Tracing

Question 1

3rd party: What are the 2 heads of liability?

Answer 1

1. Knowing receipt
2. Dishonest assistance

‘Different considerations apply to the two heads of liability. Recipient liability is restitution-based, accessory liability is not.’
[Royal Brunei Airlines, Lord Nicholls]

Question 2

3rd party: What kinds of claims can be brought against 3rd parties?

Answer 2

Equitable remedies:
• Proprietary claim for actual trust property or traceable proceeds still held by stranger
• Personal claim to restore the trust (i.e. pay money to the value of the dissipated trust property)
• Personal claim for stranger’s being an accessory to the breach of trust

Common law remedies:
• Restitution based on unjust enrichment
• Compensation for loss based on tort of conversion

Question 3

3rd party: Is there a defence for 3rd parties?

Answer 3

Change of position defence
• Only under common law
• Only for innocent strangers to trust

Question 4

Innocent 3rd party: What can Bs do when trust property falls into hands of innocent 3rd parties?

Answer 4

Once Bs’ interests are located via tracing, Bs may make a claim in respect of that interest, whether against Ts or 3rd parties
[Boscawen v Bajwa, Millett LJ]

Question 5

Innocent 3rd party: What actions are available to Bs in Equity?

Answer 5

1. Adopt any property obtained with trust funds as part of trust, even if value of property has diminished; or
2. Be ordered to just leave the property with the 3rd party where it would be inequitable to take it back
   [Re Diplock]

Question 6

Re Diplock (1948)

Answer 6

[IF INEQUITABLE TO DO SO, PROPERTY WILL NOT BE REMOVED FROM INNOCENT 3RD PARTY]

Facts:
• Innocent recipient was a charity that was mistakenly paid by an executor

Judgment:
• A charge over the trust property made by Bs might require the charity to sell the property, so risk of causing significant loss to the charity outweighed need to compensate Bs

Question 7

Innocent 3rd party: What actions are available to Bs in common law?

Answer 7

Can trace proceeds as well as in Equity, but might be harder to lay claim on proceeds – conflict re validity of change of position defence as it comes about from restitution basis for compensation.

Question 8

Innocent 3rd party: What are arguments favouring restitution in common law?

Answer 8

Restitutionary liability is ‘applicable regardless of fault but subject to a defence of change of position.’
[Lipkin Gorman, Lord Nicholls]

Question 9

Lipkin Gorman v Karpnale (1991)

Answer 9

[COMMON LAW REMEDY FOR Bs = RESTITUTION]

Facts:
• Solicitor used his signing authority to withdraw funds from firm’s client account to gamble
• Firm sued owner of casino and argued only on common law principles of restitution

Judgment:
• HL: firm retained sufficient legal interest in the money to claim it back as trustees of their client’s money

Question 10

Innocent 3rd party: What are arguments against restitution in common law?

Answer 10

Traditional formulation should apply (i.e. no change of position defence should be available, Bs should remain always entitled to assert their title over trust property)
[Westdeutsche Landesbank v Islington London BC]

‘the restitution basis is unhistorical.’
‘The restitution basis reflects a mentality in which considerations of ideal taxonomy prevail over a pragmatic approach to legal development.’
[Farah Constructions v Say-Dee, Australia]

Question 11

Dishonest assistance: Definition?

Answer 11

• Accessories to breaches of trust can be liable whether or not trustee was dishonest, so long as accessories themselves are dishonest
[Royal Brunei Airlines, disagreeing with Lord Selborne LC in Barnes v Addy]

Question 12

Dishonest assistance: Standard of dishonesty?

Answer 12

1. Test is objective: Assess by the behaviour of an honest and reasonable man
   [Royal Brunei Airlines, Lord Nicholls in Privy Council]
2. Combined subjective/objective test (Lord Hutton) OR objective test (Lord Millett)
   [Twinsectra v Yardley]
3. Back to objective test (Lord Hoffmann)
   [Barlow Clowes v Eurotrust Int’l, Privy Council]
4. Affirmed the objective test, because the more warped D’s standard of dishonesty is the more likely D would be acquitted
   [Ivey v Genting Casinos (2017)]

Question 13

Dishonest assistance: How can [Royal Brunei Airlines] and [Barlow Clowes] be taken as authoritative?

Answer 13

Past cases have:
• Supported them as authoritative and binding
[Abou-Rahmah v Abacha, Arden LJ]

• Held them as most authoritative, despite them being Privy Council decisions
[Statek Corp v Alford, Evans-Lambe J]

Question 14

Dishonest assistance: Why can accessories be held liable?

Answer 14

Prevailing view in [Agip] and [Barlow Clowes]:
•Not making inquiries into ANY suspicious activity is dishonest so 3rd parties ‘cannot complain if, for the purpose of civil liability, they are treated as if they had actual knowledge’
[Agip (Africa) v Jackson, Millett J]

• ‘Someone can know, and can certainly suspect, that he is assisting in misappropriation of money without knowing that the money is held on trust or even what a trust means.’
[Barlow Clowes]

Alternative view in [Brinks v Abu-Saleh]:
•Woman believed she was assisting in tax evasion instead of transferring robbery proceeds, which was what she was actually doing; woman was excused of liability

Question 15

Knowing Receipt: Definition?

Answer 15

‘Liability for knowing receipt is a distinctive, primary, custodial liability, which closely resembles the liability of express trustees to account for the trust property with which they are charged.’
[Mitchell and Watterson (2010)]

So, knowing recipients = constructive Ts

Question 16

Can non-Ts acting as Ts be held liable?

Answer 16

Yes, for any misapplication of trust or other losses caused to trust
[Mara v Browne (1896)]
[Dubai Aluminium v Salaam (2003), Lord Millett: De facto Ts liable under strict liability]

Question 17

Knowing Receipt: What is knowing dealing?

Answer 17

• Minor variation where ignorant recipient learns of breach of trust and still deals with trust property inappropriately

• Recipient is treated as knowing recipient from the point of knowing about the breach of trust and assigned personal liability
[Lee v Sankey]

Question 18

Lee v Sankey (1872)

Answer 18

[3RD PARTIES WHO KNOWINGLY MANAGE TRUST PROPERTY INAPPROPRIATELY = KNOWING DEALING + PERSONAL LIABILITY]

Facts:
• Solicitors received proceeds of sale of trust property and held it for further investment
• Fully aware this would breach trust, they transferred part of the funds to only one of the trustees, who dissipated the whole amount

Judgment:
• Solicitors held personally liable for the loss of trust money

Question 19

Knowing Receipt: What is standard of knowledge required?

Answer 19

1. 5 knowledge categories in [Baden v Societe Generale]

Question 20

Knowing Receipt: Banque Belge v Hambrouck, Atkin LJ on equity tracing v common law following

Answer 20

Common law ‘halted outside the banker’s door’ but Equity has ‘the courage to lift the latch, walk in and examine the books’