Third Party Liability (focusing on 'dishonest assistance') - Lecture 16 - Property II

Barnes v Addy is not good law, however it acts as an important foundation in the development of the law historically, therefore what is the role that Barnes v Addy plays? How do later cases of Dubai Aluminium and Royal Brunei Airlines v Tan relate to the relevancy of Barnes v Addy?

In relation to Barnes v Addy, it is an important foundation of understanding the development of the law historically, but it is doubtful whether Barnes v Addy remains good law in England (despite being good law in Australia), however, it is frequently mentioned within the law.

Within Barnes v Addy, Lord Selbourne outlined 3 aspects -

1. Those who create a trust clothe the trustee with a legal power and control over the trust property, imposing on him a corresponding responsibility [...]

2. Strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions, perhaps of which a Court of Equity may disapprove,

3. Unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees

However, the relevancy of Barnes v Addy is brought into question by Dubai Aluminium case as the court outlined that the assistor is seen as an express trustee, not an constructive trustee (Barnes v Addy viewed the assistors as being constructive trustees, based on the orthodox rationale of beneficiaries bringing claims against trustees in equity, then by extension to third party assistors, however the relevancy of this is questioned since third party liability exists as a concept).

Barnes v Addy led to the naming being 'knowing assistance', after Royal Brunei Airlines v Tan led to the shift to 'dishonest assistance'  - both terms have been used, but dishonest assistance remains the prominent naming (which is better, knowledge or dishonesty?).

What are the 3 elements of liability required to establish ‘dishonest assistance’ in summary?

1. Must establish a breach of trust or fiduciary duty

2. Must establish assistance or inducement

3. Fault element

Is there distinction between assistance and inducement within ‘dishonest assistance’ as per Royal Brunei Airlines v Tan?

There is no distinction between assistance and inducement, therefore both assistance and inducement are placed underneath the same umbrella as 'dishonest assistance'.

What is the first requirement to establish ‘dishonest assistance’?

You must establish a breach of trust or fiduciary duty

Baden Delvaux addresses the 2nd requirement of establishing liability as to ‘dishonest assistance’ (which is ‘must establish assistance or inducement’), what does Baden Delvaux state?

Baden Delvaux outlines that the 2nd requirement of ‘dishonest assistance’ is -

• A simple question of fact whether there is assistance, this must not be of minimal importance - as long as it has some impact, then this would be enough to satisfy the requirement.

Grupo Torras SA v Al Sabah (No 5) addresses the 2nd requirement of establishing liability as to ‘dishonest assistance’ (which is ‘must establish assistance or inducement’), what does Grupo Torras SA v Al Sabah (No 5) state?

Grupo Torras SA v Al Sabah (No 5) outlines that the 2nd requirement of ‘dishonest assistance’ is -

• There is no strict 'but for' test of causation

• LJ Mance stated that it is inappropriate if we attempt to assess the PRECISE significance in respect to resulting loss, breach and etc, instead it is important that the assistance led to the breach of trust/fiduciary duty, no need to assess the 'precise causative significance' but what assistance was it and what did this assistance cause. There won't be any accessory liability if the breach actually occurs, hence some link between the accessories conduct and the result is required (you must participate in the PRIMARY breach of duty, not after the breach has occurred, but a breach can occur over a continuous over the period of time if the breach is ongoing, therefore the conduct element is very broad).

Baden Delvaux addresses the 3rd requirement of establishing liability as to ‘dishonest assistance’ (which is ‘fault element’), what does Baden Delvaux state? Which case later invalidated Baden Delvaux, and what does it show about the development of the law within ‘dishonest assistance’?

Baden Delvaux outlines that the 3rd requirement of ‘dishonest assistance’ is -

It established the Baden Scale, where you can distinguish between 5 types of 'knowing' such as -

1. actual knowledge,

2. deliberately not looking at something hence shutting your eyes to the knowledge,

3. wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make;

4. knowledge of circumstances which would indicate the facts to an honest and reasonable man;

5. knowledge of circumstances which would put an honest and reasonable man on inquiry

It is important that the Baden Scale was later invalidated by the case of Royal Brunei Airlines v Tan in favour of an objective test of dishonesty, we see transition from these rigid standards of proving ‘knowing’ - addresses criticisms of the Baden Scale which was that the threshold must be higher if we must make third parties liable for breach of trust or breach of a fiduciary duty.

Royal Brunei Airlines v Tan establishes the Baden scale created by the Baden Delvaux as bad law and addresses the 3rd requirement of establishing liability as to ‘dishonest assistance’ (which is ‘fault element’), what is the context, outcome and importance of Royal Brunei Airlines v Tan?

