2017-A

Question 6
In Barnes v Addy(1874) Lord Selborne said: ‘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 … they assist with knowledge in a
dishonest and fraudulent design on the part of the trustees.’
Discuss.
General remarks
This quotation invited candidates to write an essay on dishonest assistance, which
is discussed in Chapter 16 of the module guide and in Chapter 11 of Penner.
Law cases, reports and other references the examiners would expect you to
use
Royal Brunei Airlines v Tan [1995] UKPC 4; Twinsectra Ltd v Yardley [2002] UKHL
12; Barlow ClowesInt Ltd v EurotrustInt Ltd [2005] UKPC 37.
Common errors
A common error was the failure to address the specific question asked.
A good answer to this question would…
discuss what it means when assistants are ‘made constructive trustees’ and how
the Privy Council in Royal Brunei Airlines v Tan (1995) changed the old requirement
that the breach of trust had to be fraudulent. It might compare dishonest assistance
with knowing receipt but should not write a general essay on accessory liability.
Poor answers to this question…
merely recited a general essay on dishonest assistance and knowing receipt.

Answer

An trustee is under obligation to fulfil some duties that are called

trustee duties and fiduciary duty if a trustee is acting contrary to duty
then trustee can be held for the breach of duty.
However under equity a third party can also be held for breach of
trustee under a constructive trust. A constructive where a person has
unconscionably asserted a beneficial interest in property, that person
may be held accountable in equity as a constructive trustee.

Third parties will sometimes be personally liable (i.e. liable to pay

money from their own pockets) to make up the loss to the trust fund
caused by a breach of trust. They may be required to do so in a number
of cases, one of them is where they have dishonestly assisted the
trustees to breach the trust. In this essay we will discuss DISHONEST
ASSISTANCE category of third party liability, and our focus would be
how much knowledge is required to establish liability of this honest as
there has been constant uncertainty about requirement of knowledge.

Any person who assists in a breach of a fiduciary duty, such as a breach

of trust, will be personally liable to account to the beneficiaries of that
fiduciary duty for any loss caused by that breach of duty if the
defendant has acted dishonesty.
There should two elements to the defendant stranger’s liability, first,
that the defendant must have helped in the breach of trust second
liability is that the help in must be dishonest. Liability for dishonest
assistance is a secondary form of liability in that the dishonest assistant
will be sued either once the trustees’ liability for breach of trust has
been created or only if the trustees cannot be held accountable for
breach of trust for some cause. The liability is secondary then to the
primary liability of the trustees. Furthermore, the liability of the
dishonest assistant is based on fault which means that the defendant is
held liable for the act of assisting in the breach of trust as well as for
her fault in doing so dishonestly. The loss for which the stranger must
be liable and must be accountable to the beneficiaries is the loss which
arises from defendant’s assistance in the breach of trust. Without a
breach of trust there would be no loss for which to account
The test to prove dishonesty “dishonesty” is objective test which means
what would an honest person have done in these situation from an
objective standpoint. Moreover, question would be asked did the
defendant do what an honest person would have done? Liability is
therefore gauged on failing to act honestly rather than strictly on acting
honestly, so one need not have lied nor need one have been actively
deceitful.
A test for ‘dishonesty’ established in Royal Brunei Airlines case. This
was a plainly an objective test. In the Following decision of the House of
Lords in Twinsectra v Yardley. the speech of Lord Hutton established
that this test should not be solely an objective but instead it should be a
mixed of subjective and objective elements, with the unintended effect
that a person who considered his subjective morality to be an excuse
for objectively dishonest behaviour would not be liable for assistance in
a breach of trust. Lord Nicholls reasserted his objective approach in the
House of Lords in Dubai Aluminium v Salaam, a case which seems to
have been avoided in this area may be because it does not appear in
the electronic legal databases primarily under cases on ‘dishonest
assistance’ but rather on the liability of partners. This dilemma of
objective-subjective test was brought to the Barlow Clowes v Eurotrust
where Privy Council unopposed manner and joint opinion was delivered
by Lord Hoffmann. HE went on to elaborate that Lord Hutton had been
misunderstood. Latter on, the Court of Appeal in Abou Rahmah v
Abacha have purportedly followed Royal Brunei Airlines but
nonetheless case re-introduced subjective elements to the test for
dishonesty. These are matters that we discuss now in detail
Lord Nicholls in Royal Brunei Airlines v Tan stated that a breach of trust
by a trustee need not have been a dishonest act on the part of the
trustee. Rather, it is enought that an defendant has acted
dishonestly.The trustee’s own state of mind will not be taken any
consideration as Lord Niccolas held that:
“acting dishonestly, or with a lack of probity, which is synonymous,
means simply not acting as an honest person would in the
circumstance. This is an objective standard.’
From the remainder of this judgment it is clear that dishonesty in this
context covers situations in which there has been either fraud, or a lack
of probity or some reckless risk-taking which calls the defendant’s
honesty into question.
In Twinsectra v Yardley, Lord Hutton established that it was not enough
to declare a person liable for dishonest assistance to demonstrate that
an objectively honest Person instead his it was decided that it would be
imperative for the stranger to have understood subjectively that other
people would have declared his behaviour to have been dishonest.
According to Hoffmann the principles laid down in Tan “require more
than knowledge of the facts which make the conduct wrongful”.
This added second element to the test of dishonest of the test. The
implication for improvement and amendment in old criteria was that a
defendant could avoid liability by proving that he did not understand
that an objectively honest person would have understood her as
dishonest act.
Privy Council had an opportunity to revisit the issue of dishonest in
Barlow Clowes International v Eurotrust International. Counsel for Mr
Henwood, relying on Lord Hutton’s speech in Twinsectra, argued that
this state of mind was not dishonest unless Mr Henwood was aware
that it would by ordinary standards be regarded as dishonest. The Privy
Council accepted that Lord Hutton’s speech in Twinsectra might have
contained an element of ‘ambiguity’ and could be read as inconsistent
with the test adopted by Lord Nicholls in Tan.. However, the Privy
Council was keen to deny that Lord Hutton had intended to depart from
the approach in Tan. Lord Hoffmann clarified that the test put forward
by Lord Hutton did not create a requirement to the effect that the
defendant must have reflected on what the normally accepted
standards of honest behaviour were. All that was required was that the
defendant was conscious of the elements of the transaction that made
participation transgress these standards. However, the Privy Council’s
assertions that the majority approach in Twinsectra (the ‘combined
test’) does not conflict with Lord Nicholls’ approach (the ‘purely
objective’ standard) in Tan are unconvincing. As Lord Millett pointed
out in his dissenting judgment in Twinsectra, they are plainly different
tests. A number of academics have described Barlow Clowes as a
‘reinterpretation’ of Twinsectra. The Privy Council could not, in any
event, overrule Twinsectra, which was a House of Lords decision.
Nonetheless, Barlow Clowers was confirmed in subsequent cases. E.g.
in Abou-Rahmah v Abacha accepted obiter that the Barlow Clowes
“clarification” prevailed.

