Dishonest assistance
Dishonest assistance, or knowing assistance, is a type of third party liability under
History
It is a common belief that dishonest or knowing assistance originates from Lord Selbourne's judgment in Barnes v Addy:[1]
[S]trangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions, … unless those agents received 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.
As can be seen, the judgment laid down two heads of liability: one based on receipt of trust property (knowing receipt) and the other on assisting with knowledge in a dishonest and fraudulent design (knowing assistance).
Lord Selbourne's statement has been heavily criticized, particularly on the requirement that the defaulting fiduciary / trustee has to be dishonest or fraudulent. A commentator noted that Fyler v Fyler[3] and AG v The Corporation of Leicester,[4] two decisions on knowing assistance in the 1840s which predated Barnes v Addy, did not mention the moral quality of the breach induced or assisted at all.[5]
Another debate was regarding the type of knowledge that would suffice to impose liability. Peter Gibson J in
Nature
Secondary
The prevalent view is that liability for dishonest assistance is secondary. Therefore, the liability of the assistant is premised on that of the defaulting fiduciary / trustee and he/she will be jointly and severally liable with the fiduciary / trustee whom he/she assisted. However, Charles Mitchell recognized possible difficulties with this categorization: firstly, secondary liability means that the dishonest assistant will be liable for the disgorgement gains of the defaulting fiduciary / trustee, while the fiduciary / trustee will not be liable for secret profits of the dishonest assistant; secondly, the assessment of exemplary damages against the dishonest assistant will be based on that of the fiduciary / trustee which can be undesirable.[7]
There are also views that liability for dishonest assistance should be primary. However, such views have yet to receive judicial endorsement.[8]
Constructive trusteeship
Dishonest assistants have been frequently described by courts as constructive trustees. However, such classification is not without difficulty: dishonest assistance is often imposed even if there is no obviously identifiable property subject to the trust; also, in many cases of dishonest assistance property has reached the hands of innocent third parties who may not be under any obligation to restore it.[9] Some commentators have sought to explain this on the basis that there is a type of constructive trust which can arise even if there is no identifiable trust property.[10]
However, the prevalent view is that dishonest assistance is a personal liability that does not result in an imposition of constructive trust.
Equity gives relief against fraud by making any person sufficiently implicated in the fraud accountable in equity. In such a case he is traditionally (and I have suggested unfortunately) described as a 'constructive trustee' and is said to be 'liable to account as a constructive trustee'. But he is not in fact a trustee at all, even though he may be liable to account as if he were. He never claims to assume the position of trustee on behalf of others, and he may be liable without ever receiving or handling the trust property... In this second class of case the expressions 'constructive trust' and 'constructive trustee' create a trap... The expressions are nothing more than a formula for equitable relief'... I think we should now discard the words 'accountable as constructive trustee' in this context and substitute the words 'accountable in equity'.
Elements
Breach of trust
The trustee or fiduciary of the claimant must be liable for a breach of trust or fiduciary duty. It is sufficient if the trust in question is a resulting trust[12] or constructive trust.[13]
Previously, it was thought that the dishonest assistant would not be liable unless the defaulting trustee was also dishonest or fraudulent,
Whether a breach of trust should be required at all has been queried by a commentator, since no breach is required for the analogous tort of interference with contractual relations and if the fiduciary reasonably relies on the probity and competence of the dishonest assistant, the claimant would be left with no remedy.[16]
Assistance by defendant
This element is a question of fact as to whether the defendant has been accessory to the misfeasance or breach of trust in question.
Dishonesty
The test
Historically in England, liability would be imposed on persons who assisted in a breach of trust or fiduciary duty "with knowledge".
Drawing the threads together, their Lordships' overall conclusion is that dishonesty is a necessary ingredient of accessory liability. It is also a sufficient ingredient. A liability in equity to make good resulting loss attaches to a person who dishonestly procures or assists in a breach of trust or fiduciary obligation. It is not necessary that, in addition, the trustee or fiduciary was acting dishonestly...'Knowingly' is better avoided as a defining ingredient of the principle...
His Lordship went on to articulate a test for dishonesty, which is generally perceived to be an objective test with some subjective characteristics:
Whatever may be the position in some criminal or other contexts (see, for instance, R v Ghosh[19]), in the context of the accessory liability principle acting dishonestly, or with a lack of probity, which is synonymous, means simply not acting as an honest person would in the circumstances. This is an objective standard. At first sight this may seem surprising. Honesty has a connotation of subjectivity, as distinct from the objectivity of negligence. Honesty, indeed, does have a strong subjective element in that it is a description of a type of conduct assessed in the light of what a person actually knew at the time, as distinct from what a reasonable person would have known or appreciated. Further, honesty and its counterpart dishonesty are mostly concerned with advertent conduct, not inadvertent conduct. Carelessness is not dishonesty. Thus for the most part dishonesty is to be equated with conscious impropriety. However, these subjective characteristics of honesty do not mean that individuals are free to set their own standards of honesty in particular circumstances. The standard of what constitutes honest conduct is not subjective. Honesty is not an optional scale, with higher or lower values according to the moral standards of each individual. If a person knowingly appropriates another’s property, he will not escape a finding of dishonesty simply because he sees nothing wrong in such behaviour.
Hence, the conduct of the defendant is to be assessed according to an objective standard of dishonesty in light of the actual knowledge of the defendant. When undertaking such exercise, the court will also have regard to personal attributes of the defendant, such as his experience and intelligence, and the reason why he acted as he did. His Lordship then gave a few examples of dishonesty, such as deception, knowingly taking the property of others, participation in a transaction in light of knowledge that it involves a misapplication of trust assets, willful blindness etc.