Context → The Royal Brunei Airline had employed BLT to work as it's travel agent, accounting for their Brunei airlines' ticket sales and deducting commission, therefore BLT was a trustee for the claimant Brunei airline, holding the money on trust. BLT didn't put the money into a segregated client account, instead used the monies in course of the regular business and BLT went bust, therefore the claimant was looking for remedies discovering a breach of trust and not holding money for the airline properly, BLT were bust/in insolvency therefore Tan was sued as the major shareholder and director of BLT. Tan agrees that he knew about the breach of trust and assisted, Tan argued that he didnt act in a dishonest design, it was solely a badly set out travel agency design and therefore he argued under Barnes v Addy, he couldn't be liable. the First Instance Court concluded that he wasn't liable due to it not being of a dishonest design.

Why did Royal Brunei Airlines sue Tan as the third party? And what concerns does this raise? → They sued Tan, a third party, to get remedy satisfaction and deeper pockets than the primary wrongdoer - might be concerns about claimants going defendants' shopping to bring distant defendants to hold them liable for remedies is a criticism of widening the scope?

Outcome → The PRIVY COUNCIL departed from Barnes v Addy on this point and that Tan was personally liable for assisting and knew what he was doing, it doesn't matter whether BLT was dishonest or not, Lord Nichols argued 'trustees state of mind is irrelvant, and if the third party is at fault/dishonest, we shouldnt care if the trustee is dishonest or not, it does not matter and Lord Nichols argued we must forget the Baden Scale of knowledge (as per Baden Delvaux) due to concerns of inconsistent application of differing courts applying it in different ways.

Importance → Establishing a new test for ‘dishonest assistance’ - Lord Nichols argued we must remove knowledge to its entirety, focusing on honesty more specific 'dishonesty', it is not subjective and people cannot set their own standards of honesty, it is an OBJECTIVE TEST (broad conduct element, but strict intention element by implementing an objective standard of the 'reasonable' person as per Nichols approach).

Twinsectra Ltd v Yardley is the leading case which establishes the 3rd requirement of establishing liability as to ‘dishonest assistance’ (which is ‘fault element’) and affirms Royal Brunei Airlines v Tan, what is said by Lord Hutton here when he is affirming, and how does Twinsectra Ltd v Yardley depart from the test set out by Lord Nicholls in Royal Brunei Airlines v Tan? And why was this departure by Lord Hutton controversial in Twinsectra Ltd v Yardley?

Twinsectra Ltd v Yardley is the leading case and had endorsed the perspective of Lord Nichols statement in Royal Brunei Airlines v Tan, and Twinsectra case altered the stance of Lord Nichols.

Lord Hutton gave the leading speech, introducing a subjective element to dishonesty, the 'defendant must have realised that what he did was dishonest as per reasonable people' and  the context is a claim against the solicitor, the trial judge said even if the soliictor (leach) shut his eyes to the details of the transaction and didnt act dishonestly because he didnt believe the money was trust money. The HOL argued Leach didn't act dishonestly.

Lord Hutton outlined 3 possible standards of dishonesty, which are

1. it is purely subjective, if you dont comply to your own honesty,

2. purely objective standards of dishonesty by the ordinary reasonable people or

3. COMBINED standard which combines objective and subjective standards, but also the defendant realised their conduct was dishonest by those standards

In contrast to Royal Brunei Airlines v Tan, when they discuss dishonesty, Lord Nicholls argued that we cannot have the Ghosh test criminal equivalent, HOWEVER in Twinsectra Ltd v Yardley revived this combined test of Lord Hutton, which is controversial as some argue defendants can set their own standards of honesty and dishonesty, Lord Millett dissented on the dishonest assistance point in regards to Lord Hutton's words not being consistent with Lord Nichol's approach in Royal Brunei Airlines v Tan.

Barlow Clowes International Ltd v Eurotrust International Ltd tried to reconcile Lord Nicholl’s test in Royal Brunei Airlines v Tan and Lord Hutton’s test in Twinsectra Ltd v Yardley relating to the 3rd requirement of establishing liability as to ‘dishonest assistance’ (which is ‘fault element’), what is endorsed and concluded in Barlow Clowes International Ltd v Eurotrust International Ltd and by whom?

Lord Hoffmann in Barlow Clowes International Ltd v Eurotrust International Ltd concluded that what Lord Nichols stated in Royal Brunei Airlines v Tan is the same as what Lord Hutton stated in Twinsectra Ltd Yardley, therefore the approach Lord Nicholls outlined in Royal Brunei Airlines v Tan is the CONCLUSIVE approach.

Therefore, Barlow Clowes International Ltd v Eurotrust International Ltd affirmed the objective test for dishonesty set out by Lord Nicholls in Royal Brunei Airlines v Tan as the leading approach in establishing the fault element for ‘dishonest assistance’.