To sum up this answer was simply a debate regarding

misunderstanding which has followed Royal Brunei Airlines v Tan
regarding extent of element of knowledge required to establish
liability .What is a misunderstanding is what was required by Lord
Nicholls in Royal Brunei Airlines v Tan was a purely objective test. It is
not a test of what the defendant knew; rather it is only a question of
what an honest person would have done in the circumstances and
whether or not the defendant lived up to that standard of honesty.
Failure to be honest in this sense renders a person dishonest. It was
Lord Hutton’s now discredited suggestion in Twinsectra v Yardley – that
the defendant must also be proved to have appreciated that other
people would have considered her behaviour to have been dishonest –
which brought in this element of subjective dishonesty to the
previously entirely objective test of dishonesty. However, as Rix LJ
recognised, the unanimous decision of the Privy Council in Barlow
Clowes v Eurotrust sought to return the test to its purely objective state
in Royal Brunei Airlines v Tan. Therefore, the reference to knowledge
which Rix LJ makes should not be made if, as Rix LJ claimed to be doing,
the law is to be returned to its purely objective state in Royal Brunei
Airlines v Tan. What Rix LJ has achieved instead, ironically enough, is an
affirmation of the hybrid subjective-objective test for dishonesty in
Twinsectra v Yardley.

KNOWING RECIPIENT ONLY ESSAY

2018-A
Question 6
In El Ajouv Dollar Land Holdings plc(1993), Hoffmann LJ said: ‘This is a
claim to enforce a constructive trust on the basis of knowing receipt. For this
purpose the plaintiff must show, first, a disposal of his assets in breach of
fiduciary duty; secondly, the beneficial receipt by the defendant of assets
which are traceable as representing the assets of the plaintiff; and thirdly,
knowledge on the part of the defendant that the assets he received are
traceable to a breach of fiduciary duty.’
Discuss.
General remarks
This is an essay question about knowing receipt, which is discussed in Chapter 17 of
the module guide and Chapter 11 of Penner.
Law cases, reports and other references the examiners would expect you to use
El Ajouv Dollar Holdings plc[1994] EWCA Civ 4, BCCI v Akindele[2001] Ch 457,
WestdeutscheLandesbankGirozentralev Islington LBC [1996] AC 669, Re
Montagu’s Settlements [1987] Ch 264, C. Mitchell and S. Watterson ‘Remedies for
knowing receipt’ in C. Mitchell (ed.) Constructive and resulting trusts (Hart, 2010) 115.
Common errors
These included not referring to the quotation or to the case from which it was taken
and offering a general disquisition on accessory liability.
A good answer to this question would…
discuss the nature of liability for knowing receipt and the degree of knowledge or
notice required. It might consider whether knowing receipt should extend beyond
breach of fiduciary duty and whether beneficial receipt should be required. It might
mention dishonest assistance but should not focus on that.
Poor answers to this question…
offered a general description of accessory liability.

Page 204 Equity and trusts book

https://www.studocu.com/en-gb/document/durham-university/trusts-law/dishonest-
assistance-and-knowing-receipt/26506356

https://www.studocu.com/en-gb/document/university-of-london/equity-and-trusts/
knowing-receipts-dishonest-assistance/4561968

https://www.studocu.com/en-gb/document/manchester-metropolitan-university/equity-
and-trusts/activity-7-the-liability-of-strangers-knowing-receipt-or-unconscionable-
receipt-or-recipient-liability/16671674

https://www.studocu.com/en-gb/document/brunel-university-london/trusts/s8-trusts-
equity-knowing-receipt-dishonest-assistance/7743173
https://www.studocu.com/en-gb/document/university-of-london/equity-and-trusts/
breach-of-trust-grade-7/15477745

https://www.studocu.com/en-gb/document/nottingham-trent-university/law-of-trusts/
lecture-18-knowing-receipt/1088601

This essay will discuss the law governing the liability of a trustee in an
accusation of Knowing receipt.

An trustee is under obligation to fulfil some duties that are called

trustee duties and fiduciary duty if a trustee is acting contrary to duty
then trustee can be held for the breach of duty.
However under equity a third party can also be held for breach of
trustee. A constructive where a person has unconscionably asserted a
beneficial interest in property, that person may be held accountable in
equity as a constructive trustee.

Sometimes third parties would be personally liable to make up the loss

to the trust fund caused by a breach of trust, and this liability may occur
in either of these two situations; 1)party have dishonestly assisted the
trustees to breach the trust (Dishonest Assistance) 2) where party have
received trust rights dissipated in breach of trust(KNOWING
RECIEPIENT). In this essay we will discuss latter category of third party
liability.
However before we move to discuss Knowing receipt it is necessary to
distinguish between dishonest assistance n Knowing receipt. Dishonest
assistance is basically when a person assists in a breach of a fidicuary
duty. Whereas Knowing receipt refers to liability of a person who in the
knowledge receives property and commits a breach of trust.

