Learning Outcomes
This article outlines the principles governing the liability of third parties who become involved in a breach of trust. It details the requirements for establishing knowing receipt and dishonest assistance. Additionally, it examines the defences available to third parties, particularly innocent volunteers, who receive trust property or assist in a breach without fault. Understanding these concepts is essential for identifying potential claims and advising clients in scenarios involving breaches of trust and third-party involvement, as required for the SQE1 assessments.
SQE1 Syllabus
For SQE1, you are required to understand the circumstances in which third parties may become liable for breaches of trust committed by trustees. This involves applying the principles of recipient liability (knowing receipt) and accessory liability (dishonest assistance). A key aspect is appreciating the defences that may protect innocent third parties. Your understanding should cover:
- The distinction between recipient liability and accessory liability.
- The elements required to establish knowing receipt, focusing on the concept of knowledge and unconscionability.
- The elements required to establish dishonest assistance, focusing on the objective standard of dishonesty.
- The defences available to third parties, particularly the defence of bona fide purchaser for value without notice and change of position.
- The nature of liability imposed on third parties found liable (constructive trusteeship).
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.
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Which of the following is the established test for the state of mind required for liability in dishonest assistance?
- The defendant acted negligently.
- The defendant acted dishonestly according to the standards of reasonable and honest people.
- The defendant suspected wrongdoing but failed to make enquiries.
- The defendant had actual knowledge of the breach of trust.
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A third party receives trust property transferred in breach of trust but is unaware of the breach at the time of receipt. They later learn of the breach but have already spent the money in good faith on living expenses. Which defence might be available?
- Bona fide purchaser for value without notice.
- Change of position.
- Ministerial receipt.
- Laches.
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For a claim of knowing receipt to succeed against a third party, which element regarding their state of mind is essential according to BCCI v Akindele?
- The recipient acted dishonestly.
- The recipient's knowledge made it unconscionable for them to retain the benefit.
- The recipient had constructive notice of the breach.
- The recipient wilfully shut their eyes to the obvious breach.
Introduction
When a trustee commits a breach of trust, the primary claim for the beneficiaries lies against the trustee. However, circumstances may arise where a third party becomes involved, either by receiving trust property transferred in breach of trust or by assisting the trustee in the breach. Equity provides mechanisms to hold such third parties liable, ensuring beneficiaries can seek remedies even when the trustee is insolvent or untraceable. This area of law distinguishes between two main forms of third-party liability: recipient liability (often termed 'knowing receipt') and accessory liability ('dishonest assistance'). Furthermore, equity recognises certain defences that may protect third parties, especially those who act innocently and without knowledge of the wrongdoing ('innocent volunteers'). Understanding these principles is essential for advising on remedies following a breach of trust.
Recipient Liability (Knowing Receipt)
Recipient liability arises when a third party receives trust property or its traceable product, which has been transferred in breach of trust or fiduciary duty. The recipient is not liable merely for receiving the property; their liability depends on their state of knowledge regarding the breach.
Key Term: Knowing Receipt
Liability imposed on a third party who receives trust property transferred in breach of trust, where the recipient's state of knowledge makes it unconscionable for them to retain the benefit of the receipt.
Elements of Knowing Receipt
To establish liability for knowing receipt, a claimant (usually a beneficiary) must demonstrate:
- A disposal of assets in breach of trust or fiduciary duty: There must have been an initial wrongdoing by the trustee or fiduciary.
- Beneficial receipt by the defendant: The third party must have received the trust assets (or their traceable product) for their own use and benefit, not merely as an agent for another.
- Knowledge making retention unconscionable: The recipient must possess a level of knowledge about the breach that makes it unconscionable for them to retain the property.
The Knowledge Requirement
The landmark case of BCCI v Akindele [2001] Ch 437 established that the test for knowledge in knowing receipt is whether the recipient's state of knowledge is such as to make it unconscionable for them to retain the benefit of the receipt. This test replaced previous, more complex categorisations of knowledge.
