Remedies Against Third Parties

Equity and Trusts Chapter 10

How can a third party be sued by a beneficiary?

If they are found to be accessories or recipients - liable as though they were trustees.

What is accessory liability?

A third-party stranger is liable under this head if they dishonestly assist a breach of trust or fiduciary duty

i) assistance = in breach - need awareness of the purpose - liable if they knew about an illegal scheme, even if they don’t know the details

ii) dishonesty = ‘conscious impropriety’ - it involves advertant conduct (carelessness/negligence is not enough)

What was decided in Brunei Air?

Lord Nicholls confirmed that a stranger can be liable if they participate in or instigate a breach of trust (irrespective of whether this breach was committed in good faith or fraudulently)

It is only the stranger who must be dishonest for the liability to arise

Test = did the defendant act as an honest person would have acted in the circumstances? (also an objective standard of honesty)

When does recipient liability arise?

a) the trustee transfers trust property to a stranger in breach of trust (or a fiduciary transfers property in breach of fiduciary duty)

b) the stranger receives the property for their own benefit

c) the stranger receives the property with the requisite degree of knowledge that the transfer of the property was in breach of trust or fiduciary duty (or later acquire the knowledge)

What is the standard for knowledge in recipient liability?

To show that the defendant’s knowledge made it unconscionable for them to retain the property

How much knowledge is unconscionable?

Actual knowledge about the provenance of the receipt would give rise to liability

It is also accepted that deliberately shutting one’s eyes to the obvious or deliberately failing to make enquiries would constitute such unconscionable knowledge

*unlikely to include constructive knowledge (i.e. knowledge which would have been acquired had the defendant made the enquiries a reasonable person would have made)

What is intermeddling and how does it apply?

Where someone, not a trustee, does acts characteristic of a trustee - they will be liable for any misapplication of trust property or other loss caused to the trust just as if they had been appointed an express trustee

E.g. continuing to collect rent when no longer authorised

= 'trustee de son tort’ (a trustee of his own wrong)

What happens if you are a Bona fide purchaser?

BFP = ‘bona fide purchaser of the legal interest for value without notice’ - acted honestly, paid market value

No proprietary claim can be brought against this third party.

the beneficiaries’ equitable rights transfer to the proceeds of sale which the trustee or fiduciary received

What happens if the third party is a wrong-doer? (i.e. recipient liability)

Beneficiaries or fiduciary principals can bring a proprietary claim against the recipient to recover property received or its replacement, and as the third-party stranger is a wrongdoer, they are liable as if they were trustees

What happens if there is clear sub? (wrong-doer)

The claimant can elect to take the substitute property or to have a charge over the property to secure the amount due to the trust (the equitable lien).

What happens if there is mixed sub? (i.e. mixed trust fund and own funds) - (wrong-doer)

The claimant can take a lien over the purchased asset for the amount of the fiduciary receipt contributing to the purchase, or, alternatively, they can claim ownership of a proportion of the asset (corresponding to the proportion of the purchase price contributed).

What happens if the T-P is innocent and it is a clean sub?

Bring a proprietary claim against that innocent volunteer to recover substituted property, despite the recipient’s lack of awareness as to the provenance of the original propert

What happens if the T-P is innocent and it is a mixed sub?

The solution which equity adopts is that the trust and the innocent volunteer share the asset pro rata in proportion to their contributions to the purchase price (e.g. 2/3 trust fund = 2/3 of asset)

*no option of lien as innocent - both parties must be treated equally

What is a defence for innocent volunteers?

Inequitable result - due to tracing and resulting proprietary claim

This defence is never available to trustees and fiduciaries who have misappropriated property subject to trust or fiduciary duties or to wrongdoers like recipients or intermeddlers.

What was decided in Diplock?

money used for the alterations and improvements could not be traced as:

a) improvements may not have added to the value of the buildings - the trust money no longer existed, and so was dissipated.

b) tracing does not produce this equality of treatment

c) Cannot use defence if the money was used to acquire a new asset, rather than to improve a property she already owned.

What is restitution?

A legal claim against the person now holding the property on the grounds of unjust enrichment

Restitution is a personal claim, not proprietary, and thus will not have priority on the bankruptcy of the defendant

What are the key features of restitution?

a) claimant must be legal owner - legal title - e.g. trustee claim to recover from co-trustee

b) strict liability - no need to prove that the defendant acted dishonestly, nor indeed any reason to inquire into the defendant’s state of mind or their knowledge of the provenance of the stolen money.

c) proof of receipt of the claimant’s property - prove that the defendant received the claimant’s property - if changed form will be necessary to use common law tracing to establish that the property received by the defendant is indeed the claimant’s.

*common law tracing has to be employed (not equitable) because restitution is a common law claim (if doesn’t work - claim will fail)

What are the defences to restitution?

a) Bona fide purchaser - cannot claim

b) Change of position - an innocent defendant who has so changed their position that it would be unjust to compel them to make restitution can claim this defence (spent in an ‘exceptional way’)