Now we will discuss knowing receipt in detail

Definition

When someone gets property from a trust knowing that it was given to
her in violation of the terms of the agreement, that person will be
personally accountable to the trust for the value of the property that
was given away. Unlike dishonest assistance, liability for knowing
receipt is not strict but fault-based: The recipient must have known
about the trust. Now third party must be held responsible for the
property they received, regardless of whether they retained it. This is
called ‘knowing receipt’ or also sometimes called as ‘unconscionable
receipt.

Knowing receipt liability is not just confined to trusts but its scope and
claims go beyond that and we see such claims in cases that involve
misapplication of property by a fiduciary. For instance, the misuse of of
company’s share by its boss.

Hoffmann in famous case established set criteria for knowing

recipient liability in the El Ajou v. Dollar Land Holding, where he
stated that to establish knowing recipient, "plaintiff must first prove a
disposal of his assets in breach of fiduciary duty; second, the
defendant's beneficial receipt; and third, the defendant's knowledge."

Done

According to above we can anticipate three limbs that are supposed to

be proven if a plantiff wants a stranger to be liable to account for
receipt of property from a fiduciary. These conditions are; 1) Disposal
of trust assests in breach of trust or fidicuary duty which can take place
where a trustee has transferred the trust assests to a third party in
breach of trust there is no difficulty establishing this condition(Agip
case)., 2)Beneficial receipt which is to be contrasted with mere
ministerel receipt. Bank’s use of the money to reduce an overdraft will
constitute beneficial receipt (Stephens Travel Service International Ltd
v Quantas Airways (1988)), To have the received the assests
beneficially, the stranger must have received the property for his own
use and benefit No action will lie against a stranger who recieves the
trust property as an agent for another I.e not for strangers own use and
benefit and 3) Knowledge (BCCI V AKINDELE).

Recipient

Knowledge
Defining knowledge has been difficult for legal experts as debate is
continue to what degree of knowledge is required to impose liability
liability for knowing recipient. The traditional approach has been to
hold accountable a stranger who had actual or constructive knowledge
of the prior breach of fiduciary duty (Linter Group Ltd v Goldberg).

PRE AKINDELE

The position pre Akindele is is that constructive knowledge can, on this

approach, include knowledge of circumstances which would place an
honest and reasonable person on inquiry (Eagle Trust plc v SBC
Securities Ltd. There are five categories established in (Baden case ) of
knowledge 1) Actual knowledge 2) wilfully shutting one’s eyes to the
obvious breach, 3) reckless failure to make inquiries, 4) knowledge of
circumtances which would indicate facts to an honest reasonable
person 5) Knowledge of circumtances which would make a resonable
man on inquiry. Peter Gibson J made it clear that knowledge for these
purposes was the same as for the purposes of knowing receipt.

The difficulty was determining which of the five categories of

knowledge would suffice for the
imposition of knowing receipt liability. The distinction is often said to be
that a person in categories
(2) and (3) is taken to have actual knowledge, whereas a person in
categories (4) and (5) is taken to
have only constructive knowledge. The principal difficulty is in deciding
whether categories (4) and (5), which involve mere negligence and
inadvertence rather than conscious impropriety, are
sufficient to give rise to liability for knowing receipt.
Applying the categories rigidly is really difficult because the boundaries
between them are not clear or precise (Polly Peck International). It is
also very to diffcult to determine whether someone’s failure to make
inquiries was wilful or merely stupid.

In Citadel General Assurance Co v Lloyds Bank Canada (1998) in the

Supreme Court of Canada, the court noted that, in ‘knowing receipt’
cases, relief flows from the breach of a legally recognised duty of
inquiry. Relief is granted where a stranger to the trust, having received
trust property for his or her own benefit and having knowledge of facts
which would put a reasonable person on inquiry, fails to make such
inquiry, thereby rendering the recipient’s enrichment unjust.

In Agip case the court has disregarded the subjective knowledge test
but rather it was decided that liability on third party will be decided on
on the basis of dishonesty which is an objective test. However SC soon
clarified this and said Re Montague test is right approach hence
subjective knowledge would be applied in (Westduetsche case). This
clarity was short lived because COA introduced concept of
unconsciousability in (BCCI V Akindele) Lord Nourse LJ stated that
dishonesty will suffice.. he continued that defendant state of
knowledge is such as to make it unconsiciouable for him to retain
benefit of the receipt. That means personal liability can only be
imposed upon third parties if there is consicousability on their part. The
BCCI test rejected strict liability I.e you have received my property and
must give it back was no longer applicable along with rejection of 5
categories of knowledge test established by (Baden).

The unconsicousability test has created more certainty rather than

predicability required by any law. Concept of unconsioucability is broad
with no clear legal definition. Whereas, earlier terms which were used
i.e knowledge and notice were clear in everyday sense usage.
Unconciousability test has also been rejected in rooney airlines case
and falling back to BCCI test.

An unjust entrichment approach to recipient liability has recently been

proposed, although no english case has actually adopted it. On this
approach, a recipient of rights dissipated in breach of trust would be
strictly liable to repay its value to the trust, for otherwise they would be
unjustly entriched at the expense of the beneficiaries. However, this
liability would be subject to the defences of bona fide purchase and
change of position. If innocent recipients rely upon the legitimacy of
their receipt and thereby change their position, making it unfair for
them to pay all or some of it back, their liability will be reduced
accordingly.

Given the emphasis in knowing receipt cases on the overall knowledge

of the recipient and the unconscionable failure to act upon receiving
this knowledge, it is justifiable to impose liability upon a recipient who
only has constructive knowledge of a breach of trust. In Kooroontang
Nominees Pty Ltd v ANZ (1998), Hansen J also concluded that
constructive knowledge would be sufficient to attract liability to a
recipient.

