Third party liability
Key issue: are KR/DA cases really true trusts or not?
- Lord Nicholls in Tan: ‘The third party’s liability is not property-based. His only sin is that
he interfered with the due performance by the trustee of the fiduciary obligations
undertaken by the trustee’
- Megarry VC in Re Montagu’s ST: ‘a person becomes liable as a constructive trustee
if he knowingly assists in some fraudulent design on the part of a trustee’
No
- Lord Millett in Dubai Aluminium: a knowing recipient/dishonest assistant is not a true
trustee - ‘not a trustee at all’, even though he is liable to account as if he were a trustee
- Rather, he is described as such so liability can be imposed and the remedy
of account of profits allowed
- SC in Williams: knowing receipt and dishonest assistance do not involve ‘true
trusts’ in that: they do not involve real ‘trusting’, fiduciary duties, or powers of
investment, delegation and maintenance
- For this reason, the normal trust limitation periods don't apply to KR/DA
- Me: but this could equally be said of other constructive trusts! E.g. remedial
constructive trusts as in Chase Manhattan - did the payee bank really have e.g.
powers of investment?
- Ridge: dishonest assistance as a constructive trust is only imposed so that the
beneficiary can be compensated if the trustee in breach is insolvent, or cannot be found
- Liability does not arise due to any inherent characteristic of trusts law, but as a
matter of fairness and practicality
- Liability for DA is a primary liability based on the third party's
exploitation of the beneficiary’s vulnerability. This has 2 elements: a)
principle/justice - the DA’s conduct was wrongful, and b) practicality - the
beneficiary needs an alternative remedy if the trustee is insolvent/ran
away
- Me: agree - DA is a personal claim/remedy based solely on practicality and
fairness
- One approach: liability of KR/DA isn’t the same as constructive trusts because the
‘trusteeship’/liability to account is founded on a WRONG, not on a DUTY (as for true
trusts)
- One approach: the constructive trust that arises in KR/DA isn’t a true constructive trust
- It’s just used to denote the liability of the 3rd party to an account
- It DOESN’T involve the acquisition or granting of a property right in the same way
as do the vendor purchase constructive trust, Bannister v Bannister, Pennington
v Waine, Boardman v Phipps or FHR
- Court in Novoship: liability to account for profits in KR/DA arises based on a wrong;
liability of a trustee to account for profits is based on a duty (the fiduciary duty)
- Me: this could be used to support the argument that KR/DA aren’t true trusts
, - Me: this isn’t true: liability to account for profits in KR is also based on a duty
owed by the KR as a constructive trustee; the KR becomes a constructive trustee
because of the unconscionability of retaining the trust property
- By contrast, the DA never retains the trust property so cannot biome a
constructive trustee
- So liability to account for profits in KR and breach of trust is based on a
duty; but the court is right that liability to account for profits in DA is based
on a wrong. So we see that KR is a true constructive trust, but DA is not
Yes
- One approach: KR/DA must be constructive trustees, otherwise an account of
profits wouldn't be available (as in Novoship, Akita Holdings)!
- Mitchell/Watterson: KR/DA is a true constructive trust, because the nature of a
trustee’s liability to account (both equitable compensation and to say what he did with
the trust property) is a distinctive feature of trusteeship
- This justifies the use of the term in cases concerning Knowing Receipt
- Me: but in AIB the court expressly rejected the idea that the beneficiary’s right to
an account is fundamentally different to common law damages - i.e. it’s not a
unique, proprietary right. So Mitchell/Watterson's argument seems to fail
because the beneficiary's right to an account isn’t some unique, proprietary
feature of trusteeship!
- Longmore J in Novoship: the nature of the liability of a knowing recipient or dishonest
assistance is the responsibility of an express trustee; this responsibility includes liability
to account for profit
- For this reason, liability to account for profits should be available for both KR and
DA
KR is a true trust; DA isn’t
- Me: if DA is a true trust, why is a DA limited to only account for profits caused by his
dishonest assistance (Novoship) and not all the profits caused by the breach of trust (as
is the case for fiduciaries)?
- If a DA is a true trustee, he should be liable for all the profits caused by the
breach of trust; Novoship undermines the idea of DA as a trustee
- This is because a fiduciary is required to account for all profits falling
within the scope of his duty of loyalty. But a DA is only required to
account for profits caused by his dishonest assistance.
- Me: KR is a true constructive trust, DA isn’t
- In KR, the defendant holds trust property knowing that it’s from breach of trust
property, which is ‘unconscionable’; this ‘unconscionable’ behaviour makes it
justified to impose trusteeship duties on him as in a real constructive trust.
His knowledge that the property came from a breach of trust, count as implied
consent to onerous fiduciary duties of trusteeship
- So he has to e.g. abide by custodial duties
Key issue: are KR/DA cases really true trusts or not?