The issue was later reconsidered in
- Consciousness of wrongdoing is an aspect of mens rea and an appropriate condition of criminal liability: it is not an appropriate condition of civil liability.
- The objective test is in accordance with Barnes v Addy and the traditional doctrine.
- The claim for “knowing assistance” is the equitable counterpart of the economic torts. These are intentional torts; negligence is not sufficient and dishonesty is not necessary. Liability depends on knowledge. A requirement of subjective dishonesty introduces an unnecessary and unjustified distinction between the elements of the equitable claim and those of the tort of wrongful interference with the performance of a contract.
What
Subsequently, the lower English courts have adopted the test laid down in Barlow Clowes, although theoretically it is not open to them to refuse to follow the House of Lords decision in Twinsectra. In
- Barlow Clowes did not require a departure from Twinsectra, but merely give guidance as to the proper interpretation to be given to Twinsectra as a matter of English law.
- Barlow Clowes drew no distinction between the law of Isle of Man and English law
- Members of the Privy Council in Barlow Clowes were all members of the House of Lords, and included 2 members of the majority from Twinsectra. The House of Lords is unlikely to come to a different view as to the proper interpretation of Twinsectra.
- There are no overriding reasons why in the context of civil liability (as opposed to criminal liability) the law should take account of the defendant’s subjective views of the morality of his actions.
However, the other two judges, Pill LJ and Rix LJ, refused to get drawn into the controversy as it was unnecessary to decide on the proper test for dishonesty to dispose of the appeal. In fact, some commentators have suggested that Pill LJ seems to support the combined test in Twinsectra, although he did not make it explicit.[22]
In
The test in Royal Brunei and Barlow Clowes has been accepted as the law in
What knowledge constitutes dishonesty
In
What level of suspicion suffice to trigger the liability continues to trouble the courts. In Abou-Rahmah, Arden LJ opined that the dishonest assistant is not dishonest if he only has general suspicions about impropriety as opposed to particular suspicions regarding specific transactions. However, Rix LJ thought otherwise and said that general suspicion is enough to trigger the liability.
Causation
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Relationship with knowing receipt
Traditionally, dishonest assistance and
Remedies
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See also
- English trusts law
Notes
- ^ a b c d Barnes v Addy (1874) 9 Ch App 214
- ^ [2002] UKHL 12
- ^ Fyler v Fyler (1841) 3 Beav 550, 49 ER 216 (1 March 1841)
- ^ Attorney-General v The Corporation of Leicester (1844) 7 Beav 176, 49 ER 1031 (17 February 1844)
- ISBN 978-0-19-825902-2.
- Lord Nicholls of Birkenhead
- ^ S Elliot and C Mitchell, 'Remedies for Dishonest Assistance' (2004) 67 MLR 16
- ^ P Ridge, 'Justifying the Remedies for Dishonest Assistance' (2008) 124 LQR 445-468
- ^ ISBN 978-0-421-94590-6, 408-409
- ISBN 978-0-420-48240-2, 440-441
- ^ [2002] UKHL 48
- Twinsectra v Yardley[2002] UKHL 12
- ^ Competitive Insurance Company v Davies Investments [1975] 1 WLR 1240
- ^ a b Consul Development v DPC Estates Pty Ltd [1975] HCA 8
- ^ a b Farah Constructions Pty v Say-Dee Pty Ltd [2004] NSWSC 800
- ^ S Gardner 'Knowing Assistance and Knowing Receipt: Taking Stock' (1996) 112 LQR 56,58
- ^ Gold v Rosenberg [1997] 3 SCR 767
- ^ [1995] 2 AC 378
- ^ [1982] QB 1053
- ^ [2006] 1 WLR 1476
- ^ [2005] EWHC 2662; [2006] 1 All ER 247
- ^ K Nikunj, 'Dishonest Assistance: The Latest Perspective From the Court of Appeal' (2007) 22(6) Journal of Banking Law and Regulation 305-317
- ^ [2007] EWHC 952
- ^ [1992] 4 All ER 385
- ISBN 978-1-84113-174-0.
- ISBN 978-1-901362-42-8.
References
- Books
- DJ Hayton, OR Marshall and JA Nathan Hayton & Marshall Commentary & Cases on the Law of Trusts and Equitable Remedies (9th edn 1991) ISBN 978-0-420-48240-2
- D Hayton, Hayton and Marshall's Commentary and Cases on the Law of Trusts and Equitable Remedies (12th edn Sweet & Maxwell 2005)
- D Haytonand P Matthews, Underhill and Hayton's Law Relating to Trusts and Trustees (17th edn Butterworths, 2006)
- AJ Oakley, Parker and Mellows: The Modern Law of Trusts (9th edn Sweet & Maxwell 2008) ISBN 978-0-421-94590-6
- C Webb and T Akkouh, Trusts Law (Palgrave 2008)
- Articles
- S Elliot and C Mitchell, 'Remedies for Dishonest Assistance' (2004) 67 MLR 16
- S Gardner 'Knowing Assistance and Knowing Receipt: Taking Stock' (1996) 112 Law Quarterly Review 56
- P Birks, Breach of Trust (Hart Publishing 2002) ch 6, 209-211
- Lord Nicholls, 'Knowing Receipt: The Need for a New Landmark' in WR Cornish (ed), Restitution Past, Present and Future (Hart Publishing 1998) 231
- K Nikunj, 'Dishonest Assistance: The Latest Perspective From the Court of Appeal' (2007) 22(6) Journal of Banking Law and Regulation 305-317
- P Ridge, 'Justifying the Remedies for Dishonest Assistance' (2008) 124 LQR 445-468