Ivey v Genting Casinos UK Ltd (Crockfords Club) addresses the 3rd requirement of establishing liability as to ‘dishonest assistance’ (which is ‘fault element’), what is the context, outcome and importance of Ivey v Genting Casinos Uk Ltd?

Context → The defendant noticed the patterns during the casino, earning millions and the casino refused to pay, speculating that he cheated and the claimant wished to claim the money, and the pitt manager agreed to all of the claimant's requests not realising that the claimant had an edge.

Outcome → The Supreme Court held that edge-sorting amounted to cheating. The court found that while Ivey didn't believe he was cheating, his actions were "positive steps" to manipulate the game’s, making his conduct dishonest by the standards of ordinary people. Therefore, his actions were found dishonest.

Importance → This case established the removal of Subjective Element, therefore the defendant no longer needs to have known that their actions were considered dishonest by others, and the previous "two-stage Ghosh test" - used in criminal law which asked if the conduct was dishonest by standard, and if the defendant knew it was - was deemed problematic and overruled. Therefore, the objective standard test for dishonesty was applied, which meant that Mr. Ivey’s actions were dishonest, regardless of whether he believed his tactic was legitimate, as it was objectively dishonest.

Group Seven Ltd v Notable Services LLP addresses the 3rd requirement of establishing liability as to ‘dishonest assistance’ (which is ‘fault element’), what is the context, outcome and importance of Group Seven Ltd v Notable Services LLP? What were the comments made in obiter dicta by Court of Appeal within Group Seven Ltd v Notable Services LLP?

Context → Fraudsters defrauded Allseas Group of €100m, laundering a portion through a client account at Notable Services LLP, a multi-disciplinary firm of solicitors. The defendant Martin Landman, a partner in Notable Services and an accountant, assisted the scheme and received a bribe. Group 7 brought a claim against the solicitor (Mr Landman) who worked within one of the companies which the money was transferred to, arguing there was dishonest assistance.

Outcome → The court concluded the test for dishonesty is set in Royal Brunei Airline v Tan, and that the test in Royal Brunei Airlines v Tan was reinforced again by HOL's findings in Twinsectra Ltd v Yardley. The court found that the solictor did knowingly shut his eyes to the fiduciary duty, and that blind-eye knowledge was sufficient on the facts of Group Seven Ltd v Notable Services LLP and even suspicions falling short of blind eye knowledge weren't wholly irrelevant, the court should ascertain all the facts such as the knowledge and beliefs of the defendant to assess dishonesty and it was found that solicitor's behaviour was objectively dishonest irrespective of it being not being subjectively dishonest.

Importance → This case affirmed the validity of the objective test of dishonesty established by Lord Nicholls within Royal Brunei Airlines v Tan, and echoed similar sentiment of Lord Hoffman in Barlow Clowes International Ltd v Eurotrust International Ltd that Lord Hutton in Twinsectra Ltd v Yardley merely affirmed Lord Nicholl’s objective test as opposed to creating a new Ghosh test equivalent.

Obiter dicta comments → The Court of Appeal said in obiter hat there is no minimum content of knowledge, and that this depends on the facts.

Ultraframe (UK) Ltd v Fielding addresses the remedies available for ‘dishonest assistance’ (once the 3 requirements have been proven), what is the conclusion of Ultraframe (UK) Ltd v Fielding? And what is the issue/controversy of this in terms of remedies?

The court concluded that if you look at loss, this will look like joint and several loss liability and you can sue the trustee/third party and etc involved to recover the loss as per orthodoxy. (This only deals with loss and compensation, it doesn't involve gains made in relation to joint and several loss liability).

The controversy regarding remedies available within ‘dishonest assistance’ relating to Ultraframe (UK) Ltd v Fielding →

In Canada and other jurisdictions, they allow joint and several liability for gains AND loss in relation to dishonest assistance, whilst in the UK, Ultraframe outlines that you can only obtain joint and several liability when it comes to compensating loss and not gain (though you can obtain remedies for gains made, just not through joint and several liability)

Novoship (UK) Ltd v Nikitin addresses the remedies available for ‘dishonest assistance’ (once the 3 requirements have been proven), what is the conclusion of Novoship (UK) Ltd v Nikitin? And what is the issue/controversy of this in terms of remedies?

Context → The gain made by the accessory was an opportunity to enter into charters at market rates, but they were not essentially advantageous.

Outcome → The court concluded that profit made from charters are too remote, made on market value and normal rates therefore you couldn't get an account of profits, there needs to be a SUFFICIENTLY, DIRECT CAUSAL CONNECTION to gain account of profits against the accessory/third party specifically. This case outlined that in this English jurisdiction, we cannot order an account of profits against a defendant who has NOT made any profits, it is personal to the person who has made profits - as it appears overly punative in it's measure. ACCOUNT OF PROFITS is personal to the profits made by the defendant.

