Strangers

Question 1

3 situations where a 3rd party will be personally liable

Answer 1

1. Intermeddling
2. Accessory liability
3. Recipient liability

All categories apart from intermeddling are fault-based - the stranger is held liable to the trust for acting wrongfully.

Question 2

What does the term ‘stranger to the trust’ mean?

Answer 2

the 3rd party wasn’t a trustee when the breach was committed and therefore wasn’t subject to any obligations prior to his involvement in the breach.

Question 3

benefits of beneficiaries seeking remedies against a stranger to the trust

Answer 3

1. trustee in breach may be insolvent
2. there may be other remedies against a 3rd party e.g. the trustees may have an action for breach of contract or in tort against an adviser who has given negligent advice

Question 4

What are the TWO general reasons for a stranger to the trust being liable?

Answer 4

A stranger can be liable either -

1. because the stranger holds property which is still subject to a trust (proprietary remedies); or
2. for doing something which is considered to be so wrong that equity requires the individual to pay compensation –> focus on these ones as they’re personal remedies

Question 5

when are beneficiaries confined to personal claims for equitable compensation brought against a 3rd party?

Answer 5

where a stranger has participated in the commission of a breach of trust, but has not received any trust property i.e. there is no trust property which beneficiaries can claim to recover
OR
where the stranger did receive trust property but it has been dissipated so that no traceable proceeds remain –> so cannot pursue a proprietary claim

UNLESS - they can rely on common law breach of contract or tort.

Question 6

What is the terminology for a 3rd party personally liable?

Answer 6

The stranger has liability as constructive trustee / liability to account as a constructive trustee
- this doesn’t mean a proprietary remedy like a constructive trust - here we’re primarily concerned with personal liability to account

in this context it means “as if he were a trustee”

Question 7

Individual/case which pointed out the misleading and artificial nature of the terminology - “liability as a constructive trustee” when considering personal liability to account

Answer 7

Paragon Finance plc v D B Thackerar & Co [1999] per Millett LJ
- The 3rd party isn’t a trustee, there’s no trust, no proprietary remedies, is just a formula for giving a remedy in equity.

Question 8

What is the starting point when considering the potential liability of 3rd parties?

Answer 8

A person who simply acts honestly in the capacity of agent to trustees will not be liable.
- won’t hold them liable if they’re simply following instructions

Question 9

Example of the rule “a person who simply acts honestly in the capacity of agent to trustees will not be liable” in action

Answer 9

Barnes v Addy (1874)

FACTS - 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.
- Solicitor wasn’t liable because he had simply done what he was told and had advised against that trustee

Question 10

What does it mean for a 3rd party to be personally liable for intermeddling (aka trustee de son tort)?

Answer 10

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 properly appointed trustee.

i.e. anyone who acts as an executor or as an agent for another will be held liable to account for his principal just as if he had been properly appointed.

Question 11

Authority for 3rd party personal liability for intermeddling (trustee de son tort)

Answer 11

Blyth v Fladgate [1981]

FACTS - T gave trust property to a firm of solicitors. After T’s deaths the solicitors took it upon themselves to change the investments.

HELD - Since the trustees were already dead, the solicitors couldn’t be acting as agents, they had assumed responsibility as trustees and were liable for the inadequacy of the investment

Question 12

Is the honesty or intentions of the 3rd party relevant when bringing a personal action for equitable compensation against a 3rd party for intermeddling?

Answer 12

NO -

Irrelevant whether they were honest or had good intentions, just matters if they acted as if they were a trustee

Question 13

What does it mean for a 3rd party to be personally liable for accessory liability (aka dishonest assistance in a breach of trust) ?

Answer 13

Where a stranger dishonestly participates in a breach of trust committed by the trustees, he will be liable to account personally as a constructive trustee for any loss suffered by the trust.
- The accessory doesn’t have to have benefitted

Question 14

TWO leading authorities on accessory liability

Answer 14

1. Royal Brunei Airlines v Tan [1995]

2. Twinsectra Ltd v Yardley [2002]

Question 15

What is the relationship between the liability of the accessory in accessory liability and the liability of the trustee in breach?

