Equity: Third-Party Liability under Trusts

Third-Party Liability under Trusts

A trustee may breach a trust in a manner which involves third-parties. For example, they might misapply trust property by disposing of it to a third-party. Or, a third-party might assist or induce the breach: e.g. by paying the trustee a secret commission. In some circumstances, third-parties can be liable for their involvement. Two causes of action are relevant: knowing receipt and dishonest assistance.

Knowing Receipt

A non-trustee may be liable for knowing receipt where they have ‘knowingly’ ‘received’ traceable trust property or funds.

What Degree of Knowledge is Required?

The courts treat a third-party as having ‘actual knowledge’ of the breach if:

The third-party had actual knowledge of the breach: Baden v Societe Generale [1993] 1 WLR 509.

They wilfully shut their eyes to an obvious breach. The third-party must suspect a breach and decide they do not want to know and will not investigate: Manifest Shipping v Uni-Polaris [2003] 1 AC 469.

The third-party wilfully and recklessly failed to inquire into circumstances which a reasonable and honest person would investigate: Cantor Fitzgerald v Bird [2002] WL 1446181.

A person has constructive knowledge if:

  • They are aware of circumstances indicating breach to a reasonable, honest person; or
  • They are aware of circumstances which would put a reasonable, honest person on inquiry: Baden v Societe Generale [1993] 1 WLR 509.

A third-party with actual knowledge is liable. A third-party with constructive knowledge is liable if their state of mind amounts to dishonesty or want of probity (lack of proof of honesty) in the circumstances: Agip v Jackson [1990] Ch 265. This is less likely in commercial settings – parties are expected to trust each other rather than act with suspicion: Eagle Trust v SBC Securities [1993] 1 WLR 484.

Some cases have disapproved of the above categorisation. They instead ask whether the third-party’s state of mind makes it unconscionable for them to retain the trust property: Bank of Credit and Commerce v Akindele [2001] Ch 437.

When is Trust Property ‘Received’?

A person does not receive property unless they possess it in a way which is ‘relevant to the loss’: Agip v Jackson [1990] Ch 265. Equity distinguishes between two situations in which a person possesses of property:

Beneficial Receipt

If a person has beneficial receipt, they receive the property for their own benefit. For example: a trustee sells trust property to their friend to keep or dispose of as they please.

Ministerial Receipt

If a person has ministerial receipt, they do not receive the property for their own benefit. For example: the trustee hands money to a teller, for the teller to deposit in a particular bank account.

Only beneficial receipt counts for the purposes of knowing receipt.

A complicated case arises where a trustee gives money to a bank. When a bank takes customer money to deposit in an account, they become absolute owner of that money. In exchange, the customer takes ownership of a debt equal to the sum deposited. Despite this, banks are usually treated as acting as the customer’s agent and so get only ministerial receipt: Agip v Jackson [1990] Ch 265. There is an exception where the bank uses the money to discharge the customer’s overdraft, in which case they receive beneficially.

Issues of Timing

A third-party might receive trust property and then only later learn of the trustee’s breach. They are liable from the moment they acquired this knowledge. This is trust even if they took possession innocently at an earlier date: Re Montagu’s Settlement Trusts [1987] Ch 264. However, the third-party must still possess the property when they acquire the knowledge. If they disposed of it before they acquired the necessary knowledge, they will not be liable.

It is also possible for a person to receive money in a ministerial capacity, but later adopt a beneficial capacity. If so, they are liable for knowing receipt: Akita v Attorney General of the Turks and Caicos Islands [2017] UKPC 7. Their later decision to keep the property for their own use transforms their ministerial receipt into beneficial receipt.

For example: a trustee transfers trust money to an agent to put in a bank account. The agents knows the trustee is acting in breach of trust. However, they are not liable at this point because they received the money in a purely ministerial capacity. The agent later decides to gamble the money on the ponies instead of giving it to the bank. In doing so, the agent adopts a beneficial position and is liable.

Dishonest Assistance

A third-party is liable if they dishonestly assist or procure the trustee’s breach: Royal Brunei Airlines v Tan [1995] 2 AC 378. Unlike knowing receipt, there is no need for the third-party to ever gain possession of the property (though they might do so).

Dishonesty

The third-party is dishonest if a reasonable bystander would consider them dishonest: Barlow Clowes v Eurotrust [2008] UKPC 37. Their own subjective moral standards are irrelevant, though a reasonable bystander takes account of the defendant’s factual knowledge and beliefs: Ivey v Genting Casinos [2017] UKSC 67.

Dishonesty and negligence are distinct. The test is not what a competent person might have done, but what an honest person might have done given the knowledge and skills the defendant actually possessed: Republic of Zambia v Meer Care & Desai [2008] EWCA Civ 1007.

Since the standard is honesty, it is not necessary for the defendant to know they are assisting a breach of trust. However, a greater degree of knowledge is likely to indicate dishonesty: Heinl v Jyske Bank [1999] EWHC J1029-4. That the defendant’s conduct is commercially unacceptable is potentially evidence of dishonesty: Cowan de Groot Properties v Eagle Trust [1992] 4 All ER 700.

Note that there is no need for the trustee to have acted dishonestly in breaching the trust for a third-party to be liable for dishonest assistance. The breach of trust can be entirely innocent.

Assistance

A third-party assists a breach if they engage in some positive conduct designed to help, promote or advance it. This includes helping the trustee to cover up the breach afterwards (e.g. by money laundering): Twinsectra Ltd v Yardley [2002] UKHL 12.

There is no need for the third-party’s help to cause the breach, but the behaviour’s impact must be more than minimal: Brinks v Abu-Saleh (No 3) [1996] CLC 133.