Whereas, restitution writers have strongly urged that liability of

recipients should, in principle, be strict, although recipients should be
entitled to set up the defence of a good-faith change of position. This
approach is logical, but has so far attracted little judicial support. In the
recent Privy Council decision of Royal Brunei Airlines v Tan (1995),
however, Lord Nicholls noted in obiter dicta that ‘recipient liability is
restitution-based’.
The arguments for strict liability are convincing, especially in view of
the
fact that the equivalent grounds of common law liability in conversion
(where goods are claimed), and for money had and received (where
money is claimed), are also strict. As yet, however, there is little
support in the authorities for such an approach. Hence it can be said
there is continuing uncertainty about the boundaries of liability for
knowing receipt, on the basis of this uncertainty we would like to
support Lord Summon’s statement that Knowing reciepients are not
true trustee
A third party who has received property in consequence of a fiduciary’s
breach of obligation may be held personally accountable as
constructive trustee. The existence of this head of constructive
trusteeship is not in doubt, but the principles governing the imposition
of liability are still undeveloped. The liability to account is imposed not
only on a stranger who, at the time of the action, holds property
received as a result of a breach of fiduciary duty; subject to certain
conditions set out below, a party who previously held the
property can also be made to account a constructive trustee.

This head of constructive trusteeship is more likely to be imposed on a

party who no longer holds the property. Tracing techniques are
generally preferred to recover property from a party who holds it,
unless that party is a bona fide purchaser for value without notice, or
unless the property has depreciated in value in the ultimate recipient’s
hands, and the beneficiary wants to recover the property and hold the
recipient accountable for the fall in the asset’s value.

A stranger will be held liable to account for receipt of property from a

fiduciary if following conditions are satisfied 1) Disposal of trust assests
in breach of trust or fidicuary duty which can take place where a trustee
has transferred the trust assests to a third party in breach of trust there
is no difficulty establishing this condition(Agip case)., 2)Beneficial
receipt which is to be contrasted with mere ministerel receipt. Bank’s
use of the money to reduce an overdraft will constitute beneficial
receipt (Stephens Travel Service International Ltd v Quantas Airways
(1988)), To have the received the assests beneficially, the stranger must
have received the property for his own use and benefit No action will
lie against a stranger who recieves the trust property as an agent for
another I.e not for strangers own use and benefit.

The question has arisen in the context of banks. If, for example a
trustee deposits money in a bank account in breach of trust, can the
bank be considered to have the received the property beneficially.
As to traceable assests, this means that it is not neccssary that the
assests that the defendant receives are the original trust property as
long as they represent such property ( as it proceeds or substitutions)
and the beneficary can trace into them. Often the purpose when
stealing or misappropriating is to make changes so it can not be
recovered but tracing allows beneficiaries to identify either the original
or substitutes.3) the recipient must have received the property with the
requisite degree of knowledge.

With the liability for knowing recipient, the difficulty has been defining
knowledge. The authorities are in a state of considerable disarray as to
what that degree of knowledge is. The traditional approach has been to
hold accountable a stranger who had actual or constructive knowledge
of the prior breach of fiduciary duty (Linter Group Ltd v Goldberg
(1992)). Constructive knowledge can, on this approach, include
knowledge of circumstances which would place an honest and
reasonable person on inquiry (Eagle Trust plc v SBC Securities Ltd
(1992)). More recent English authority favours holding a recipient liable
on the basis of actual knowledge (Re Montague (1987)). There are five
categories established in (Baden case ) of knowledge 1) Actual
knowledge 2) wilfully shutting one’s eyes to the obvious breach, 3)
reckless failure to make inquiries, 4) knowledge of circumtances which
would indicate facts to an honest reasonable person 5) Knowledge of
circumtances which would make a resonable man on inquiry.

Applying the categories rigidly is really difficult because the boundaries

between them are not clear or precise (Polly Peck International). It is
also very to diffcult to determine whether someone’s failure to make
inquiries was wilful or merely stupid.

In Citadel General Assurance Co v Lloyds Bank Canada (1998) in the

Supreme Court of Canada, the court noted that, in ‘knowing receipt’
cases, relief flows from the breach of a legally recognised duty of
inquiry. Relief is granted where a stranger to the trust, having received
trust property for his or her own benefit and having knowledge of facts
which would put a reasonable person on inquiry, fails to make such
inquiry, thereby rendering the recipient’s enrichment unjust.

In Agip case the court has disregarded the subjective knowledge test
but rather it was decided that liability on third party will be decided on
on the basis of dishonesty which is an objective test. However SC soon
clarified this and said Re Montague test is right approach hence
subjective knowledge would be applied in (Westduetsche case). This
clarity was short lived because COA introduced concept of
unconsciousability in (BCCI V Akindele) Lord Nourse LJ stated that
dishonesty will suffice.. he continued that defendant state of
knowledge is such as to make it unconsiciouable for him to retain
benefit of the receipt. That means personal liability can only be
imposed upon third parties if there is consicousability on their part. The
BCCI test rejected strict liability I.e you have received my property and
must give it back was no longer applicable along with rejection of 5
categories of knowledge test established by (Baden).
The unconsicousability test has created more certainty rather than
predicability required by any law. Concept of unconsioucability is broad
with no clear legal definition. Whereas, earlier terms which were used
i.e knowledge and notice were clear in everyday sense usage.
Unconciousability test has also been rejected in rooney airlines case
and falling back to BCCI test.

An unjust entrichment approach to recipient liability has recently been

proposed, although no english case has actually adopted it. On this
approach, a recipient of rights dissipated in breach of trust would be
strictly liable to repay its value to the trust, for otherwise they would be
unjustly entriched at the expense of the beneficiaries. However, this
liability would be subject to the defences of bona fide purchase and
change of position. If innocent recipients rely upon the legitimacy of
their receipt and thereby change their position, making it unfair for
them to pay all or some of it back, their liability will be reduced
accordingly.