Answer 15

Accessory is jointly and severably liable with trustees

- Beneficiaries could sue the trustee or the accessory for the full loss

Question 16

Authority which held that an accessory is jointly and severably liable with trustees

Answer 16

Ultraframe (UK) Ltd v Fielding [2007]

Question 17

Authority for the rule that an accessory can be liable not only for any loss caused but also for any profits that they make

Answer 17

Novoship (UK) Ltd v Nikitin [2014]

- BUT… liability for profits is at the discretion of the courts.

Question 18

Case which established the law in the area of imposing liability on an accessory

Answer 18

Royal Brunei Airlines v Tan [1995] per Lord Nicholls (gave judgment)

Question 19

TWO reasons for giving a remedy against a 3rd party for accessory liability

Answer 19

1. To ensure beneficiaries receive compensation for the loss if a trustee doesn’t have the funds available - insolvent
2. To deter deliberate interference in the trustee/beneficiary relationship

Question 20

What are the facts of the case - Royal Brunei Airlines v Tan [1995] - Privy Council

Answer 20

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. This was clearly a breach of trust by the company. The company became insolvent, and the airline brought proceedings against the defendant.

HELD - the defendant was liable – he had caused or permitted the company to use the money in a way he knew wasn’t authorised and this was dishonest
- It was irrelevant that he hoped to repay the airline

Question 21

FOUR requirements for accessory liability

Answer 21

(1) The existence of a trust
(2) A breach of trust
(3) The assistance of the stranger (3rd party) in the breach of trust
(4) Dishonesty by the stranger –> this is where problems come about

Question 22

Case which got rid of categories of knowledge to fulfil the requirement of dishonesty for accessory liability and instead look at a sole requirement of dishonesty

Answer 22

Royal Brunei Airlines v Tan [1995] - Privy Council

• Defined an objective standard of what is dishonest
• Question of FACT whether a particular defendant has acted dishonestly BUT…need to apply the criteria

Lord Nicholls - “dishonesty is to be equated with conscious impropriety”

Question 23

What is the objective standard of dishonesty in Royal Brunei Airlines v Tan [1995]

Answer 23

Looking at the particular defendant and what they actually knew, and then assessing if he was dishonest in the light of what he actually knew
- Lord Nicholls notes that there are subjective elements to honesty but held it is an objective standard so that …

“if a person knowingly appropriates another’s property, he will not escape a finding of dishonesty simply because he sees nothing wrong in such behaviour.”

Question 24

Are the personal attributes of the defendant relevant to the issue of dishonesty?

Answer 24

YES -
Lord Nicholls -
“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.”

Question 25

Is the application of Lord Nicholls approach to dishonesty in Royal Brunei Airlines v Tan [1995] predictable?

Answer 25

Objective standard of dishonesty
BUT… he emphasises taking into account ALL the circumstances and the personal attributes of the defendant so there is a lot of discretion for the court which can create unpredictability EVEN IF IT IS A QUESTION OF FACT.

Question 26

Case in which the 3rd party wasn’t held liable as an accessory because the court took into account his personal attributes

Answer 26

A-G of Zambia v Meer Care & Desai [2008]
- Concerned with potential liability of the solicitor and he avoided liability on the basis that he was “foolish and incompetent”. He wasn’t dishonest.

