Third Party Liability and Tracing
Accessory/Stranger Liability – (Knowing) Dishonest Assistance and (Knowing)
Unconscionable Receipt
Liability to Account or Constructive Trust?
If a stranger to the trust assists a trustee in the breach of trust, or received property
that has come from a breach of trust, then that stranger, even though they are not in
a prior relationship, may be liable to account either personally or through a
constructive trust to the beneficiaries of the breached trust.
Selangor Utd Rubber Estates Ltd.
Justice Ungoed-Thomas – ‘strangers will be personally liable to account as
constructive trustees not because they are trustees. The court recognises
that technically they’re strangers. Rather, they are liable as if they are
trustees. This constructive trusteeship is nothing more than a formula for
equitable relief. The court of equity says that the defendant shall be liable in
equity as though he were a trustee’.
Polly Peck Int v Nadir.
Lord Justice Scott - ‘The in personam constructive trust claim’.
Virgo – ‘personally liable in equity’.
Dubai Aluminium Company v Salaam.
Lord Justice Millet – ‘should discard the words accountable as constructive
trustee in this context, and should substitute it with accountable in equity’.
Debtor/creditor relationship.
Ownership not to be confused with obligation.
Williams v Central Bank of Nigeria.
The language of saying that strangers are constructive trustees is in no way
the same as trusteeship.
Multiple Claims/Remedies
Proprietary – imposing a constructive trust.
Tracing and following the assets.
Personal liability to account.
Common law claim for money had and received.
When Will Liability Arise?
Barnes v Addy.
Lord Selborne - ‘The responsibility of a trustee may no doubt be extended in
equity to others who are not properly trustees, if they are found … actually
participating in any fraudulent conduct of the trustee to the injury of the
cestui que trust. But … strangers are not to be made constructive trustees
merely because they act as the agents of trustees in transactions within their
legal powers, transactions, perhaps of which a court of equity may
disapprove, unless those agents receive and become chargeable with some
part of the trust property, or unless they assist with knowledge in a dishonest
and fraudulent design on the part of the trustees’.
, There are limitations to where a third party will be liable to the
beneficiary or principal.
Trustee de son tort – if you act like a trustee, and handle trust
property without authority to do so.
o Court would give them responsibilities and hold them
liable as though they were a trustee.
Dishonest assistance in the breach of trust – helping a
trustee/fiduciary to breach the trust with knowledge of it
being dishonest/fraudulent.
o Held liable as though they are a trustee/fiduciary.
The receipt of trust property – stranger receives trust property
knowing that it was trust property.
o Held liable to account.
Trustee De Son Tort
If you act like a trustee, and handle trust property without authority to do so.
Court would give them responsibilities and hold them liable as though they
were a trustee/fiduciary.
If you act like a trustee, you will be treated like a trustee.
Mara v Browne.
Lord Justice Smith - ‘If one, not being a trustee, and not having authority from
a trustee, takes upon himself to intermediate in trust matters or do acts
characteristic of the office of trustee, he may thereby make himself what is
called in law a trustee of his own wrong – i.e. a trustee de son tort, or, as it is
also termed a constructive trustee’.
Blyth v Fladgate.
Trustee gave property to a firm of solicitors to look after.
The final trustee died and the solicitors decided to change the investments
made with the trust fund – this is the job of a trustee.
The change in investments led to a loss.
The solicitors were held personally liable for that loss as trustee de son tort.
Court held that as such were personally liable to make up the financial
shortfall.
They were not the trustees who had authority and power – they had
no right to manage/sell trust property.
But, in acting as they did, and then taking action to sell the bills, the
court said the firm have become constructive trustees of the money.
, Dishonest (Knowing) Assistance
Helping a trustee/fiduciary to breach the trust with knowledge of it being
dishonest/fraudulent.
Held liable.
Baden Delvaux – Justice Peter Gibson identified 4 elements required to give rise to
liability for assisting in the breach of trust:
Existence of a trust.
Fiduciary relationship is just as good.
Dishonest/fraudulent design on part of the trustee.
Assistance by the stranger in that design.
Knowledge of the stranger.
What level of knowledge do they need to have?
Level of Knowledge
Baden Delvaux.
Actual knowledge.
This is fair enough.
Acceptable for liability by courts.
Nelsonian knowledge.
Knowledge the stranger would have obtained had he not shut his eyes
to the obvious.
Nelson deliberately chose not to look with his good eye in 1801 during
battle, as he wouldn’t have liked what he would’ve seen.
Acceptable for liability by courts.
Wilfully/recklessly failing to inquire.
Regarding it as none of their business.
Acceptable for liability by courts.
Knowledge of facts that would indicate the fact to an honest/reasonable
man.
Criticised by courts as not sufficient to make the person liable.
Knowledge of the circumstances that would put an honest/reasonable man
on inquiry.
Suggests that they should have had the knowledge, even if they
didn’t.
Akin to negligence.
Criticised by courts as not sufficient to make the person liable.
Agip (Africa) Ltd v Jackson.
Peter Millet – ‘If a man does not draw the obvious inferences or make the
obvious inquiries, the question is why not? If it is because however foolishly
he didn’t suspect wrongdoing, or having suspected it, he had his suspicions
allayed, however unreasonably that’s one thing. But, if he did suspect
wrongdoing yet failed to make enquiries because he didn’t want to know, or
because he regarded it as being none of his business, that’s quite another
thing. Such conduct is dishonest, and those who are guilty of it cannot
complain if, for the purpose of civil liability, they’re treated as if they had
actual knowledge’.
