Cowan de Groot Properties Ltd v Eagle Trust plc - suggested it was that easier to impose liability on volunteers.
(h) Relevant factors: the type of transaction
Eagle Trust plc v SBC Securities
Land
– suggested that it is easier to impose liability in land situations, especially where the land issue is to the title of the land.
This, however is subject to objection because when it comes to title of land, it may just be able negligence in failure to make enquiries and there are other suggestions that negligence is not sufficient.
We do not know what is required by knowledge, not in a way to predict how a case will be decided.
Re Montagu’s Settlement Trust.
Timing
A final point: any knowledge that the recipient had knowledge in the past, but has subsequently forgotten will not be sufficient for liability, this based on case of Re Montagu settlement.
Relevant knowledge must be held at the time the recipient deals with the property inconsistently with the trust.
Facts:
The case concerned a succession of Dukes of Manchester. In 1923 the 10th Duke promised to create a trust of chattels to which he would become entitled on the death of the 9th Duke. The trustees were meant to draw up an inventory but did not. When the 9th Duke died in 1947 all the chattels were released to the 10th Duke. He disposed of some items which he shouldn’t have done. After his death in 1977 the 11th Duke brought an action against his estate. There was only going to be liability if the 10th duke had sold those assets which knowledge that they were subject to the 1923 settlement. It was not entirely clear if he had actual knowledge of the settlement, but his solicitor had. But what was clear was that even if he had knowledge of settlement in the past, he had forgotten them. Therefore, no liability.
Is liability fault based or recipiet based?
clear from Akindele that the law at present is fault based.
Why is the law as it is: the law that fault is required?
There are 2 reasons why law developed this way:
- Over the years, the majority of cases have considered accessory liability and recipient liability side by side. Therefore, recipient liability has been heavily influenced by the requirements of accessory liability.
- As we have seen, what the courts do is to impose a constructive trusteeship on the recipient. Constructive trusts and constructive trusteeships are all intrinsically linked with issues of unconscionability: unacceptable behaviour.
But it is being increasingly argued that recipient liability should be distinguished from accessory liability. As with accessory liability, accessory liability is secondary liability - liability for involvement in or helping someone else commit the breach. Therefore, arguably that it is justifiable to require fault on the part of the accessory.
Who are the two leading proponents that recipient liability should be recipient based with change of position defence.
Nicholls and Millet believe this should be the law, they argued that liability should be receipt based because:
- So it is harmonisation with common law liability
- They argue in favour of strict liability to recognise the endurance of property rights. To recognise the unjust enrichment on recipients at the expense of another and to get a coherent system of remedies.
So how would this receipt based liability work?
A person who receives trust property (to whom you can trace and follow trust property) would prima facie be personally liable to the beneficiaries regardless of his state of knowledge, even if he had no knowledge or no suspicion and no reason to make enquiries, this is unless the recipient is a bona fida purchase without notice.
Although the recipient would prima facia be personally liable, an honest and reasonable defendant might be able to rely on the defence of changes of position – this would shift the burden of proof.
At present, the claimant must show that the recipient was at fault, the claimant has to show that the recipient has such knowledge to make it unconscionable for him to retain the benefit of the recipient. If the law were to change, all the claimant would have to show is that the recipient received trust property - it would then be for the recipient to argue that he ought to be excused from liability.
What is the change of position defence?
The change of position defence is a defence to restitutionary claims.
It is available to an innocent person, acting in good faith who has changed his position in such a way that it would be inequitable in the circumstances to require him to make restitution or make full restitution. This is not available for a wrongdoer.
But it is not clear as to what degree of knowledge makes someone a wrongdoer - the change of position defence seems to require extraordinary expenditure (not ordinary expenditure, but, for example, giving a large sum to charity), so this exists.
Change of position defence does exist and could be used.
There is some case law suggesting equity will accept receipt-based liability under a personal claim in Re Diplock.
So, English law could be open to receipt based liability, with a change of position defence. Although people like Nicholls L and Millet J have argued in favour of it, there are people against this position.
Lipkin Gorman v Karpnale
The House of Lordsunanimously established that the basis of an action for money had and received is the principle of unjust enrichment, and that an award of restitution is subject to a defence of change of position.
Arguments against a change of position defence?
- Reversal of burden of proof is regarded as commercially unworkable by Nourse LJ in Akindele.
- L Smith regarded to it as an incorrect allocation of risk. He felt it would be wrong that a bank which received trust funds is prima facia liable and that the bank would then have to prove that they did not deserve to be liable - that no one within that bank had any relevant knowledge.
- Another objection to a change in the law is that the change of position defence is still not clear, we need more cases. There have been some cases, but there is still not real clarity as to the change of position defence. It is argued that the change of position defence may not relieve from liability, every recipient who ought not to be liable. Bear in mind there is a distinction with proprietary liability, we are saying this recipient no longer has that property, but must find money of his own to pay compensation.
