Royal Brunei Airlines v Tan [1995] 2 AC 378

Facts

• Royal Brunei Airlines entered into an arrangement with a travel agency, which was to hold certain funds on trust for the airline.
• Mr. Tan, director of the travel agency, misapplied funds that were held on trust, using them for the agency’s own purposes.
• Royal Brunei Airlines suffered financial loss as a result of the misappropriation.
• The central question was whether Mr. Tan could be personally liable for the breach of trust, even if he did not personally benefit from the misappropriated funds.

Issues

1. Whether dishonesty, for the purpose of establishing third party liability in breach of trust, should be assessed by an objective or subjective standard.
2. Whether a fiduciary or third party who does not personally benefit from a breach of trust can be held personally liable based on their role and state of mind.
3. The circumstances under which third parties assisting in a breach of trust may be found personally liable.

Decision

• The House of Lords held that dishonesty is to be judged by the standards of ordinary, reasonable people, introducing an objective standard for such assessments.
• It was determined that a fiduciary or third party can be personally liable for a breach of trust if their conduct is dishonest by this objective test, regardless of personal benefit.
• The court clarified that knowledge and state of mind of the defendant remain relevant but must be considered against societal norms of honesty.
• The liability of third parties is not limited to individuals knowingly participating in a breach; it extends to those whose conduct fails to meet the required objective standard of honesty.

Legal Principles

• Dishonesty in trust and fiduciary law is assessed objectively, by the standards of ordinary, reasonable people, not the defendant's subjective views.
• An individual may be personally liable for breach of trust if found dishonest by this objective standard, regardless of whether they derived financial benefit.
• Third parties who assist in a breach can be liable if their actions would be considered dishonest by societal standards, broadening the potential scope of liability in fiduciary contexts.
• The court’s approach ensures consistent application of the law and reflects societal expectations of honesty in professional dealings.

Conclusion

Royal Brunei Airlines v Tan clarified that liability for assisting in a breach of trust is determined by the objective standard of dishonesty, making conduct, rather than intent or personal gain, central to personal liability for breach of trust and fiduciary obligations.