Stranger’s Liability

 

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Introduction

Any person who plays a role in breaching a fiduciary duty, including breach of trust, is personally held liable by beneficiaries for any loss resulting from such a breach, in case the defendant has operated dishonesty. Examples include an investment advisor who provides advice to trustees and companies, and solicitors who advise trustees when they act on behalf of the company’s management. The case in question revolves around the issue of stranger liability, personal remedy, and the requirements of accessory liability[1]. A stranger is only to be held accountable if four requirements have been fully satisfied and will be the central focus throughout this essay. The requirements are explored fully by Peter Gibson J in Baden Delvaux v Société Général [2]and have been subject to noteworthy revision in the latter years. These four requirements will be fully discussed in this essay and include: existent of a trust, a breach of trust, assistance in the breach of trust, and dishonesty.[3] The purpose of the essay is to use relevant case law and academic commentary to critically discuss whether HealthyLife’s management have a case against Oliver, and the extent of the remedy, if any.

Key Issues

            The case between HealthyLife’s management and Oliver concerns two central issues. Firstly, Oliver acted alone without the approval of the company, and secondly, he acted with dishonesty. In this case, the management of HealthyLife demands that extra profit be made by Oliver for using the company’s assets. Thus, Oliver is expected by HealthyLife’s management to account for the trust money because they believe that there was a case of dishonest assistance. The beneficiaries of a trust are in pursuit of the third party because they believe that the third party possesses the proceeds of trust property and the value of its proceeds has increased.

Facts

HealthyLife was in a financial problem but Oliver, a solicitor, put forward proposals to enable the company improve financially. However, the management of the company did not support the proposal by Oliver.  Oliver acted on his own initiative and he decided to make some alterations to the company’s financial structure. Subsequently, Oliver  bought shares in the company and his strategy and initiative paid off. HealthyLife’s financial prospects were completely reversed and the shares trebled in value. Although the management of HealthyLife was very happy with Oliver’s efforts and the positive outcome, they were not pleased with the fact that Oliver had made a personal profit. As a result, the management wants Oliver to be accountable for all the profits made from the transaction.

Relevant Law and Cases

Dishonest assistance differs from knowing receipt in several different aspects. For example, dishonest assistance focuses on being an 'accessory' to a breach of fiduciary duty, while knowing receipt is concerned with receiving property that has been transferred by an established breach of trust and fiduciary duty.[4] The two primary situations when third parties can be deemed liable subsequent to a breach of trust are: knowing receipt and dishonest assistance.[5] For liability of dishonest assistance to be applicable, there must be evidence of a dishonest, a trust, and a fraudulent design on the trustee part of such a trust. The stranger must have played an integral part in assisting the design, and it must also be evident that the stranger has been dishonest in his/her actions.[6] Liability for knowing receipt must be supported by proof that the defendant had knowledge of the possibility of the breach of trust and must have received trust property based on that knowledge.

Assistance in the breach of trust and Dishonest

According to the law, a person who assists dishonestly in a breach of a trust becomes liable and accountable to the trust’s beneficiaries for any possible loss that was as a result of the breach of trust. When there is a breach of fiduciary duty, then a breach of trust is made.  According to Hudson[7] a stranger becomes liable in case he has played a role in in assisting commission to breach a trust. For instance, in Royal Brunei Airlines v Tan [1995] 3 All ER 97[8], the defendant authorised the firm to use of trust money for its common business purposes, such as salary and expenses payments, and to keep its bank overdraft down. As such, the defendant knowingly assisted the commission, and hence the breach of trust. In case there are challenges in showing if the stranger has aided in the process of a breach of trust, then it becomes difficult to establish whether the stranger was an accessory liability.[9]

As a matter of principle, the equitable liability of a stranger as part of a breach of trust is considered by law as fault-based. There must be a degree of knowledge in it for the trust to be breached and the third person to become liable.[10] Accordingly, in Baden Delvaux and Lecuit v Societe Generale (1983)[11], five classes of knowledge that must be present for knowing receipt were identified. For instance, there must be actual knowledge whereby the trustee knowingly fails to preserve trust property.[12] There is wilful closing of one’s eye (Nelsonian blindness) whereby the defendant does not wish to know about a relevant fact of the case and will not. Also, the defendant recklessly, wilfully, and failing to make enquiries as an honest and reasonable person would make.

There are four requirements for accessorial liability or dishonest assistance to take place. First, there must be an existence of trust such as in JD Weatherspoon plc Vs Van de Berg & Co Ltd [2009][13] whereby there was fiduciary relationship. Second, there must be a breach of trust. Third, assistance is needed.  Thus, it must be shown that the accessory actually assisted in the enterprise or breach. The assistance need not have been the cause of the loss, but must have been positive as opposed to passive conduct. For instance, it must be evident that the accessory actually assisted in the enterprise or breach. The assistance need not have been the cause of the loss, but must have been positive as opposed to passive conduct. For example, in the Brinks Ltd V Abu-Saleh [1995][14], the husband breached trust and the wife was liable for breach assistance because she had stayed with him and did nothing to procure the breach.