Key Term: Unconscionability
Conduct that is considered so unfair or unreasonable as to shock the conscience of the court. In knowing receipt, it relates to the recipient's knowledge of the breach of trust.
What constitutes unconscionable knowledge depends on the facts, but includes actual knowledge, wilfully shutting one's eyes to the obvious, and wilfully and recklessly failing to make inquiries an honest person would make. Mere negligence or carelessness is generally insufficient.
Worked Example 1.1
A trustee, in breach of trust, transfers £50,000 from the trust fund to their friend, Ben. Ben is told the money is a loan from the trustee personally. Ben uses £30,000 to buy shares and puts £20,000 in his savings account. Later, Ben discovers the money came from a trust fund and was transferred improperly. He decides to keep the shares and the remaining money. Are the beneficiaries likely to succeed in a claim for knowing receipt against Ben?
Answer: Yes, potentially. Ben received trust property beneficially. Although initially unaware, he gained knowledge of the breach while still possessing the traceable proceeds (£20,000 cash and the shares bought with £30,000). His decision to retain the benefit after acquiring this knowledge likely makes it unconscionable. The beneficiaries could pursue a personal claim for knowing receipt and potentially a proprietary claim against the traceable assets (the shares and the remaining cash).
Accessory Liability (Dishonest Assistance)
Accessory liability arises where a third party dishonestly assists a trustee or fiduciary in committing a breach of trust or fiduciary duty. Unlike recipient liability, the third party does not need to have received any trust property themselves. Liability focuses on the dishonesty of the assistance provided.
Key Term: Dishonest Assistance
Liability imposed on a third party who dishonestly assists or procures a breach of trust or fiduciary duty.
Elements of Dishonest Assistance
Establishing liability requires proof of:
- A breach of trust or fiduciary duty: Committed by the trustee or fiduciary (though the trustee need not themselves be dishonest).
- Assistance by the third party: The third party must have assisted in the breach. Assistance can cover a wide range of actions, including planning, executing, or covering up the breach.
- Dishonesty by the third party: The assistance must have been dishonest according to objective standards.
The Dishonesty Standard
The test for dishonesty was established in Royal Brunei Airlines v Tan [1995] 2 AC 378 and confirmed in Barlow Clowes v Eurotrust [2006] 1 WLR 1476. Dishonesty is judged objectively: did the defendant act as an honest person would have acted in the circumstances? This involves considering what the defendant actually knew at the time (their experience, intelligence, and the reason for their actions) and assessing whether, knowing those facts, their conduct was dishonest by the standards of ordinary decent people. It is not necessary for the defendant to appreciate that their conduct was dishonest.
Worked Example 1.2
Chloe, a solicitor, is instructed by trustees to draft documents enabling an investment. Chloe realises the investment is highly speculative and likely outside the trustees' powers according to the trust deed she has seen. She advises the trustees against it but, upon their insistence, proceeds to draft the necessary documents, suspecting a breach is occurring but choosing not to investigate further or refuse instructions. The investment fails, causing loss to the trust. Could Chloe be liable for dishonest assistance?
Answer: Possibly. A breach of trust occurred (unauthorised investment). Chloe assisted by drafting documents. The key issue is dishonesty. An ordinary, honest solicitor, aware of the trust deed's limitations and the speculative nature of the investment, might have refused to proceed or sought further clarification/advice. If Chloe's conduct, given her knowledge and professional position, fell below the objective standard of honesty expected in those circumstances, she could be liable for dishonest assistance, even if she did not personally benefit.
Defences for Innocent Volunteers
Where a third party receives trust property without knowledge of the breach and without providing value (an 'innocent volunteer'), they may have defences against claims by beneficiaries. A person who provides value and has no notice is protected as a 'bona fide purchaser'.
Key Term: Innocent Volunteer
A person who receives trust property transferred in breach of trust without giving valuable consideration and without knowledge of the breach.