Question 27

Case which suggested that when taking personal attributes of the defendant into account in considering accessory liability it’s probably easier to establish liability against persons like solicitors than against business people because we expect a higher standard of conduct from solicitors

Answer 27

Twinsectra Ltd v Yardley [1999] - CoA
- this has introduced some confusion
Slightly contradicts precedent in Royal Brunei Airlines v Tan [1995] and A-G of Zambia v Meer Care & Desai [2008]

Question 28

Authority for the combined test for dishonesty in accessory liability

Answer 28

Twinsectra Ltd v Yardley [1999] - CoA
Lord Hutton set out 3 possible standards for dishonesty
- this has introduced some confusion
- it was imported from the criminal law from the case of R v Ghosh [1982] - CA

Question 29

What is the “combined test” for dishonesty in accessory liability?

Answer 29

per Lord Hutton in Twinsectra v Yardley [1999] -

“a standard which combines an objective test and a subjective test, and which requires that before there can be a finding of dishonesty it must be established that the defendant’s conduct was dishonest by the ordinary standards of reasonable and honest people AND that he himself realised that by those standards his conduct was dishonest. I will term this “the combined test”.

Question 30

How does the combined test for dishonesty in accessory liability (Twinsectra) provide less protection for beneficiaries than the objective test (Royal Brunei)?

Answer 30

The combined test provides less protection for beneficiaries because it allows the defendant to argue that they don’t know what the honest person thinks and so can’t be held liable
- this would prevent equitable compensation for the beneficiaries

Question 31

What was the dissenting judgment of Lord Millett in Twinsectra v Yardley [1999]?

Answer 31

Lord Millett preferred the objective test for dishonesty in accessory liability per Lord Nicholls in Royal Brunei
- questioned the basis of the combined test being from the criminal case (R v Ghosh) - stated that this isn’t like criminal law in trying to find guilt – only trying to find fault to impose civil liability here.

Question 32

What are the facts of Twinsectra v Yardley [1999]?

Answer 32

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.

Question 33

Case which, in the context of criminal law, held that R v Ghosh (the basis of the reasoning in Twinsectra) was effectively wrong

Answer 33

Ivey v Genting Casinos (UK) Ltd [2017] - Supreme Court

So this brings Twinsectra’s combined test for dishonesty in accessory liability into question

Question 34

What was the test for dishonesty in accessory liability applied in Barlow Clowes International Ltd v Eurotrust International Ltd [2006]?

Answer 34

Adopted the dissenting approach of Lord Millet in Twinsectra v Yardley

• didn’t require the defendant to be conscious that he was transgressing the standards of a reasonable and honest person –> same as Lord Nicholls in Royal Brunei
• they said that Lord Hutton’s view in Twinsectra was no different than Lord Nicholls in Royal Brunei –> WHICH ISN’T TRUE?!

BUT… is a Privy Council decision so isn’t binding so theoretically Twinsectra is the binding law

Question 35

Case which considered the objective test (Royal Brunei) and the combined test (Twinsectra) for dishonesty in accessory liability

Answer 35

Barlow Clowes International Ltd v Eurotrust International Ltd [2006]
- agreed with Lord Hutton in Royal Brunei but said that Lord Hutton in Twinsectra had similarly agreed - NOT TRUE

BUT… Royal Brunei and Barlow Clowes are both privy council so aren’t binding law even if they do seem to be the better law

Question 36

What are the facts of Barlow Clowes International Ltd v Eurotrust International Ltd [2006]?

Answer 36

Clear case of dishonesty in accessory liability -

D was one of the principal directors of a company providing offshore financial services which were used to pay away money misappropriated from investors by Peter Clowes and his associates.
D was fully aware of the investment business so must have realised there was a real possibility the large amount of money belonged to the investors;
He knew of previous dishonesty on their part; and he told lies in court.

Question 37

Most recent case to discuss the test for dishonesty in accessory liability

Answer 37

Ivey v Genting Casinos (UK) Ltd [2017] - Supreme Court per Lord Hughes

• concluded the test for dishonesty in criminal law is the objective test
• mentioned the test in the context of civil liability as well and held that Lord Nicholls in Royal Brunei and subsequently in Barlow Clowes International Ltd v Eurotrust International Ltd were correct

So strictly Twinsectra is the binding authority but there seems little chance that a court will follow it - 2 privy council decisions against it and a SC decision (in the context of the criminal law) taking the view that it is an objective test
- It is arguable that if it ever got the SC again then would conclude it was an objective test.

