Remedies against third parties: recipient and accessory liability - Liability of strangers to the trust

Learning Outcomes

After studying this article, you will be able to explain when a third party (stranger) can be liable for breach of trust, distinguish between recipient and accessory liability, identify the requirements for each, and outline the remedies available against third parties. You will also be able to apply these principles to SQE1-style scenarios and avoid common exam pitfalls.

SQE1 Syllabus

For SQE1, you are required to understand when and how third parties (strangers) may be liable for breaches of trust. Focus your revision on:

  • the distinction between recipient liability (knowing receipt) and accessory liability (dishonest assistance)
  • the legal tests for each type of liability, including the required knowledge or dishonesty
  • the remedies available against third parties, including personal and proprietary claims
  • the main defences available to third parties facing such claims

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. What are the essential elements for establishing recipient liability against a third party who receives trust property?
  2. Which of the following best describes the standard for dishonesty in accessory liability (dishonest assistance)? a) The defendant must personally believe their conduct is dishonest.
    b) The defendant's conduct is judged by the standards of ordinary honest people.
    c) The defendant must intend to defraud the beneficiaries.
  3. True or false? A bona fide purchaser for value without notice can be liable for knowing receipt.
  4. What is the main difference between a personal and a proprietary remedy against a third party in breach of trust?

Introduction

When a breach of trust occurs, liability is not limited to the trustees. In some cases, third parties—known as "strangers to the trust"—may also be liable. This article explains the two main routes to liability for strangers: recipient liability (knowing receipt) and accessory liability (dishonest assistance). You will learn the requirements for each, the available remedies, and the main defences.

Liability of Strangers to the Trust

A "stranger" is any person who is not an appointed trustee but becomes involved in a breach of trust. There are two main ways a stranger can be liable:

  • as a recipient of trust property (recipient liability)
  • as an accessory who assists in a breach of trust (accessory liability)

Key Term: stranger
A person who is not an appointed trustee but becomes involved in a breach of trust, either by receiving trust property or by assisting in a breach.

Recipient Liability (Knowing Receipt)

Recipient liability arises when a third party receives trust property in breach of trust and, in the circumstances, it would be unconscionable for them to retain it.

Key Term: recipient liability (knowing receipt)
Liability imposed on a third party who receives trust property in breach of trust, where their knowledge makes it unconscionable to retain the benefit.

Requirements for Recipient Liability

To establish recipient liability, the following must be shown:

  1. Disposal of trust property in breach of trust: The property must have been transferred in breach of trust.
  2. Beneficial receipt by the third party: The third party must have received the property for their own benefit.
  3. Knowledge making retention unconscionable: The third party's knowledge must be such that it would be unconscionable for them to retain the property.

The test for knowledge is whether the recipient's state of knowledge makes it unconscionable for them to retain the benefit. This is an objective test, considering what the recipient knew or ought to have known.

Key Term: unconscionable
Conduct that is contrary to the standards of honest and reasonable people, making it unfair for a person to retain a benefit.

Worked Example 1.1

A trustee transfers £40,000 of trust money to his friend, who uses it to buy a car. The friend later learns the money was misappropriated from the trust. Is the friend liable?

Answer: Yes. Once the friend learns the money was trust property received in breach of trust, it is unconscionable for her to keep the car. She is liable as a knowing recipient.

Defences to Recipient Liability

A recipient will not be liable if they are a bona fide purchaser for value without notice, or if they have changed their position in good faith before learning of the breach.

Key Term: bona fide purchaser for value without notice
A person who acquires property for value, in good faith, and without knowledge of any breach of trust. Such a person takes free of the beneficiaries' equitable interests.

Key Term: change of position
A defence where a recipient, acting in good faith, has changed their circumstances in reliance on the receipt, making it unjust to require repayment.

Accessory Liability (Dishonest Assistance)

Accessory liability, also called dishonest assistance, arises when a third party assists in a breach of trust and acts dishonestly.

Key Term: accessory liability (dishonest assistance)
Liability imposed on a third party who assists in a breach of trust, where their conduct is dishonest by the standards of ordinary honest people.

Requirements for Accessory Liability

To establish accessory liability, the following must be shown:

  1. Existence of a trust and breach: There must be a trust and a breach of trust (the trustee need not be dishonest).
  2. Assistance by the third party: The third party must assist in the breach (by act, not mere inaction).
  3. Dishonesty: The third party must act dishonestly, judged objectively.

The standard for dishonesty is objective: would an honest person, knowing what the defendant knew, have acted as the defendant did?

Worked Example 1.2

A solicitor helps a trustee transfer trust funds to a private account, knowing the trustee lacks authority. The solicitor believes the beneficiaries will not be harmed. Is the solicitor liable?

Answer: Yes. The solicitor's conduct would be considered dishonest by ordinary honest people, regardless of his personal belief. He is liable for dishonest assistance.

Exam Warning

The standard for dishonesty is objective. A defendant cannot escape liability by claiming they personally thought their conduct was honest.

Remedies Against Third Parties

Where recipient or accessory liability is established, the court may grant:

  • Personal remedies: An order to pay compensation (equitable compensation) for the loss caused by the breach.
  • Proprietary remedies: If the trust property (or its traceable proceeds) is still in the recipient's hands, the beneficiaries may claim the property itself.

Key Term: equitable compensation
A monetary award to restore the trust fund to the position it would have been in but for the breach.

Key Term: proprietary remedy
A remedy allowing the claimant to recover specific property or its traceable proceeds, rather than just compensation.

Worked Example 1.3

A third party receives trust money and uses it to buy shares, which increase in value. The trust seeks a proprietary remedy. What can the trust claim?

Answer: The trust can claim a proportionate share of the shares (reflecting the trust money used), including any increase in value.

Defences and Limitations

Third parties may have defences, including:

  • Bona fide purchaser for value without notice: Not liable for knowing receipt.
  • Change of position: May reduce or defeat liability if the recipient acted in good faith and changed their circumstances.
  • Limitation periods: Claims for breach of trust are generally subject to a six-year limitation period, but not where there is fraud.

Revision Tip

Always check whether the third party received the property for value and without notice, or changed their position in good faith—these are common defences.

Key Point Checklist

This article has covered the following key knowledge points:

  • The distinction between recipient liability (knowing receipt) and accessory liability (dishonest assistance).
  • The requirements for each type of liability, including knowledge and dishonesty.
  • The remedies available against third parties, including personal and proprietary claims.
  • The main defences available to third parties, including bona fide purchaser and change of position.
  • The objective standard for dishonesty in accessory liability.

Key Terms and Concepts

  • stranger
  • recipient liability (knowing receipt)
  • unconscionable
  • bona fide purchaser for value without notice
  • change of position
  • accessory liability (dishonest assistance)
  • equitable compensation
  • proprietary remedy
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