Given the emphasis in knowing receipt cases on the overall knowledge

of the recipient and the unconscionable failure to act upon receiving
this knowledge, it is justifiable to impose liability upon a recipient who
only has constructive knowledge of a breach of trust. In Kooroontang
Nominees Pty Ltd v ANZ (1998), Hansen J also concluded that
constructive knowledge would be sufficient to attract liability to a
recipient.

Whereas, restitution writers have strongly urged that liability of

recipients should, in principle, be strict, although recipients should be
entitled to set up the defence of a good-faith change of position. This
approach is logical, but has so far attracted little judicial support. In the
recent Privy Council decision of Royal Brunei Airlines v Tan (1995),
however, Lord Nicholls noted in obiter dicta that ‘recipient liability is
restitution-based’.

The arguments for strict liability are convincing, especially in view of

the
fact that the equivalent grounds of common law liability in conversion
(where goods are claimed), and for money had and received (where
money is claimed), are also strict. As yet, however, there is little
support in the authorities for such an approach. Hence it can be said
there is continuing uncertainty about the boundaries of liability for
knowing receipt, on the basis of this uncertainty we would like to
support Lord Summon’s statement that Knowing reciepients are not
true trustee
2016-A
Question 1
In Williamsv Central Bank of Nigeria (2014), Lord Sumption said that
dishonest assistants and knowing recipients are not ‘true trustees’.
To what extent, if at all, do you agree with this statement?
General remarks

This essay will discuss the law governing the liability of a trustee in an
accusation of dishonest assistance and Knowing receipt.

An trustee is under obligation to fulfil some duties that are called

trustee duties and fiduciary duty if a trustee is acting contrary to duty
then trustee can be held for the breach of duty.
However under equity a third party can also be held for breach of
trustee. A constructive where a person has unconscionably asserted a
beneficial interest in property, that person may be held accountable in
equity as a constructive trustee.

Third parties will sometimes be personally liable (i.e. liable to pay

money from their own pockets) to make up the loss to the trust fund
caused by a breach of trust. They may be required to do so in a number
of cases, two of which are; 1)where they have dishonestly assisted the
trustees to breach the trust (Dishonest Assistance) 2) where they have
received trust rights dissipated in breach of trust(KNOWING
RECIEPIENT).

1) Knowing recipient
A third party who has received property in consequence of a fiduciary’s
breach of obligation may be held personally accountable as
constructive trustee. The existence of this head of constructive
trusteeship is not in doubt, but the principles governing the imposition
of liability are still undeveloped. The liability to account is imposed not
only on a stranger who, at the time of the action, holds property
received as a result of a breach of fiduciary duty; subject to certain
conditions set out below, a party who previously held the
property can also be made to account a constructive trustee. This head
of constructive trusteeship is more likely to be imposed on a party who
no longer holds the property. Tracing techniques are generally
preferred to recover property from a party who holds it, unless that
party is a bona fide purchaser for value without notice, or unless the
property has depreciated in value in the ultimate recipient’s hands, and
the beneficiary wants to recover the property and hold the recipient
accountable for the fall in the asset’s value. A stranger will be held
liable to account for receipt of property from a fiduciary if two
conditions are satisfied 1) the stranger holds, or has held, the property
beneficially which means that receipent has received property. (Agip
(Africa) Ltd v Jackson (1992)) – the passing of money through a bank
account will not constitute receipt, but the bank’s use of the money to
reduce an overdraft will constitute beneficial receipt (Stephens Travel
Service International Ltd v Quantas Airways (1988)), 2) the recipient
must have received the property with the requisite degree of
knowledge.

With the liability for knowing recipient, the difficulty has been defining
knowledge. The authorities are in a state of considerable disarray as to
what that degree of knowledge is. The traditional approach has been to
hold accountable a stranger who had actual or constructive knowledge
of the prior breach of fiduciary duty (Linter Group Ltd v Goldberg
(1992)). Constructive knowledge can, on this approach, include
knowledge of circumstances which would place an honest and
reasonable person on inquiry (Eagle Trust plc v SBC Securities Ltd
(1992)). More recent English authority favours holding a recipient liable
on the basis of actual knowledge (Re Montague (1987)). Actual
knowledge can include wilfully shutting one’s eyes to the obvious, and
reckless failure to make inquiries. As Megarry VC stated in Re
Montague, ‘the basic question is whether theof such a trust’.

In Citadel General Assurance Co v Lloyds Bank Canada (1998) in the

Supreme Court of Canada, the court noted that, in ‘knowing receipt’
cases, relief flows from the breach of a legally recognised duty of
inquiry. Relief is granted where a stranger to the trust, having received
trust property for his or her own benefit and having knowledge of facts
which would put a reasonable person on inquiry, fails to make such
inquiry, thereby rendering the recipient’s enrichment unjust.

Given the emphasis in knowing receipt cases on the overall knowledge

of the recipient and the unconscionable failure to act upon receiving
this knowledge, it is justifiable to impose liability upon a recipient who
only has constructive knowledge of a breach of trust. In Kooroontang
Nominees Pty Ltd v ANZ (1998), Hansen J also concluded that
constructive knowledge would be sufficient to attract liability to a
recipient.

Whereas, restitution writers have strongly urged that liability of

recipients should, in principle, be strict, although recipients should be
entitled to set up the defence of a good-faith change of position. This
approach is logical, but has so far attracted little judicial support. In the
recent Privy Council decision of Royal Brunei Airlines v Tan (1995),
however, Lord Nicholls noted in obiter dicta that ‘recipient liability is
restitution-based’.

In Powell v Thompson (1991), Thomas J adopted an unjust enrichment

approach which equated unjust enrichment with the commission of
unconscionable conduct by the stranger. The conscience approach is,
however, generally thought to be incompatible with a head of
constructive trusteeship, which is based on conceptions of equitable
title (Equiticorp Industries Group Ltd v Hawkins (1991)).