Question 38

Is the defendant’s knowledge still relevant in the test for dishonest in accessory liability since the courts opinion against the use of categories of knowledge post Royal Brunei?

Answer 38

Defendant’s knowledge is still important because we have to look at what he actually knew, deliberately avoided knowing or ought to have known and decide whether in the light of that knowledge his actions were dishonest.

• This has meant that some judges in later cases said that the categories of knowledge used before Royal Brunei may still be helpful –> but these caused uncertainty and complicated judgments so hopefully wont follow them too much

Question 39

Case on suspicions and enquiries of a defendant when considering dishonesty in accessory liability

Answer 39

Agip (Africa) Ltd v Jackson [1991] - CoA
- even though this case pre-dates Royal Brunei it is still useful on its facts

HELD - per Millett J -
“if he did suspect wrongdoing yet failed to make enquiries because “he did not want to know” … or because he regarded it as “none of his business”…, that is quite another. Such conduct is dishonest, and those who are guilty of it cannot complain if, for the purpose of civil liability, they are treated as if they had actual knowledge.”
- this means he was prepared to infer knowledge
- There wouldn’t be liability if they asked questions and they were answered or if they were foolish in not suspecting wrongdoing

Question 40

Authority for the fact that the defendant doesn’t have to have ACTUAL knowledge to be regarded as dishonest. If the person OUGHT to have known that there was a breach of trust then that person can also be regarded as dishonest.

Answer 40

Agip (Africa) Ltd v Jackson [1991] - CoA
- even though this case pre-dates Royal Brunei it is still useful on its facts

FACTS - Complex fraud case. 1st and 2nd defendants were partners in a firm of accountants; 3rd defendant was their employee. Their clients were the ultimate recipients of the money. They set up and managed companies whose only reason for existence was to receive the moneys obtained by fraud and make it difficult to detect the fraud and follow the money (i.e. money went through a string of companies).

HELD - First and third defendants were held liable at first instance because they had actual knowledge of information which proved they were dishonest.
2.d defendant was held vicariously liable because he OUGHT to have known that there was a breach of trust

look at p9 of notes for more info

Question 41

After considering the degree of the defendant’s knowledge, what do you consider next?

Answer 41

Consider the content of the knowledge

Question 42

Authority for the rule that the defendant doesn’t need to know the ACTUAL fraud to be dishonest in accessory liability, it is enough to suspect A FRAUD

Answer 42

Agip (Africa) Ltd v Jackson [1991] - CoA
There was some evidence that the defendants thought that the scheme was actually aimed at avoiding Tunisian exchange control regulations.

HELD - it wasn’t necessary that the defendant knows the precise nature of the fraud or the precise nature of the breach of duty or even the identity of any victim.

Question 43

content of the knowledge for dishonesty in accessory liability - Does the defendant need to know that it is the trust money which is being misappropriated?

Answer 43

NO -
according to Twinsectra Ltd v Yardley and Barlow Clowes International Ltd v Eurotrust International Ltd
- it is sufficient that D knows of a misappropriation of money, that there is a disassociation with money with someone who isn’t entitled –> the D doesn’t need to know it is trust money, doesn’t even have to know what a trust is

Question 44

Authority which held that the knowledge for dishonesty in accessory liability must be knowledge of the FACTS, not enough to have ‘mere claims or allegations’

Answer 44

Royal Brunei Airlines v Tan
- if there is a genuine doubt that fraud is occurring then there is no liability

This confirmed what was held in the Court of Appeal in Carl Zeiss Stiftung v Herbert Smith & Co (No 2) [1969]
- that knowledge of a doubtful equity isn’t sufficient