- Lord Nicholls in Tan: ‘The third party’s liability is not property-based. His only sin is that
he interfered with the due performance by the trustee of the fiduciary obligations
undertaken by the trustee’
- Megarry VC in Re Montagu’s ST: ‘a person becomes liable as a constructive trustee
if he knowingly assists in some fraudulent design on the part of a trustee’
No
- Lord Millett in Dubai Aluminium: a knowing recipient/dishonest assistant is not a true
trustee - ‘not a trustee at all’, even though he is liable to account as if he were a trustee
- Rather, he is described as such so liability can be imposed and the remedy
of account of profits allowed
- SC in Williams: knowing receipt and dishonest assistance do not involve ‘true
trusts’ in that: they do not involve real ‘trusting’, fiduciary duties, or powers of
investment, delegation and maintenance
- For this reason, the normal trust limitation periods don't apply to KR/DA
- Me: but this could equally be said of other constructive trusts! E.g. remedial
constructive trusts as in Chase Manhattan - did the payee bank really have e.g.
powers of investment?
- Ridge: dishonest assistance as a constructive trust is only imposed so that the
beneficiary can be compensated if the trustee in breach is insolvent, or cannot be found
- Liability does not arise due to any inherent characteristic of trusts law, but as a
matter of fairness and practicality
- Liability for DA is a primary liability based on the third party's
exploitation of the beneficiary’s vulnerability. This has 2 elements: a)
principle/justice - the DA’s conduct was wrongful, and b) practicality - the
beneficiary needs an alternative remedy if the trustee is insolvent/ran
away
- Me: agree - DA is a personal claim/remedy based solely on practicality and
fairness
- One approach: liability of KR/DA isn’t the same as constructive trusts because the
‘trusteeship’/liability to account is founded on a WRONG, not on a DUTY (as for true
trusts)
- One approach: the constructive trust that arises in KR/DA isn’t a true constructive trust
- It’s just used to denote the liability of the 3rd party to an account
- It DOESN’T involve the acquisition or granting of a property right in the same way
as do the vendor purchase constructive trust, Bannister v Bannister, Pennington
v Waine, Boardman v Phipps or FHR
- Court in Novoship: liability to account for profits in KR/DA arises based on a wrong;
liability of a trustee to account for profits is based on a duty (the fiduciary duty)
- Me: this could be used to support the argument that KR/DA aren’t true trusts
, - Me: this isn’t true: liability to account for profits in KR is also based on a duty
owed by the KR as a constructive trustee; the KR becomes a constructive trustee
because of the unconscionability of retaining the trust property
- By contrast, the DA never retains the trust property so cannot biome a
constructive trustee
- So liability to account for profits in KR and breach of trust is based on a
duty; but the court is right that liability to account for profits in DA is based
on a wrong. So we see that KR is a true constructive trust, but DA is not
Yes
- One approach: KR/DA must be constructive trustees, otherwise an account of
profits wouldn't be available (as in Novoship, Akita Holdings)!
- Mitchell/Watterson: KR/DA is a true constructive trust, because the nature of a
trustee’s liability to account (both equitable compensation and to say what he did with
the trust property) is a distinctive feature of trusteeship
- This justifies the use of the term in cases concerning Knowing Receipt
- Me: but in AIB the court expressly rejected the idea that the beneficiary’s right to
an account is fundamentally different to common law damages - i.e. it’s not a
unique, proprietary right. So Mitchell/Watterson's argument seems to fail
because the beneficiary's right to an account isn’t some unique, proprietary
feature of trusteeship!
- Longmore J in Novoship: the nature of the liability of a knowing recipient or dishonest
assistance is the responsibility of an express trustee; this responsibility includes liability
to account for profit
- For this reason, liability to account for profits should be available for both KR and
DA
KR is a true trust; DA isn’t
- Me: if DA is a true trust, why is a DA limited to only account for profits caused by his
dishonest assistance (Novoship) and not all the profits caused by the breach of trust (as
is the case for fiduciaries)?
- If a DA is a true trustee, he should be liable for all the profits caused by the
breach of trust; Novoship undermines the idea of DA as a trustee
- This is because a fiduciary is required to account for all profits falling
within the scope of his duty of loyalty. But a DA is only required to
account for profits caused by his dishonest assistance.
- Me: KR is a true constructive trust, DA isn’t
- In KR, the defendant holds trust property knowing that it’s from breach of trust
property, which is ‘unconscionable’; this ‘unconscionable’ behaviour makes it
justified to impose trusteeship duties on him as in a real constructive trust.
His knowledge that the property came from a breach of trust, count as implied
consent to onerous fiduciary duties of trusteeship
- So he has to e.g. abide by custodial duties
