Strangers who assist a Breach of Trust

Primary Liability

Where a trustee commits a breach of trust he will be personally liable to compensate the trust for any loss suffered in consequence of his breach. His liability is a primary liability, as he was subject to the trust obligations. However, equity will also hold liable a stranger who participates in a breach of trust by assisting a trustee in action which constitutes a breach.

The liability of such an assisting stranger is a secondary liability.  The stranger is liable as an accessory to the breach of trust. Such accessory liability may provide the only effective remedy for the beneficiaries if the trustee is insolvent. Equity will hold a stranger who assisted a breach of trust liable to account as a constructive trustee. This was recognised in Barnes v Addy (1874) 9 Ch App 244 where Lord Selbourne stated that the responsibilities and liabilities of a trustee may be ‘extended to those who are not properly trustee, if they are found…actually participating in any fraudulent conduct of the trustees to the injury of the [beneficiary] trust.’

A personal remedy

A stranger who acts as an accessory to a breach of trust will generally only be subject to a personal liability to account to the trust for the loss suffered in consequence of the breach. Ordinarily he will not have received any trust property, and consequently the beneficiaries will be unable to identify any assets in his hands which could be the subject of a proprietary claim.  It is highly artificial to describe the liability of a stranger who has assisted a breach of trust as ‘liability to account as a constructive trustee.’ By definition restitution is only available to reverse an unjust enrichment. This was recognised by the Privy Council in Royal Brunei Airlines v Tan:

‘Liability as an accessory is not dependent upon receipt of trust property; it arises even though no trust property has reached the hands of the accessory. It is a form of secondary liability in the sense that it only arises where there has been a breach of trust,’ [1995] 3 All ER 97.

Requirements of accessory liability

A stranger will only be held liable as an accessory to a breach of trust if four requirements are satisfied. These requirements were identified by Peter Gibson J in Baden Delvaux v Société Général and subjected to significant revision by the Privy Council in Royal Brunei Airlines v Tan.

The existence of a trust

A stranger can only be held liable as an accessory to a breach of trust if there was in fact a trust in existence. This requirement is generally uncontroversial. For example, in Royal Brunei Airlines v Tan the claimants were an airline which employed a firm to act as their agents for the sale of tickets. Under the contract between the parties, the firm agreed to hold any money received from the sale of tickets on trust for the airline until it was paid over. The defendant was the founder and the principle shareholder of the firm. In breach of the terms of the contract the firm, authorised by the defendant, used money received from ticket sales for its own purposes. On the insolvency of the firm the airline claimed that the defendant was liable to account as an accessory to the breach of trust that had been committed by the firm. In these circumstances there was clearly an express trust, thus opening the possibility of accessory liability. There is no need for the defendant to have known of the existence of the trust.

A breach of trust

A stranger will almost certainly only be liable as an accessory if a breach of trust was committed by a trustee.  In Baden Delvaux v Société Général Peter Gibson J had held that a stranger would only be liable if the trustee had assisted in a dishonest and fraudulent design of the trustees. In Royal Brunei Airlines v Tan [1995] 3 All ER 97, the defendant therefore claimed that he should not be liable as an accessory because the firm, which had misused money held on trust, had not acted fraudulently or dishonestly.

Assistance in the breach of trust

A stranger will only be liable as an accessory if he in fact assisted the commission of a breach of trust. In Royal Brunei Airlines v Tan [1995] 3 All ER 97, the defendant had authorised the use of trust money by the firm for its ordinary business purposes, including the paying of salaries and expenses and keeping its bank overdraft down. He had clearly assisted in the commission of the breach. However, where it cannot be shown that the stranger has assisted the breach of trust there will be no grounds for any accessory liability.

Dishonesty

The equitable liability of a stranger as an accessory to a breach of trust is fault-based. It operates as a species of equitable wrong, similar to a common law tort. Much of the debate over the years has concerned the degree of fault which must be demonstrated before an assistor will be held liable as an accessory. Prior to Royal Brunei Airlines v Tan, [1995] 3 All ER 97, this debate was couched in the language of ‘knowledge.’ In some cases it has been held that a stranger would be liable as a knowing assistor if he had participated in a breach of trust without any actual knowledge but in circumstances where he had been negligent in not realising, or discovering, that he was assisting a breach of trust. However, increasingly it came to be held that a higher standard of fault than mere negligence was required to establish accessory liability.

In Twinsectra v Yardley [2002] 2 All ER 377 the House of Lords confirmed that dishonesty was the necessary condition for the imposition liability, thus affirming the decision in Royal Brunei Airlines v Tan.