Importance → Novoship demonstrates the distinction from the rules on account of profits to the fiduciary meanwhile accoount of profits cannot be made against defendants who don’t make profit from their ‘dishonest assistance’. Novoship demonstrates the difference between obtaining remedies by accessories and fiduciaries.

Issues → Potential injustice for beneficiaries who attempt to reclaim loss or compensation due to the actions of the third party who ‘dishonestly assisted’ the breach of duty or fiduciary duties since the beneficiaries cannot go defendant shopping and recoup losses against defendants who haven’t made a profit but nonetheless assisted or induced the breach of duty dishonestly. THOUGH … this is protective to defendants as it would be excessive to disgorge them for profits they have not gained from their actions, but is this not protecting the wrongdoing third party with no accountability? Barring beneficiaries from suing third parties who haven’t made a profit from their ‘dishonest assistance’ prevents from them alternative options of redressing their loss, hence the wrongdoer is in a better situation despite their actions and the beneficiaries must continue defendant shopping to address their loss.

How have other common law jurisdictions reacted to Novoship (UK) Ltd v Nikitin relating to remedies available for ‘dishonest assistance’ - as in Ancient Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd? What is the context, outcome and importance of Ancient Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd? (an alternative approach to remedies for ‘dishonest assistance’)

Context → Two senior employees of Lifeplan Australia (a funeral products provider) prepared a business plan while still employed, aimed at transferring Lifeplan's customer base to a smaller competitor, Ancient Order of Foresters ("Foresters"). Foresters was aware of the confidential nature of the information and the breach of duty by the employees, yet proceeded with the plan, resulting in significant profits for Foresters and losses for Lifeplan - knowingly assisted.

Outcome → The High Court of Australia found that Foresters was liable as an accessory. The court ordered that Foresters account for the total capital value of the benefit derived from the breach, not just the profits, marking a strong stance on deterring dishonest commercial behavior.

Importance and why the Australian Courts refused to follow Novoship (UK) Ltd v Nikitin? → The Australian courts refused to follow Novoship (UK) Ltd v Nikitin, instead this case clarified that an accessory can be liable for the entire profit derived from the breach, aiming to prevent unjust enrichment and demonstrated Australian policy of deterrence, making it more risky for businesses to knowingly capitalize on a competitor's breach of fiduciary duty by their employees.

Hotel Portfolio II UK Ltd v Stevens addresses the remedies available for ‘dishonest assistance’ (once the 3 requirements have been proven), what is the context, outcome and importance? And what is the issue/controversy of this case in terms of remedies? How does Hotel Portfolio II UK Ltd v Stevens relate to Novoship (UK) Ltd v Nikitin?

Context → The director's company sold luxury hotels to another company which the director effectively controlled, they were then sold on for profit, the first instance judge concluded they committed two breaches of fiduciary duties and exploited the profits for his own use and were over 100+ million and the profits were all dissapated due to investments made, the claimant issued a claim against Stevens.

Outcome → The court found that Stevens assisted both breaches of fiduciary duties, and Stevens was paid 1.5 million from the director, based on Novoship case, you can take account of profits from the dishonest assistor, however the issue is whether the claimant could get 100+ million from Stevens which the director made, can you hold the accessory liable for the profits made by the director/fiduciary, Hotel Portfolio stated that they were seeking compensation from Stevens since the director was holding the money on a constructive trust (as per FHR case) and Stevens assisted in paying away the 100+ million - Supreme Court argued the claimant could establish compensatory liability, so Stevens was liable for 100+ million too.

Importance → This case reaffirmed Novoship case, and you can get an account of profit against the accessory, but in cases where the fiduciary does not obtain any money but the accessory does, we can disgorge the accessory or vice versa.

What are criticisms relating to this case → There was a dissent whether it was right to hold Stevens liable or not? - is this the price he paid for being dishonest and assisting in that breach, or is he having to account for the profits made by the director himself? There are concerns about whether we are disgorging Stevens excessively and whether this is proportionate to hold him account for the ‘dishonest assistance’ in paying away 100+ million despite only receiving a 1.5 million sum.

How does Hotel Portfolio II UK Ltd v Stevens relate to Novoship (UK) Ltd v Nikitin? → They relate because Hotel Portfolio reaffirmed the Novoship case, therefore confirming that the English stance was that we cannot order an account of profits against a defendant/third party who has not made any profits, it is personal to the person who has made profits. However, if the third parties do make a profit, we can disgorge them for the entirety of the money stolen.

Can you elect different remedies against different parties when it comes to dishonest assistance?

You can make a different election against different parties - it doesn't mean you're bound to seek the same remedy against another defendant.