The arguments for strict liability are convincing, especially in view of

the
fact that the equivalent grounds of common law liability in conversion
(where goods are claimed), and for money had and received (where
money is claimed), are also strict. As yet, however, there is little
support in the authorities for such an approach. Hence it can be said
there is continuing uncertainty about the boundaries of liability for
knowing receipt, on the basis of this uncertainty we would like to
support Lord Summon’s statement that Knowing reciepients are not
true trustee

Dishonest assistance (Remaining)

A stranger who knowingly assists in a breach of fiduciary duty is

accountable as a constructive trustee (Barnes v Addy(1874)). Liability
can be imposed under this head, even though the stranger may never
have received any property from the fiduciary; it is not the receipt of
property which attracts equitable intervention but, rather, the
knowledge of the stranger about the fraudulent design (Royal Brunei
Airlines v Tan (1995)). The conditions for imposing an obligation to
account for knowing assistance are as follow 1) The existence of trust/
fidicuary relation 2) a breach of trust or fidicuary duty 3) Assistance in
that breach 4) dishonesty

The stranger must have knowingly assisted in the breach of fiduciary

duty. Although judicial terminology is not always consistent, there is
less disagreement about the meaning of knowledge under this head
than under the head of knowing receipt.

It is clear that dishonesty requires knowledge to raise liability but what

is unclear is whether knowledge of unacceptability is accepted. In
Twinsectra v Yardley the HOL held that defendant must have realized
that their behaviour was dishonest by ordinary standard of reasonable
and honest person but later case derailed on this test, the privy council
Barlow Clowes rejected this interpretation of HOL and said that it had
not introduced a requirement of conscious wrong doing. This retireding
of Twin sectra was approved in Abachha v Abbouti Rehman. On the
basis of this one can say that imposing liability will be prerequisite of a
finding dishonesty. Although it is not clear whether this is correct the
interpretation of twinsectra or a convenient rettireading of it, the COA
in abacha was confident that this is how the house of lords would now
state the test. This is certainty of a kind and probably enough for
liability to be predicted with reasonable accuracy.

In Royal Brunei Airlines SdnBhd v Tan (1995), the Privy Council noted
that, in most situations, there is little difficulty in identifying how an
‘honest’ person would behave: they do not intentionally deceive others
to their detriment, and they do not knowingly take others’ property.
Honest people do not involve themselves in misapplications of trust
assets to the detriment of beneficiaries, and do not deliberately ignore
circumstances or fail to ask questions in case they might learn
something they would rather not know about a transaction they are
pursuing. Honesty is an objective standard – an individual is expected
to attain the standard observed by an ‘honest person’ under the same
circumstances

Knowing recipient and both are commonly said to be liable to account

‘as a constructive trustee’, but in the case of a dishonest assistant, this
means that he is fixed with a ‘secondary’ or ‘attributed’ liability which
duplicates the liability of the trustee whose breach of trust he assisted.
This has some important consequences. First, he may owe the same
liability to account for the trust property as does the trustee, Secondly,
he owes the same liability to make reparation for loss caused by the
trustee’s breaches of duty as does the trustee, thirdly, and more
controversially, but by the same reasoning, he might also owe the same
liability as the trustee to account for profits received by the trustee,
although he has not had the benefit of these for himself.
2016-B
Question 1
Is it possible to include a clause in a trust that exempts the trustees from all
liability for breach of trust so long as they have acted honestly? Should it be?
General remarks

https://www.studocu.com/en-gb/document/university-of-london/trust/trustee-exemption-clauses-a-
call-for-caution/22849118

page 179 routlegde guide

This essay will deal with exemption clause of breach of trust and will try
to analyze whether trustee should be allowed to use such a defence if
he has acted honestly while being liable for breach.

There are two types of breach of trust 1) where trustee misapplies trust
money by for instance, distributing it to the wrong person. The essence
is that the trustee has done something which she should not do. 2)
Where the trustees for instance makes unauthorized investments and
in doing so fails to show the necessary standard of care. Here the
trustee has done something that they are entitled to do so, making the
investments but has done it negligently, dishonestly or not in a good
faith.

Had the trustee fails to comply with any of the above duties then the
trustee can be held for a breach of a trust. Beneficiary in that case can
bring claim of proprietary(seeking to gain a security interest in the
defendant’s property or recovery property from defendant) or personal
claim(a monetary remedy amounting to the value of the claim) against
the trustee/defendant. However there are some the defences available
to defendant One of that defence is exemption clause he can rely upon
in order to eliminate personal liability for breach of trust so long as the
trustees act honestly; Armitage v Nurse.

The current law recognises that there is an irreducible core of

obligations from which trustees cannot escape. However, as that core
comprises little more than a duty to act honestly and in good faith it
does not impact seriously on a settlor’s freedom to exclude trustees’
liability by express terms in the trust instrument.

In 1998 in Armitage v Nurse the Court of Appeal dispelled all doubts as

to the validity of trustee exemption clauses which exclude liability for
ordinary or even gross negligence. The court held that a clause could
exclude the trustee from liability for loss or damage to the trust
property “no matter how indolent, imprudent, lacking in diligence,
negligent or wilful he may have been, so long as he has not acted
dishonestly”. It is now settled law in England and Wales that trustee
exemption clauses can validly exempt trustees from liability for
breaches of trust except fraud.

The test of dishonesty was set in Walker v Stones. At first instance,

Rattee J, purporting to apply dicta in Armitage v Nurse, derived two
propositions: first, that the deliberate commission of a breach of trust
is not necessarily dishonest; secondly, that it is only dishonest if the
trustee committing it does so ‘either knowing that it is contrary to the
interests of the beneficiaries or being recklessly indifferent whether it is
contrary to their interests or not’. These two propositions appeared to
be accepted by the Court of Appeal, but there was a third proposition—
namely: ‘It seems to me impossible to call a trustee’s conduct
“dishonest” in any ordinary sense of that word, even if he knew he was
acting in breach of the terms of the trust, if he so acted in a genuine
(even if misguided) belief that what he was doing was for the benefit of
the benefi ciaries. This last proposition required qualification.