- Indeed, we can say that the recipient normally benefits if they receive a significant sum of money and they spend it on travelling the world or a party - they have undoubtedly benefited. But if they would not otherwise have spent it, then if you have to pay compensation, then you will be worse off, and this could potentially be unfair and we do not know if the change of position defence will give a defence in those kind of circumstances.
- Final argument against strict liability is on the bases of the theoretical understanding of recipient liability, not just recipient liability but a constructive trusteeship. Aconstructive trusteeship has implications such as liability for profits, liability to pay interest, different limitation periods.
- So it might be easier to establish receipt based liability if there was just personal liability and not just a constructive trusteeship.
RE DIPLOCK
The personal claim
Practically this is not an important claim, its availability is very limited. It is important in that:
- It shows that equity will impose receipt-based liability
- There is an argument that the courts could extend this liability if they so wanted.
It comes from the decision of HL in Re Diplock.
If, in the administration of an estate, a payment has been wrongfully made, any unpaid or underpaid creditor, legatee or next of kin can recover that payment from the recipient
Facts:
Concerned with the payment of sums to charities pursuant to gifts in a will. The gifts turned out to be invalid and the testator’s next of kin sought to recover the sums from the charities. Held: If, in the administration of an estate, a payment has been wrongfully made, any unpaid or underpaid creditor, legatee or next of kin can recover that payment from the recipient.
Charities were personally liable to pay a sums equivalent to sum received to next of kin, so purely receipt based liability. The charity had no knowledge and did no wrong, but was not allowed to keep the money received at the expense of next of kin.
What were the limitations of Re Diplock?
Limitations on the claim:
- defendant must be a volunteer
- claimant must first sue the personal representatives for breach of trust
- claimant can only claim the principal sum, not interest.
There are dicta to the effect that the claim is available in other situations in which a fiduciary makes a wrongful payment, e.g. in relation to an inter vivos trust or the liquidation of a company. But this is only dicta. This is a rule of law which is limited to its facts. It is said to have arisen by a historical accident. But by theory, it could be extended.
What would the defences be for re diplock?
Defences:
- bona fide purchaser
- claimant acquiesced in the payment
- Limitation Act 1980, s22 - 12 years
- change of position? In theory, now English law recognises change of position defence, this defence may now be available.
Change of position defence is only a defence to unjust enrichment.
Would strict liability be good?
- It would mirror the common law doctrine of unjust enrichment.
But
- the imposition of a strict liability to account as a constructive trustee is inconsistent with the general emphasis on fault as the justification for the remedy.
The development of unjust enrichment means that the Re Diplock equitable accounting rule will rarely be needed (says pearce and barr.
What did Millett J in Agip v Jackson think about beneficial receipt?
He suggested that a bank would not normally be liable for unsconscionable receipt, as it would be acting de facto as the agent of its customers.
What did Uzinterimpex think about Agrip v Jackson and recpiieint benfit?
Mitchell and Watterson “Remedies for knowing recipient”
When the courts say that a knowing recipient is “personally laible to account as a constructive trustee”, they mean that
because of the circumstances in which knowing recipients acquire title to the misapplied property, Equity fixed them with custodial duties which are the same as some of the duties which are voluntarily assumed by express trustees.
What can the beneficial asset the common law action “unjust enrichment”?
Where the claiamnt has legal title (perhaps as trustee) to the misappropriated assets.
The equitable rights require the continuing existence of the property in the hands of the defenant; the common law action can be pursued, subject to any change of position on the part of the recipient, even where the recipient no longer has the property.
What did BCCI v Akindele
think about negligence being sufficient for liability recipiet
Nourse LJ held that dishonest was not a “necessary ingredient of liability in knowing reciept”. He approved those English and New Zealand authorities favourign liabilty on the basis of the lower threshold of “constructive knowledge” which thus favours the adoption of a negligence standard.
But pearce and barr thinking that Nourse LJ in BCCI v Akindele did not suggest that mere negligence should be enough for liabilit; he cited with approval the statements fo Megarry V-C in Re Montagu’s Settlement Trusts requiring conscious impropriety and did consider that an element of fault was necessary.
But it is difficult to see how the test of unconscionability differs from that of dishonesty in practise, especially as Nourse LJ found on the facts that the investor had no acted “unconscionably” on the basis that he had not acted dishonestly.
Since Nourse LJ dismissed dishonesty as an essential infredient of recipient liability, he must have intended unconscionability to mean somehting different, but he gives not guidance as to what this is.
Is liability sufficient for recipient assistance?
Pearce and Barr believe that there is no real authoritiy if favour of the proposition that “mere negligence” is sufficient for laibility. The lowest test suggested is that the circumstances should have been such that a reasonable and honest recipient would have made further enquiries.
What requisite degree of fault is required?
- Strict liability
- No authority
- Negligence
- Weak authority
- Dishonesty
- More than required
- Constructive knowledge
- old authority
- Unsconscionability
- Difficult to apply, but current test