Bona Fide Purchaser for Value Without Notice (BFPFVWN)
This is a complete defence to both personal and proprietary claims in equity. If a third party acquires legal title to trust property:
- For valuable consideration (not necessarily market value, but more than nominal);
- In good faith (bona fide); and
- Without notice (actual, constructive, or imputed) of the beneficiaries' equitable interest or the breach of trust; then they take the property free from the trust. Equity's protection of beneficiaries does not extend to defeating the rights of a genuine purchaser who acquired the property fairly and without awareness of the trust.
Key Term: Bona Fide Purchaser for Value Without Notice
A person who acquires legal title to property for value, in good faith, and without notice of any pre-existing equitable interests. This status provides a defence against claims based on those equitable interests.Key Term: Constructive Knowledge
Knowledge that a person is presumed to have because, based on the known facts, a reasonable person would have made inquiries which would have revealed the truth, or because they wilfully shut their eyes to the obvious.
Change of Position
This defence is available to an innocent recipient (typically a volunteer) who has detrimentally changed their position in reliance on the receipt of the property. If it would be inequitable to require full restitution due to this change, the court may reduce or extinguish the recipient's liability.
The defence was recognised in Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548. Key requirements include:
- The recipient must have acted in good faith.
- The change of position must be causally linked to the receipt of the property.
- It must be inequitable in all circumstances to require the recipient to make restitution (or full restitution).
Key Term: Change of Position
A defence available to a recipient of property transferred by mistake or in breach of trust, where the recipient has acted in good faith and irreversibly changed their circumstances in reliance on the receipt, making full restitution inequitable.
Worked Example 1.3
Trustees mistakenly overpay a beneficiary, David, by £10,000. David, believing the payment to be correct and having no reason to suspect an error, uses £8,000 of the money to pay for essential and non-refundable surgery for his child, which he otherwise could not have afforded. The trustees later discover the error and seek repayment. Can David rely on the change of position defence?
Answer: Likely yes, in part. David received the money innocently. He changed his position significantly (£8,000 spent on non-refundable surgery) in reliance on the payment. It would likely be inequitable to demand repayment of the full £10,000. He may have a defence regarding the £8,000 spent, but would likely remain liable for the £2,000 not spent or spent on ordinary expenses he would have incurred anyway.
Other Potential Defences
- Ministerial Receipt: A person who receives property purely as an agent for another (eg, a bank processing a transaction) and passes it on according to instructions without benefiting personally may not be liable for knowing receipt.
- Dissipation: If the trust property has been dissipated (eg, spent on general living expenses or a holiday) and cannot be traced, a proprietary claim will fail. A personal claim might still exist if the recipient had the requisite knowledge.
- Laches: Unreasonable delay by the claimant in bringing the claim, which prejudices the defendant, can be a defence in equity.
Revision Tip
Remember that the BFPFVWN defence defeats both personal and proprietary claims. The change of position defence applies primarily to personal claims for restitution (though its interaction with proprietary claims is complex) and usually applies to innocent volunteers. Distinguishing between these defences and when they apply is key.
Key Point Checklist
This article has covered the following key knowledge points:
- Third parties can be liable for breaches of trust through knowing receipt or dishonest assistance.
- Knowing receipt requires beneficial receipt of trust property with knowledge making retention unconscionable.
- Dishonest assistance requires dishonest participation in a breach, judged objectively.
- Innocent volunteers are recipients who give no value and have no knowledge of the breach.
- The defence of Bona Fide Purchaser for Value Without Notice protects purchasers who acquire legal title for value, in good faith, and without notice.
- The Change of Position defence protects innocent recipients who have irreversibly altered their position in reliance on the receipt.
- Other defences like ministerial receipt and laches may also apply.
Key Terms and Concepts
- Knowing Receipt
- Unconscionability
- Dishonest Assistance
- Innocent Volunteer
- Bona Fide Purchaser for Value Without Notice
- Constructive Knowledge
- Change of Position