At least in the case of a solicitor-trustee, a qualification is necessary to

take account of the case in which the trustee’s so-called ‘honest belief’,
although actually held, is so unreasonable that, by any objective
standard, no reasonable solicitor-trustee could have thought that what
he did or agreed to do was for the benefit of the benefi ciaries. A
person may act dishonestly, even though he genuinely
believes that his action is morally justified. It was added that the test of
honesty may vary from case to case, depending on, among other
things, the role and calling of the trustee. It is not contrary to public
policy to exclude liability for gross negligence by an appropriate
clause clearly worded to that effect. Further, a trustee does not lose the
protection of an exemption clause by ceasing to be a trustee. However,
where there is a doubt on the construction of a trust whether a trustee
would be exempted from liability for breach of trust by a trustee
exemption clause, such doubt should be resolved against the trustee
and the clause construed so as not to protect him. But where a trustee
falls within the clause, the fact that the judge would unhesitatingly have
refused relief under s 61 of the Trustee Act 1925 is irrelevant. It may be
added that it has been suggested that, in the case of
a professional trustee, an exemption clause might be invalidated by the
Unfair Contract Terms Act 1977, but this seems unlikely in the light of
Bogg v Raper, in which it was held that the solicitor draft sman of a will
was entitled to rely on the provisions of an exemption clause contained
therein.

The debate about whether TECs have gone far has been characterized
as one about whether a trust continue to exist in spite of TECs. This fails
to consider real policy issues at stake. Those are 1)the need to respect
settlor’s autonomy 2)the potentional reluctance of professional
trustees to assume the responsibility of trusteeship 3) the level of
charge being demanded by professional trustees due to liability
insurance premium 4) a jurisdiction’s competitiveness with others that
may have little or no regulation on TECs.

The critics of TECs argue that TECs effectively permit a trustee to act in
a manner as he was not a trustee at all and this against the whole crux
of the having a trust. In the words of Millet LJ it allows the trustee to be
exonerated from liability no matter how indolent imprudent lacking in
diligence or negligence or willful he may have been. The fact that a
trustee is professional and rumnerated only serves to add insult to
injury. TECs, in excluding all of trustees liability except for the loss
created by the trustees fraud could effectively destroy a large portion
of the trust’s substance. The neatly summed up in Firestone. To permit
a trustee from liability of gross negligence was not only inimical to the
fidicuary duty owed to the beneficiaries but wholly destructive of the
essential features of the relationship between them.

The proponents of TECs argues that a trust will continue to have a legal
substance even where a liability is excluded. They argue that there is a
distinction between removing the underlying duties that a trustee owe
and removing liability for breach of those trustees. Because legal duties
have more functions that serving as a ground for claims for the breach
of them. As Penner notes even if trustee is not personally liable for
breach of trust. A number of legal consequences still follow from a
trust’s existence. There are number of ways through which trust
obligations and the property affected by those obligations can be
protected notwithstanding the lack of trustees lack of personal liability
to compensate for breaches of trust. Furthermore, TEC’s don’t protect
a trustee against strangers to the trust it only affects the trustee’s
liability against the beneficiary, while TECs may provide defence trustee
to exempt its personal liability yet it would continue to be liable for
proprietary claim.

TECs is an area of formidable difficulty where the tension between

settlor’s freedom and beneficiary protection is very great. As the
England and the Wales law commission noted appropriate degree of
flexibility can only be achieved by a provision to the effect that a
trustee can not rely upon a duty exclusion clauses or an extended
power clause where the actions or omissions of the trustees are
inconsistent with purpose of trust and it unreasonable for the trustee
to be exempted from the liability for breach of the trust.

On the whole, this essay argued that abundance of caution must be

recognized while reforming law on exemption clause and one must not
be in hurry to outlaw or regulate them it is clear that severe criticism
has been made against TECs which are extremely controversial because
they could exclude professional trustees from the personal liability and
loss of and damage to the trustees by negligence and even gross
negligence. The critics charge that the current law is deficient because
it accords too much deference to professional trustees at the expense
beneficiaries. Indeed calls have been for them to be invalid by the law
or at the very least regulated by the statute. However, it may all too
straightforward a solution to outlaw or impose blanket rules regulating
the use of exemption clauses because this is one area of law where
many gradations are possible. After all, the law faces the challenge of
attempting to strike the right balance between settlor autonomy, the
protection of trustees from liabilities that they are not prepared to
accept and ensuring that the trust is not rendered an empty shell
without meaningful content for the beneficiaries.
2020-B

Q6. Critically analyse the extent to which trustees should be able to avoid liability for
breach of trust, in particular by obtaining the consent of the beneficiaries, relying on
an exemption clause or invoking section 61 of the Trustee Act 1925.

Consent of the beneficiaries

https://www.studocu.com/en-gb/document/university-of-hertfordshire/equity-and-
trust/breach-of-trust/1245849

Relying on an exemption clause

S. 61 of the trustee Act 1925

As per law of trust trustee is under certain duties that he owe to

beneficiary if he fails to comply with those duties then he can be sued
by the beneficiary. However there are some the defences available
trustees to defend himself. First of that defence is consent of the
beneficiaries, second is exemption clause and the third one is s.61 of
the trustee Act,1925. We will discuss each of the defence separately.

A) Consent of the beneficiaries

A beneficiary who has freely consented to or concurred in a breach of

trust is not entitled to renege on his promise and sue the trustees.
According (Walker v Symonds)in order to be prevented from bringing
an action against the trustees, the beneficiary is required to be of full
age and sound mind, with full knowledge of all the relevant facts, and
to exercise an independent judgment.
The consent must be by beneficiary if he does not know what is
purposed amount to breach of trust Holder v Holder. However, if there
is under coercion this would eliminate consent (Re pauling).

a beneficiary who is not sui juris cannot consent, and a beneficiary who
is sui juris must consent for themselves. If an individual beneficiary
consents to the trustees departing from the trust, they are not able to
sue for breach, but the other beneficiaries are. Where a beneficiary
consents to a breach causing loss to the trust fund, her or his interest
under the trust may be ‘impounded’, in particular circumstances
(Chillingworth v Chambers [1896] 1 Ch 685; Trustee Act 1925, s.62);
that is to say, as much of the value of their interest as is needed will go
to making up the loss to the trust fund.

