Remedies against third parties: recipient and accessory liability - Establishing accessory liability (dishonest assistance)

Learning Outcomes

This article explains the principles for establishing accessory liability, also known as dishonest assistance, when a third party helps facilitate a breach of trust or fiduciary duty. It covers the necessary elements that a claimant must prove and focuses particularly on the objective standard of dishonesty applied by the courts. After reading this article, you should be able to identify the components of accessory liability and apply the relevant legal tests to SQE1-style multiple-choice questions involving third-party involvement in breaches of trust or fiduciary duties.

SQE1 Syllabus

For SQE1, you are required to understand the circumstances in which a third party may be held liable for assisting in a breach of trust or fiduciary duty. Your revision should focus on distinguishing accessory liability from recipient liability and refining the application of the dishonesty test.

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

  • the distinction between recipient liability (based on receiving trust property) and accessory liability (based on assisting the breach)
  • the four elements required to establish accessory liability
  • the objective test for dishonesty applied to the accessory's conduct
  • identifying scenarios where accessory liability might arise in practice.

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. To establish accessory liability, which of the following must be proven about the third party's state of mind?
    1. They intended the beneficiaries to suffer loss.
    2. They knew they were acting dishonestly according to their own standards.
    3. They acted dishonestly according to the objective standards of ordinary decent people.
    4. They were negligent in failing to spot the breach of trust.
  2. Which of the following scenarios is LEAST likely to constitute 'assistance' for accessory liability?
    1. A solicitor drafting documents known to facilitate a breach of trust.
    2. An accountant knowingly falsifying accounts to hide a breach.
    3. A bank processing a payment instruction from a trustee, unaware it relates to a breach.
    4. A financial advisor recommending an investment known to be part of a fraudulent scheme.

  3. True or False: For accessory liability to be established, the breach of trust or fiduciary duty committed by the primary trustee/fiduciary must itself have been dishonest.

Introduction

When a trustee or other fiduciary breaches their obligations, causing loss to the beneficiaries or principal, the primary legal action lies against that trustee or fiduciary. However, equity also recognises that third parties ('strangers' to the trust/fiduciary relationship) can sometimes be implicated in the wrongdoing. Accessory liability, commonly referred to as 'dishonest assistance', is one ground for holding such third parties accountable. It arises where a person dishonestly assists a trustee or fiduciary to commit a breach of their duty, even if the assistant does not personally receive any trust property. This contrasts with 'knowing receipt', where liability is based on the unconscionable receipt of trust property derived from a breach. Understanding dishonest assistance is essential for identifying all potential defendants in cases of trust or fiduciary wrongdoing.

The Elements of Accessory Liability (Dishonest Assistance)

Accessory liability is established by proving four elements, as confirmed in cases like Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 and Barlow Clowes International Ltd v Eurotrust International Ltd [2005] UKPC 37.

1. Existence of a Trust or Fiduciary Duty

There must be a trust in existence, or a fiduciary relationship giving rise to fiduciary duties.

Key Term: Fiduciary Duty
A duty of utmost good faith and loyalty owed by one person (the fiduciary, eg a trustee, company director, agent) to another (the principal, eg a beneficiary, company, client), requiring the fiduciary to act solely in the principal's best interests and avoid conflicts of interest.

2. Breach of Trust or Fiduciary Duty

The trustee or fiduciary must have committed a breach of their trust or fiduciary duty. Importantly, the breach itself does not need to have been dishonest on the part of the trustee/fiduciary. An innocent or negligent breach by the trustee/fiduciary can still form the basis for accessory liability if the third party's assistance was dishonest.

Key Term: Breach of Trust
Any act or omission by a trustee that is contrary to the terms of the trust instrument or the general duties imposed on trustees by law (eg the duty to act in the best interests of beneficiaries, the duty to invest prudently).