In Twinsectra v Yardley [2002] 2 All ER 377[15] , the case provides an explanation on the concept of dishonesty for a person to be liable for breach of trust. For instance, the House of Lords established that dishonesty was an important condition for imposing liability, thus confirming the decision made in the Royal Brunei Airlines v Tan. Therefore, if a stranger actively assisted in the breach of a trust, the appellant can bring a claim against the stranger personally to be compensated for.

Liability for knowing receipt is also referred to as liability for breach of trust. According to Chambers[16] knowing receipt “arises because the recipient has obtained assets that are held in trust, and after becoming aware of the trust, has failed to perform the basic trust duties to preserve the trust assets and transfer them to either the beneficiaries or the proper trustees” (p. 3). Thus, knowing the receipt focuses on ensuring fiduciary duty and breach of trust. The liability of receipt cannot be described as the unjust enrichment by a third party. Instead, it is explained by the liability for failing to undertake a duty for restoration of the misplaced property.[17] Simon Gardner provided a better description for knowing receipt as “liability for breach of trust”.[18] He stated that “knowing receipt’ is simply the usual liability for failure to preserve trust property, applicable to all trustees, given particular application to those who are trustees because they receive illicitly transferred trust property”[19] Thus, for someone to be liable for knowing receipt, the cognisance requirement is for the trustee to have had prior knowledge and contrary to the fiduciary of duty went ahead and breached the trust accorded. Knowing receipt is not just about unjust treatment by a trustee, but the inability to perform a fiduciary duty.[20]

Application and Discussion

            In Oliver vs. HealthyLife Management, the two elements linked to stranger’s liability are evident. First, there was a breach of contract and second liability dishonesty or knowledge of assistance. For instance, Oliver as the solicitor of HealthyLife was supposed to play a fiduciary duty and act on the best interests of the company. Nonetheless, Oliver acted for personal gains, rather than ensuring that the interests of the stakeholders are put into consideration. On the other hand, liability for dishonest assistance is evident because Oliver intermeddled with the trust and the fiduciary relationship. Although Oliver might have acted with the aim of turning around the financial position of HealthyLife, he acted without the consent of the managing directors who have the duty to preserve the interests of the shareholders. Thus, Oliver in the case is liable for dishonesty because there was a breach of trust.[21]

            With reference to dishonesty assistance, the Royal Brunei Airlines v Tan [1995] 3 All ER 97 case[22] is applicable. For instance, in this case, Lord Nicholls observed that[23] “…acting dishonesty, or with a lack of probity, which is synonymous, means simply not acting as honest person would in the circumstance.”  According to Chambers[24] it is for the court to establish what the defendant personally thought, and what the HealthyLife’s Management could have done if they were in the same situation as the defendant. Most importantly, dishonesty covers fraud, reckless risk taking, or lack of probity, which requires the defendant’s honesty. In regard to the case, Oliver changed the company’s financial structure even after the HealthyLife’s Management noted the changes were not necessary. As a result, his strategy and initiative paid off and he made personal profits from the transaction. From the proceeds of the transaction, Oliver plans to keep all the returns. In the case, Oliver’s investment through effective can be classified as a reckless risk-taking because he was not sure of the possible outcomes. As such, the actions of Oliver were characterized with breach of trust and his actions were dishonest.[25]

The doctrine of knowing assistance is also applicable in the Oliver vs. HealthyLife Management case. For instance, there was actual knowledge because Olive was aware of the issue.  As a claimant can state that there was a breach of trust because the defendant breached his fiduciary duty to act on the interest of the company. The concept of knowing receipt can explained by the El Ajou v Dollar Land Holdings[26] case were following was established: (1) breach of fiduciary duty; (2)an interest in the property in question; (3)beneficial receipt of the defendant, and fault based on liability.[27] For example, Oliver had an interest in the property under questions. For instance, he would like to keep all the proceeds made by his initiative. Additionally, Oliver made a beneficial receipt by withholding all the interests from the business strategy and initiative. The defendant also knows that the assets he received in terms of interests were as a result of breach of trust.  So, would an honest person have acted the same manner in which Oliver did. Based on the judgement made by Lord Nicholls in the Privy Council, Oliver was liable because he acted dishonesty.[28]

On the other hand, Oliver could argue that the company had knowledge about his actions because he informed them, but it failed to investigate, hence the ‘Nelsonian blindness’, where defendant does not want to know about a relevant fact of the case and will not investigate. In such an event, Oliver is not entirely liable because HealthyLife Management did not act in an honest way. However, there is knowing of receipt, which according to Gardner is “liability for breach of trust”[29]  failed to preserve trust prosperity. Moreover, Charles Mitchell and Dr Stephen Watterson contended that liability for knowing receipt is not explained by simple unjust enrichment[30]. Nonetheless, liability for knowing receipt is more about restoration of the misplaced trust property.  In this context, the defendant has the responsibility of returning all the benefits to the company.  The undertaking was unauthorized by Oliver and he should give back all the interests to the company because they were generated using the resources of the company, in which he has a fiduciary duty.[31]

Lord Millett in Twinsectra Ltd v Yardley y [2002] UKHL[32] stated that liability for knowing receipt dies not rely on fault, but it can be applicable when the defendant received benefited from such a transaction.[33] In the Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2000][34] Nourse LJ stipulated that, “The recipient’s state of knowledge must be such as to make it unconscionable for him to retain the benefit of the receipt”[35]  In the case, the knowledge by Oliver can be regarded as unconscionable because he wanted to retain the interests of receipt.  Thus, there is evidence that the defendant had knowledge of the breach of trust, and using that knowledge he received trust property.

