Knowing Assistance and Knowing Receipt: Detailed Study Notes
Background and Historical Context of Personal Liability for Non-Trustees
General Scope: Simon Gardner's article (1996) reviews the personal liabilities of non-trustees for losses to trusts, specifically through the mechanisms of "knowing assistance" and "knowing receipt."
Harpum’s 1986 Review: Writing a decade prior, Harpum attempted to reconcile several disjointed decisions.
Knowing Assistance: Decisions like Selangor United Rubber Estates Ltd v. Cradock (No. 3), Karak Rubber Co. v. Burden (No. 2), and Baden v. Societe Generale pour Favoriser le Developpement du Commerce et de l’Industrie en France S.A. favored a wide scope for liability. Conversely, Belmont Finance Corp. Ltd v. Williams Furniture Ltd demanded a narrower scope.
Knowing Receipt: A wide view was taken in Nelson v. Larholt, Belmont Finance Corp. Ltd v. Williams Furniture Ltd (No. 2), the Baden case, and International Sales and Agencies Ltd v. Marcus. A narrow view was represented by Carl Zeiss Stiftung v. Herbert Smith & Co. (No. 2).
Harpum’s Taxonomy: Harpum brought consistency by dividing the topic into subdivisions and using an unusual grouping method, while adhering to what he perceived as the correct underlying principles.
Current Article Objective: Gardner seeks to map the developments since 1986, focusing on the clarification of "knowledge" and "notice," the arguments regarding the "proper mission" of these liabilities, and the practical implications of recent litigation.
Conceptual Framework: Knowledge and Notice
The Baden Categories of Cognisance: Peter Gibson J. articulated five levels of awareness in Baden v. Societe Generale:
(i) Actual knowledge;
(ii) Wilfully shutting one’s eyes to the obvious;
(iii) Wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make;
(iv) Knowledge of circumstances which would indicate the facts to an honest and reasonable man;
(v) Knowledge of circumstances which would put an honest and reasonable man on inquiry.
Confusion in Classification: Knowledge is traditionally identified with categories (i)-(iii), while categories (iv)-(v) are often labeled as notice.
Gardner’s Critique of Classification:
Categories (iv) and (v) involve the defendant knowing evidence from which a reasonable person would draw inferences, but failing to do so (without being "wilful" or "reckless").
True Notice: Extends further than (iv) and (v) to cases where a reasonable person would have discovered facts regardless of whether the defendant was aware of any specific evidence.
Peter Gibson J.’s View: He did not use the word "notice"; he categorized all five as forms of "actual," "imputed," or "constructive" knowledge.
Judicial Developments in the Concept of Knowledge
Primary Architects: Millett J. in Agip (Africa) Ltd v. Jackson and Vinelott J. in Eagle Trust Plc v. S.B.C Securities Ltd.
Knowledge as Dishonesty: For Millett and Vinelott JJ., the requirement of knowledge is effectively a requirement of dishonesty.
Only categories (i)-(iii) represent knowledge because they entail dishonesty.
The distinction between (ii)/(iii) and notice is not the degree of obviousness, but the defendant’s subjective position.
The Millett Test: If a person fails to draw inferences because they "did not want to know" or felt it was "none of their business," they are dishonest and treated as having actual knowledge.
The Process of Inference: Knowledge can be inferred from the circumstances.
Vinelott J.’s View in Eagle Trust: Inferred knowledge may be based on what an honest and reasonable man would have appreciated. If the defendant remains silent, the court may infer they either appreciated the fact or willfully shut their eyes.
Rebuttal: Millett J. allows for rebuttal (e.g., the defendant was too "foolish" to see), but Vinelott J. suggests the inference might be irrebuttable.
Commercial Reality: Pleading one's own foolishness is practically difficult for commercial entities (e.g., banks), making the distinction between inferred knowledge and notice slim in practice.
The Doctrine of Notice: Land vs. Commercial Contexts
Land Transfer Origins: Notice is a rigorous standard where the reasonable person is "highly perceptive, businesslike to the point of suspicious," and expected to investigate title meticulously.
Manchester Trust v. Furniss (Lindley L.J.): Proclaimed that extending the "equitable doctrines of constructive notice" to commercial transactions would do "infinite mischief and paralyzing the trade of the country."
The Overlap Problem: Many land dealings are commercial. Millett J. in Macmillan Inc. v. Bishopsgate Investment Trust Plc suggests focusing on whether the transaction is of a type where rigour is the norm (usually land) rather than if it is "commercial."
Two Schools of Thought on Non-Land Notice:
Vinelott J. School: Assumes the "reasonable person" always acts as in land transfer. Therefore, outside land cases, "notice" must be discarded and read simply as "actual knowledge."
Millett J. School: Proposes that the "reasonable person" behaves differently depending on the context. In commercial dealings, the reasonable person is not "unduly suspicious." Notice persists but refers only to what a reasonable person would have discovered with less strenuous efforts.
Synthesis: Despite different labels, both agree that liability outside land transfer applies a more lenient standard than "constructive notice in the strict conveyancing sense."
The Law of Knowing Assistance
Evolution toward Dishonesty: Modern decisions (Re Montagu’s Settlement Trusts, Lipkin Gorman v. Karpnale Ltd) generally agree that notice is insufficient; the focus shifted from knowledge to dishonesty.