In Re Pauling (below) the courts held that a mental illness may not affect consent.
So where a benei ciary was found to be schizophrenic his ability to consent to the
trustees’ actions would not be affected. It is also important that consent must not
be given by a benei ciary while undue inl uence was exerted over him. If consent
is given by a benei ciary immediately after he/she reaches the age of majority,
then it may not be freely given but the courts held in Re Pauling that soon after
the benei ciary reaches the age of majority it is presumed they are no longer
under the inl uence of their parents

B) Exemption clause
The current law regarding exemption clause is set in 1998 in Armitage v
Nurse the Court of Appeal dispelled all doubts as to the validity of
trustee exemption clauses which exclude liability for ordinary or even
gross negligence. The court held that a clause could exclude the trustee
from liability for loss or damage to the trust property “no matter how
indolent, imprudent, lacking in diligence, negligent or wilful he may
have been, so long as he has not acted dishonestly”. It is now settled
law in England and Wales that trustee exemption clauses can validly
exempt trustees from liability for breaches of trust except fraud. Thus
all liabilities can be excluded except of bad faith including that of gross
negligence.

The test of dishonesty/fraud was set in Walker v Stones is objective.

Have two propositions: first, that the deliberate commission of a
breach of trust is not necessarily dishonest; secondly, that it is only
dishonest if the trustee committing it does so ‘either knowing that it is
contrary to the interests of the beneficiaries or being recklessly
indifferent whether it is contrary to their interests or not’. These two
propositions appeared to be accepted by the Court of Appeal, but there
was a third proposition—namely: ‘It seems to me impossible to call a
trustee’s conduct “dishonest” in any ordinary sense of that word, even
if he knew he was acting in breach of the terms of the trust, if he so
acted in a genuine (even if misguided) belief that what he was doing
was for the benefit of the beneficiaries.

At least in the case of a solicitor-trustee, above qualification is

necessary to take account of the case in which the trustee’s so-called
‘honest belief’, although actually held, is so unreasonable that, by any
objective standard, no reasonable solicitor-trustee could have thought
that what he did or agreed to do was for the benefit of the
beneficiaries. This was seen in (Bogg v Raper), It was added that the
test of honesty may vary from case to case.
The debate about whether TECs have gone far has been characterized
as one about whether a trust continue to exist in spite of TECs. This fails
to consider real policy issues at stake. Those are 1)the need to respect
settlor’s autonomy 2)the potentional reluctance of professional
trustees to assume the responsibility of trusteeship 3) the level of
charge being demanded by professional trustees due to liability
insurance premium 4) a jurisdiction’s competitiveness with others that
may have little or no regulation on TECs. Whereas the The proponents
of TEC’s such as Penner argues that while TECs may provide defence
trustee to exempt its personal liability yet it would continue to be liable
for proprietary claim

On the whole, Exemption clause the challenge of attempting to strike

the right balance between settlor autonomy, the protection of trustees
from liabilities.

C) S. 61

The section provides three main ingredients for granting relief, namely:
(a) the trustee acted honestly; and (b) the trustee acted reasonably;
and (c) the trustee ought fairly to be excused in respect of the breach
and omitting to obtain directions of the court

The expression ‘honestly’ assumes that the trustee has acted in good
faith in the interests of the trust. This is a question of fact. The claimant
beneficiary is not required to prove that the trustee acted dishonestly;
rather the trustee is required to prove affirmatively that, despite the
breach of trust, his conduct was inter alia not dishonest. This is a
negative burden imposed on the trustee and is determined objectively
by reference to the facts of each case.

The word ‘reasonably’ indicates that the trustee acted prudently in

that the conduct of the defendant complied with the standard of care
required from a reasonable trustee. Such conduct is not required to
reach a standard of perfection. In Re Stuart, the court said that it was
fair to consider whether the trustee would have acted in the same way
if he had been dealing with his own property. If he would, it is a point in
his favour, although not enough by itself to show that he acted
reasonably. in TSB Bank plc v Markandan, the court decided that
although the standard of care expected from the trustee is high, the
test remains one of reasonableness, not perfection. In any event there
must be a causal connection between the trustee’s conduct and the
loss suffered by the trust.

In Byrne J in Re Turner the courts have not sought to lay down strict
rules for deciding whether to grant relief but are guided by the
circumstances of each case. There are cases in which courts agreed to
grant relief while in some refused to provide:

In Wynne v Tempest,the court refused relief where a trustee had left

the trust money in the hands of his co-trustee, a solicitor, without suffi
cient reason. On the other hand, in Re Lord De Clifford’s
Estate,executors were relieved where, during five years’ administration
of the estate and knowing that large sums were required for
administration purposes. According to the circumstances, it may or may
not be reasonable to act without seeking the directions of the court.
Professional trustees would be expected to show higher standard of
care in (Barclays case) it was stated that if case is pertaining to
profession or business then defendant would be judged as per standard
of expert person of same profession.

Some critics do argue that court do have much discretion to relieve

trustee from his personal liability. However above case law suggest
court also follow certain criteria while it is also see some other factors
that have been taken into account by the courts are the status of the
adviser to the trust and the size of the trust estate. It has been
suggested that nothing less than the advice of a Queen’s Counsel
should be taken by the trustees in respect of a large estate. Other
considerations that are relevant include whether the breach of trust
originated from a complicated rule of law, and whether the trustees
acted on an erroneous belief that the beneficiaries had consented, so
completely giving sweeping remarks that courts do enjoy a discretion
would also be fallacy.