Remedies against third parties: recipient and accessory liability - Criteria for accessory liability

Learning Outcomes

This article outlines the requirements for establishing accessory liability against a third party who assists in a breach of trust or fiduciary duty. After reading this article, you will be able to identify the key elements necessary for such a claim, including the existence of a breach, the nature of the assistance provided, and the key test for dishonesty applied by the courts. This understanding will equip you to analyse scenarios involving third-party liability in SQE1-style multiple-choice questions.

SQE1 Syllabus

For SQE1, you are required to understand the principles governing the liability of third parties who assist in breaches of trust. This knowledge is essential for advising on potential remedies and identifying liable parties beyond the trustee.

As you work through this article, remember to pay particular attention in your revision to:

• The necessary components for establishing accessory liability.
• The requirement of a breach of trust or fiduciary duty as a prerequisite.
• What constitutes 'assistance' by a third party in the context of a breach.
• The objective test for 'dishonesty' as applied to the accessory.
• The distinction between accessory liability and recipient liability.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which of the following is NOT an essential element for establishing accessory liability?
   1. A breach of trust or fiduciary duty by the trustee.
   2. Assistance in the breach by the third party.
   3. Receipt of trust property by the third party.
   4. Dishonesty on the part of the third party.
2. How is 'dishonesty' primarily assessed in the context of accessory liability according to current case law?
   1. Purely subjectively, based on the accessory's own moral standards.
   2. Purely objectively, based on the standards of reasonable and honest people, regardless of the accessory's knowledge.
   3. Objectively, based on the standards of reasonable and honest people, considering the accessory's actual knowledge and experience.
   4. Based on whether the accessory intended to cause loss to the beneficiaries.
3. Can a third party be liable as an accessory if they did not know they were assisting in a breach of trust, but knew they were participating in an illegal scheme?
   1. No, specific knowledge of the trust breach is required.
   2. Yes, if their participation in the illegal scheme was dishonest.
   3. No, unless they directly received trust property.
   4. Yes, but only if the trustee also acted dishonestly.

Introduction

When a trustee breaches their duties, beneficiaries primarily look to the trustee for remedies. However, equity may also hold a third party liable if they played a role in that breach. This is known as accessory liability, or liability for 'dishonest assistance'. It targets individuals who facilitate or assist a trustee's wrongdoing, even if they never personally receive trust property. Understanding the criteria for accessory liability is critical for determining the full scope of potential claims arising from a breach of trust.

Establishing Accessory Liability

For a third party (the accessory) to be held liable for dishonestly assisting in a breach of trust or fiduciary duty, four key elements must be established. The absence of any one element means the claim will fail.

Breach of Trust or Fiduciary Duty

There must first be a breach of trust or a breach of fiduciary duty committed by a trustee or fiduciary. Without an initial breach, there can be no liability for assisting in one.

Key Term: Breach of trust
Any act or omission by a trustee which is inconsistent with the terms of the trust agreement or the duties imposed on the trustee by law.

The breach itself does not need to be dishonest on the part of the trustee. A trustee might breach their duties negligently or even innocently, but if a third party dishonestly assists in that breach, accessory liability can still arise.

Assistance by the Third Party

The third party must have assisted the trustee or fiduciary in committing the breach.

Key Term: Assistance
Conduct by a third party that helps, enables, or facilitates the trustee's breach of trust or fiduciary duty.

Assistance usually involves a positive act, such as transferring funds improperly, preparing false documents, or providing misleading advice that enables the breach. Merely passive acquiescence is generally not enough, although deliberately turning a blind eye or failing to act when under a duty to do so might, in some contexts, constitute assistance. The assistance provided must actually help the breach to occur; it cannot be trivial or inconsequential.

Dishonesty

This is often the most essential and contested element. The third party's assistance must have been dishonest.

Key Term: Dishonesty
In the context of accessory liability, this refers to conduct which is dishonest according to the objective standards of ordinary decent people, given the actual knowledge and experience of the defendant.

The leading cases, such as Royal Brunei Airlines v Tan and Barlow Clowes International Ltd v Eurotrust International Ltd, have established an objective test for dishonesty.

Key Term: Objective test
A legal standard based on what a reasonable person would think or do in the same circumstances, rather than the subjective viewpoint of the individual involved.

The court asks: knowing what the defendant actually knew at the time, would an ordinary, honest person consider their conduct to be dishonest? It is not necessary for the defendant to realise that their conduct would be regarded as dishonest by others; the focus is on the objective assessment of their actions given their subjective knowledge. Factors such as the defendant's experience and intelligence are relevant in assessing what they knew and understood about the transaction they were assisting.

It is not necessary for the accessory to know the precise details of the trust or the specific breach. Knowledge that they are assisting in an improper or illegal scheme can be sufficient to ground a finding of dishonesty.

Worked Example 1.1

A solicitor is instructed by a trustee client to transfer trust funds to an account in the trustee's personal name, in clear violation of the trust deed which the solicitor has seen. The solicitor suspects this is improper but carries out the instruction without question to avoid upsetting the client. The trustee then dissipates the funds.

Is the solicitor likely to be liable as an accessory?

Answer: Yes, potentially. A breach of trust has occurred. The solicitor actively assisted by enabling the transfer. The key issue is dishonesty. Given the solicitor's professional knowledge and sight of the trust deed, an ordinary honest solicitor, knowing the transfer was to the trustee's personal account in breach of the deed, would likely view carrying out the instruction without further inquiry as dishonest. The solicitor's motive (keeping the client happy) is irrelevant to the objective assessment of dishonesty.

Worked Example 1.2

A bank employee processes a series of unusual, rapid transfers out of a known trust account initiated by the trustee. The employee finds the pattern odd but does not escalate the matter, assuming internal compliance checks would flag any issues. The transfers were part of a fraudulent scheme by the trustee.

Did the employee 'assist' the breach? Was the assistance 'dishonest'?

Answer: Assistance is likely established, as processing the transfers facilitated the breach. Dishonesty is less clear. Applying the objective test: did the employee know enough facts that their failure to escalate was conduct falling below the standard expected of an ordinary honest bank employee in their position? If their failure to act was a conscious decision to ignore clear warning signs ('wilful blindness'), it might be deemed dishonest. If it was mere negligence or adherence to standard procedure without appreciating the significance of the pattern, it likely would not meet the dishonesty threshold.

Distinguishing from Recipient Liability

It is important to distinguish accessory liability (dishonest assistance) from recipient liability (knowing receipt).

Accessory liability focuses on the fault of the third party in enabling the wrongdoing, whereas recipient liability focuses on the unjust enrichment of the third party receiving misapplied trust assets. An accessory is liable personally to compensate for the loss caused by the breach they assisted.

Exam Warning

Do not confuse the tests for accessory liability and recipient liability. Accessory liability requires dishonesty based on an objective standard. Recipient liability requires knowledge making retention unconscionable. While related, they are distinct concepts with different requirements.

Key Point Checklist

This article has covered the following key knowledge points:

• Accessory liability holds a third party accountable for dishonestly assisting a trustee or fiduciary in a breach of their duties.
• Four elements are required: a breach of trust/fiduciary duty, assistance by the third party, dishonesty by the third party, and a causal link (implicit).
• Assistance usually requires a positive act that facilitates the breach.
• Dishonesty is judged objectively based on the standards of ordinary decent people, considering the defendant's actual knowledge and experience.
• It is distinct from recipient liability, which involves receiving trust property transferred in breach of trust.

Key Terms and Concepts

• Breach of trust
• Assistance
• Dishonesty
• Objective test