Royal Brunei Airlines Sdn. Bhd. v. Tan: The Privy Council (Lord Nicholls) explicitly stated that dishonesty is the requirement and "knowingly" is better avoided as a defining ingredient.
Lord Nicholls’ Definition of Dishonesty:
"Not acting as an honest person would in the circumstances."
It is an objective standard: individual moral scales are irrelevant. If a person knowingly appropriates property, individual belief that it was "okay" does not excuse them.
Subjective Elements: Accountability must be taken of the defendant’s motives, attitudes, and actual personal cognisance of the facts.
Gardner’s Critique of Tan: While Lord Nicholls suggests the Baden scale is "best forgotten," Gardner argues that the court must still grapple with the defendant’s state of mind (cognisance), which effectively revives the need for an analysis of knowledge.
Revision of Barnes v. Addy: Royal Brunei ruled that liability for knowing assistance can arise even if the trustee’s breach was innocent. Previous authority required a fraudulent breach by the trustee.
Theoretical Underpinnings and Principles of Knowing Assistance
Argument 1: Fault-Based Liability: Some argue liability is necessarily fault-based. Gardner counters that all liability is based on "done harm"; fault is just a mechanism to ensure the incidence of liability is just.
Argument 2: Logic of Assistant/Principal: Sir Peter Millett argued it was illogical to require dishonesty for the principal (trustee) but only negligence for the assistant. Gardner refutes this logic using the example of store detectives, who are liable for negligence in failing to stop dishonest thieves.
Argument 3: Secondary Liability (Sales/Harpum): Harpum argues that because knowing assistance is a form of "secondary liability" (complicity), it necessarily requires knowledge. Gardner notes that secondary liability in criminal law sometimes results in liability for those engaged in nefarious activities even without perfect knowledge.
Argument 4: The Role of Contract and Tort (Lord Nicholls): Nicholls suggests that negligence-based liability is unnecessary because actors (like banks) often already owe a duty of care in contract/tort to the trustees.
Gardner’s Rebuttal: Concurrent liability (negligence + knowing assistance) is common in law. Furthermore, many defendants may not have a voluntary undertaking of care toward the trust.
The Policing Role of Professional Agents
Policemen Metaphor: Broad liability (notice/negligence) would incentivize professional agents (banks, solicitors) to act as "policemen."
Arguments Against the Policing Role: Millett J. argues "account officers are not detectives" and are entitled to assume people are honest until alerted otherwise.
Legislative Realities:
Money Laundering Regulation: The Drug Trafficking Offences Act 1986 and Criminal Justice Act 1988 (as amended in 1993) already force agents to be vigilant.
Auditing Standards: S.A.S. 110 and S.A.S. 120 (1995) require auditors to adopt an "attitude of professional scepticism" and design procedures to detect fraud.
Welfarist Approach: Broad liability compels beneficiaries/pensioners to essentially be insured via the higher fees charged by professional agents who must cover their own liability risks.
The Law of Knowing Receipt
State of the Law: Re Montagu’s Settlement Trusts initially required knowledge (Baden i-iii). However, Agip (Africa) Ltd v. Jackson (Millett J.) introduced notice as sufficient.
Conflict of Standards:
Vinelott/Knox JJ: Notice = Knowledge (inferable).
Millett J: Notice = Reasonable person standard (context-dependent).
Knowing Receipt as Restitution (Birks/Millett): Birks argues knowing receipt is not about "wrongdoing" but "unjust enrichment."
Liability should be strict, subject to the defense of change of position or bona fide purchase for value without notice.
Sir Peter Millett (extrajudicially and in El Ajou v. Dollar Land Holdings Plc) supports strict liability, though constrained by precedent to use "notice" as a staging-post.
Theoretical Foundations of Restitution vs. Security of Wealth
Security of Wealth Interest: Traditional requirements of notice/knowledge protect the recipient’s interest in assuming their resources are safe to spend without "looking over their shoulder."
Change of Position vs. Broad Security:
Change of Position Defense: Operates on a particularized belief (e.g., "I bought a cruise because I thought I had the money").
Gardner’s Critique: In real life, spending is based on a subconscious sense of overall wealth. Protecting this interest requires a rule that assets, once assimilated into a coffer bona fide, become unrecoverable.
Purchasers as Policemen: While agents in "knowing assistance" are well-placed to be policemen, recipients in "knowing receipt" are a diffuse group (lay persons + professionals). Imposing high investigative costs on all purchasers could damage market efficiency.
Conclusion: The Relativity of Legal Values
Dismissal of Finality: Gardner argues that the confidence found in recent judgments (e.g., Lord Nicholls in Royal Brunei) is likely misplaced.
Complexity of Financial Law: Because financial dealings are sophisticated, no rule can capture "transcendent verities."
The "Jury Question": Gardner echoes Millett J.’s sentiment that liability is essentially a jury question—an emblem of the law’s need to accommodate shifting social values and contingency rather than rigid, firm rules.
Final Summary: The law regarding non-trustee liability remains a compromise between economic efficiency (minimizing commercial costs) and the protection of trusts (policing fiduciaries through their agents).