Conclusion and Recommendation

According to the law, the beneficiaries of a trust are only required to pursue a third party if the third party is found to be in ownership of trust property or in an event that trust property proceeds has increased, and the trustee has knowingly failed to return it to the rightful owners.[36] It should also be established that the trust acted knowingly and dishonestly. Thus, in this case, Oliver was liable for dishonest and knowingly breached the trust, hence personal enrichment. This is because Oliver as a solicitor of the HealthyLife he is supposed to represent the interests of the company, but he instead wanted to retain the interests of receipt. For example, even after the strategies and initiatives were effective, Oliver made personal profits and he must be accountable for all the profits generated from the undertaking.  There is evidence of full knowledge of receipt by the defendant because he obtained assets that were part of the trust, and he failed to perform the basic trust duties, which are preserving the interests. So, fiduciary duty as a solicitor of the company was not maintained, hence the breach of trust. The possible remedy for this case is for the dependant to return the interests from the investment to the claimant. This is because as a solicitor, Oliver is responsible for ensuring that the needs of the company are promoted.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

References

Birks,P “Receipt” in P Birks and A Pretto (eds), Breach of Trust (Hart Oxford 2002) 213.

Birks, P “ The Frontiers of Liability (OUP Oxford 1994) Part I.

Bryan, M.  “Recipient Liability under the Torrens System: Some Category Errors” in C Rickett and R Grantham (eds), Structure and Justification in Private Law: Essays for Peter Birks (Hart Oxford 2008) 340, 342-44.

Chambers, R. “Trust and Theft” in E Bant and M Harding (eds), Exploring Private Law (CUP Cambridge 2010) 223.

Chambers, R. “The End of Knowing Receipt” < http://law.nus.edu.sg/pdfs/clb/events/End-Knowing-Receipt.pdf>

Dietrich, J "The liability of accessories under statute, in equity, and in criminal law: Some common problems and (perhaps) common solutions" [2010] Melbourne University Law Review, 34 (1), 106-138

Devonshire, P.” Account of Profits for Dishonest Assistance”. [2015] The Cambridge Law Journal, 74, 222-233.

Flannigan, R ‘The Strict Character of Fiduciary Liability’ [2006] New Zealand Law Review 209.

 Fox, D “Constructive Notice and Knowing Receipt: An Economic Analysis” (1998) 57 Cambridge LJ 391.

Gardner, S “Moment of Truth for Knowing Receipt?” (2009) 125 LQR 20, 22.

Harpum, C “The Stranger as Constructive Trustee” (1986) 102 LQR 114-62, 267-91.

 Harpum, C “The Basis of Equitable Liability” (9 at 24-25).

 Hudson, A  “Liability for dishonest assistance in a breach of fiduciary duty”, < http://www.alastairhudson.com/trustslaw/DAMar07.pdf>;

Kiri, N. “Recipient and accessory liability - where do we stand now?” (2015) Journal of International Banking Law and Regulation

Lee, J. “Case Comment Constructing and limiting liability in equity.”  (2015) Law Quarterly Review

 Mason, A ‘The Break with the Privy Council and the Internationalisation of the Common Law’ in P Cane (ed), Centenary Essays for the High Court of Australia (Sydney, Lexisnexis Butterworths, 2004) 69.

Millett, P “Restitution and Constructive Trusts” (1998) 114 LQR 399, 403.

Millett, P “Tracing the Proceeds of Fraud” (1991) 107 LQR 71, 81-82.

 Mitchell, C and Watterson, S “Remedies for Knowing Receipt” in C Mitchell (ed), Constructive and Resulting Trusts (Hart Oxford 2010) 115.

 Penner, J “Value, Property, and Unjust Enrichment: Trusts of Traceable Proceeds” in R Chambers, C Mitchell, and J Penner (eds), The Philosophical Foundations of the Law of Unjust Enrichment (OUP Oxford 2009) 306.

Rickett, C and Grantham, R (eds), Structure and Justification in Private Law: Essays for Peter Birks (Hart Oxford 2008) 340, 342-44.

Stapleton, S ‘Cause in Fact and the Scope of Liability for Consequences’ (2003) 119 Law Quarterly Review 388.

 

Cases

Baden Delvaux and Lecuit v Societe Generale (1983).

Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2000]

Brinks Ltd V Abu-Saleh [1995]

El Ajou v Dollar Land Holdings

JD Weatherspoon plc Vs Van de Berg & Co Ltd [2009]

Royal Brunei Airlines v Tan [1995] 3 All ER 97.

Twinsectra v Yardley [2002] 2 All ER 377