Accessory/Stranger Liability – (Knowing) Dishonest Assistance and (Knowing)
Unconscionable Receipt
Liability to Account or Constructive Trust?
If a stranger to the trust assists a trustee in the breach of trust, or received property
that has come from a breach of trust, then that stranger, even though they are not in
a prior relationship, may be liable to account either personally or through a
constructive trust to the beneficiaries of the breached trust.
Selangor Utd Rubber Estates Ltd.
Justice Ungoed-Thomas – ‘strangers will be personally liable to account as
constructive trustees not because they are trustees. The court recognises
that technically they’re strangers. Rather, they are liable as if they are
trustees. This constructive trusteeship is nothing more than a formula for
equitable relief. The court of equity says that the defendant shall be liable in
equity as though he were a trustee’.
Polly Peck Int v Nadir.
Lord Justice Scott - ‘The in personam constructive trust claim’.
Virgo – ‘personally liable in equity’.
Dubai Aluminium Company v Salaam.
Lord Justice Millet – ‘should discard the words accountable as constructive
trustee in this context, and should substitute it with accountable in equity’.
Debtor/creditor relationship.
Ownership not to be confused with obligation.
Williams v Central Bank of Nigeria.
The language of saying that strangers are constructive trustees is in no way
the same as trusteeship.
Multiple Claims/Remedies
Proprietary – imposing a constructive trust.
Tracing and following the assets.
Personal liability to account.
Common law claim for money had and received.
When Will Liability Arise?
Barnes v Addy.
Lord Selborne - ‘The responsibility of a trustee may no doubt be extended in
equity to others who are not properly trustees, if they are found … actually
participating in any fraudulent conduct of the trustee to the injury of the
cestui que trust. But … strangers are not to be made constructive trustees
merely because they act as the agents of trustees in transactions within their
legal powers, transactions, perhaps of which a court of equity may
disapprove, unless those agents receive and become chargeable with some
part of the trust property, or unless they assist with knowledge in a dishonest
and fraudulent design on the part of the trustees’.
, There are limitations to where a third party will be liable to the
beneficiary or principal.
Trustee de son tort – if you act like a trustee, and handle trust
property without authority to do so.
o Court would give them responsibilities and hold them
liable as though they were a trustee.
Dishonest assistance in the breach of trust – helping a
trustee/fiduciary to breach the trust with knowledge of it
being dishonest/fraudulent.
o Held liable as though they are a trustee/fiduciary.
The receipt of trust property – stranger receives trust property
knowing that it was trust property.
o Held liable to account.
Trustee De Son Tort
If you act like a trustee, and handle trust property without authority to do so.
Court would give them responsibilities and hold them liable as though they
were a trustee/fiduciary.
If you act like a trustee, you will be treated like a trustee.
Mara v Browne.
Lord Justice Smith - ‘If one, not being a trustee, and not having authority from
a trustee, takes upon himself to intermediate in trust matters or do acts
characteristic of the office of trustee, he may thereby make himself what is
called in law a trustee of his own wrong – i.e. a trustee de son tort, or, as it is
also termed a constructive trustee’.
Blyth v Fladgate.
Trustee gave property to a firm of solicitors to look after.
The final trustee died and the solicitors decided to change the investments
made with the trust fund – this is the job of a trustee.
The change in investments led to a loss.
The solicitors were held personally liable for that loss as trustee de son tort.
Court held that as such were personally liable to make up the financial
shortfall.
They were not the trustees who had authority and power – they had
no right to manage/sell trust property.
But, in acting as they did, and then taking action to sell the bills, the
court said the firm have become constructive trustees of the money.
, Dishonest (Knowing) Assistance
Helping a trustee/fiduciary to breach the trust with knowledge of it being
dishonest/fraudulent.
Held liable.
Baden Delvaux – Justice Peter Gibson identified 4 elements required to give rise to
liability for assisting in the breach of trust:
Existence of a trust.
Fiduciary relationship is just as good.
Dishonest/fraudulent design on part of the trustee.
Assistance by the stranger in that design.
Knowledge of the stranger.
What level of knowledge do they need to have?
Level of Knowledge
Baden Delvaux.
Actual knowledge.
This is fair enough.
Acceptable for liability by courts.
Nelsonian knowledge.
Knowledge the stranger would have obtained had he not shut his eyes
to the obvious.
Nelson deliberately chose not to look with his good eye in 1801 during
battle, as he wouldn’t have liked what he would’ve seen.
Acceptable for liability by courts.
Wilfully/recklessly failing to inquire.
Regarding it as none of their business.
Acceptable for liability by courts.
Knowledge of facts that would indicate the fact to an honest/reasonable
man.
Criticised by courts as not sufficient to make the person liable.
Knowledge of the circumstances that would put an honest/reasonable man
on inquiry.
Suggests that they should have had the knowledge, even if they
didn’t.
Akin to negligence.
Criticised by courts as not sufficient to make the person liable.
Agip (Africa) Ltd v Jackson.
Peter Millet – ‘If a man does not draw the obvious inferences or make the
obvious inquiries, the question is why not? If it is because however foolishly
he didn’t suspect wrongdoing, or having suspected it, he had his suspicions
allayed, however unreasonably that’s one thing. But, if he did suspect
wrongdoing yet failed to make enquiries because he didn’t want to know, or
because he regarded it as being none of his business, that’s quite another
thing. Such conduct is dishonest, and those who are guilty of it cannot
complain if, for the purpose of civil liability, they’re treated as if they had
actual knowledge’.
