Claimants may pursue any third parties involved in the misapplication of trust
property if tracing and personal claims against trustee failed. Lord Selbourne in Barnes v
Addy set out two types of third party claims: knowing receipt (KR) and dishonest assistance
(DA). The courts faced difficulty to find a stranger liable, as it is never easy to balance
between beneficiaries’ protection and certainty in commercial transactions. This essay will
consider the guidelines for establishing a third party’s liability for DA or KR.
Knowing receipt (KR) (often called as ‘unconscionable’ receipt today)
The nature of KR has remained controversial as the level of KR required is uncertain.
In Re Baden, Peter Gibson J proposed five categories which stretched to ‘knowledge of
circumstances which would put an honest and reasonable man on enquiry’. The test has
moved away from this lately.
Megarry V-C in Re Montagu echoed, liability should not be imposed unless
recipient’s (R) conscience was affected. The test was whether the R was guilty of a ‘want of
probity’, requiring the D’s conscience to be ‘sufficiently affected’ (subjective tests of Baden).
The objective tests of (iv) and (v) in Baden is not sufficient. This narrow approach often leads
to commercial uncertainty.
The current law is probably best summed up by BCCI v Akindele, where Nourse LJ
(COA) affirmed Montagu, emphasized on knowledge, and held the Baden’s scale were more
appropriate for DA cases. Nourse LJ held, there should be a single test for KR: whether R’s
state of knowledge says it would be unconscionable for him to retain the receipt’s benefit.
Thus, unconscionability is the new touchstone for KR as he opined this would enable
greater common sense decisions. Per Akindele, ‘unconscionability’ requires more than just
having constructive notice; but requires less than dishonesty – it was a state in between the
two, which can be paraphrased as being at least quite suspicious.
As a result, it is not easy to predict when liability will arise. Although complete
certainty is not possible, and equity is not given to rigid rules, Professor Birks argued
‘unconscionability’ has no clear meaning and this level of uncertainty is undesirable.
Dishonest assistance (DA)
Traditionally, the seminal case for DA was Royal Brunei v Tan, which moved away
from the Baden’s test. Here, as per Lord Nicholls, ‘knowledge’ was unhelpful to prove DA as
it led the courts to get into ‘tortuous convolutions’ about defendant’s (D) state of
knowledge. Lord Nicholls in the Privy Council (PC) concluded, D should be liable if, given
what he knew, his assistance was dishonest based on the standards of right – thinking
members of society (objective test).
Subsequently, Lord Hutton in Twinsectra v Yardley added the requirement of self-
conscious dishonesty (subjective test) to Lord Nicholl’s objective test: the D must be aware
that honest people would call his conduct dishonest. Arguably, this subjective approach
would bring the law back into line with the traditional authorities, Twinsectra might
conceivably be seen as a return to the correct approach.
property if tracing and personal claims against trustee failed. Lord Selbourne in Barnes v
Addy set out two types of third party claims: knowing receipt (KR) and dishonest assistance
(DA). The courts faced difficulty to find a stranger liable, as it is never easy to balance
between beneficiaries’ protection and certainty in commercial transactions. This essay will
consider the guidelines for establishing a third party’s liability for DA or KR.
Knowing receipt (KR) (often called as ‘unconscionable’ receipt today)
The nature of KR has remained controversial as the level of KR required is uncertain.
In Re Baden, Peter Gibson J proposed five categories which stretched to ‘knowledge of
circumstances which would put an honest and reasonable man on enquiry’. The test has
moved away from this lately.
Megarry V-C in Re Montagu echoed, liability should not be imposed unless
recipient’s (R) conscience was affected. The test was whether the R was guilty of a ‘want of
probity’, requiring the D’s conscience to be ‘sufficiently affected’ (subjective tests of Baden).
The objective tests of (iv) and (v) in Baden is not sufficient. This narrow approach often leads
to commercial uncertainty.
The current law is probably best summed up by BCCI v Akindele, where Nourse LJ
(COA) affirmed Montagu, emphasized on knowledge, and held the Baden’s scale were more
appropriate for DA cases. Nourse LJ held, there should be a single test for KR: whether R’s
state of knowledge says it would be unconscionable for him to retain the receipt’s benefit.
Thus, unconscionability is the new touchstone for KR as he opined this would enable
greater common sense decisions. Per Akindele, ‘unconscionability’ requires more than just
having constructive notice; but requires less than dishonesty – it was a state in between the
two, which can be paraphrased as being at least quite suspicious.
As a result, it is not easy to predict when liability will arise. Although complete
certainty is not possible, and equity is not given to rigid rules, Professor Birks argued
‘unconscionability’ has no clear meaning and this level of uncertainty is undesirable.
Dishonest assistance (DA)
Traditionally, the seminal case for DA was Royal Brunei v Tan, which moved away
from the Baden’s test. Here, as per Lord Nicholls, ‘knowledge’ was unhelpful to prove DA as
it led the courts to get into ‘tortuous convolutions’ about defendant’s (D) state of
knowledge. Lord Nicholls in the Privy Council (PC) concluded, D should be liable if, given
what he knew, his assistance was dishonest based on the standards of right – thinking
members of society (objective test).
Subsequently, Lord Hutton in Twinsectra v Yardley added the requirement of self-
conscious dishonesty (subjective test) to Lord Nicholl’s objective test: the D must be aware
that honest people would call his conduct dishonest. Arguably, this subjective approach
would bring the law back into line with the traditional authorities, Twinsectra might
conceivably be seen as a return to the correct approach.