3. Assistance by the Third Party

The third party must have assisted the trustee or fiduciary in committing the breach. Assistance generally implies some active participation or involvement that furthers the breach. Merely failing to intervene is usually insufficient, unless the third party had a specific duty to act. The assistance does not need to be the sole or main cause of the breach, but it must have contributed to it.

Examples of assistance include:

  • Handling payments related to the breach.
  • Drafting documents necessary for the breach.
  • Managing accounts used in the breach.
  • Providing professional advice that facilitates the breach.

4. Dishonesty of the Third Party

The central element is that the third party's assistance must have been dishonest.

The Objective Test for Dishonesty

English law applies an objective test to determine whether the third party's assistance was dishonest. The defendant's own subjective view of their honesty is irrelevant.

Key Term: Dishonesty (in Accessory Liability)
Conduct which is dishonest according to the objective standards of ordinary, reasonable, and honest people, having regard to the specific knowledge the defendant possessed at the time.

The court follows a two-stage process:

  1. Determine the defendant's actual state of knowledge: What did the third party actually know about the transaction and the circumstances surrounding the breach? This includes knowledge they deliberately chose to ignore ('wilful blindness'). It is not based on what they ought to have known (negligence is insufficient).
  2. Assess the conduct objectively: Given that actual knowledge, would an ordinary, decent person regard the third party's actions (their assistance) as dishonest?

Applying the Test

If a third party knows facts which would indicate to an honest and reasonable person that they were assisting in wrongdoing, and proceeds regardless, they are likely to be found dishonest. Suspicion combined with a conscious decision not to make inquiries (wilful blindness) can also satisfy the test.

Worked Example 1.1

A solicitor (S) is instructed by a trustee (T) of a family trust. T asks S to draft documents to transfer £100,000 from the trust fund to T's personal offshore bank account. T explains it is a 'loan' which the trust deed permits. S reviews the trust deed and sees that while trustees can make loans, they cannot loan funds to themselves. S points this out to T, but T insists the transaction proceed, saying it's a 'temporary arrangement' and the beneficiaries 'won't mind'. S, valuing T's business, prepares the transfer documents as instructed without further inquiry or advising T against the action. The beneficiaries later sue S for dishonest assistance when the funds are lost.

Is S likely to be found liable?

Answer: Yes, S is likely liable.

  1. Trust/Duty: A trust exists.
  2. Breach: T breached the trust by making an unauthorised loan to himself.
  3. Assistance: S assisted by drafting the necessary transfer documents.
  4. Dishonesty: S knew the trust deed prohibited loans to trustees. S knew T intended to proceed despite this prohibition. An ordinary, honest solicitor, knowing these facts, would likely refuse to proceed or insist on T obtaining court or beneficiary approval. Proceeding despite knowing the transaction was a breach constitutes dishonest conduct by objective standards. S's motive (keeping the client) is irrelevant.

Exam Warning

Do not confuse dishonesty for accessory liability with the concept of 'unconscionability' required for knowing receipt. While both involve assessing the defendant's knowledge, the test for dishonest assistance focuses squarely on whether the conduct was dishonest by objective standards, given that knowledge.

Revision Tip

When tackling a problem question on dishonest assistance, systematically apply the four elements. Pay close attention to the facts indicating what the third party actually knew or suspected. The key is often assessing whether, given that knowledge, their participation crosses the line into objectively dishonest conduct.

Key Point Checklist

This article has covered the following key knowledge points:

  • Accessory liability arises from assisting a breach of trust/fiduciary duty, not receiving property.
  • Four elements are required: duty, breach, assistance, and third-party dishonesty.
  • The trustee/fiduciary's own dishonesty is not required for accessory liability.
  • Assistance usually involves active participation that furthers the breach.
  • Dishonesty is judged objectively based on the standards of ordinary decent people.
  • The court considers what the third party actually knew (including wilful blindness) when assessing dishonesty.

Key Terms and Concepts

  • Fiduciary Duty
  • Breach of Trust
  • Dishonesty (in Accessory Liability)
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