Interference with the performance of a contract, and assistance in a breach of trust, lie central to a matter involving two solicitors and a property developer, whose triangulated relationship resulted in financial abuses and ethical ignorance by those expected to conduct themselves with nothing less than self-discipline and professionalism.
Having owned and operated a number of business ventures, the respondent had ventured to obtain a business loan for the purposes of acquiring further properties, however at the time of inquiry his bank was unable to commit to lending the money, therefore he made contact with the plaintiffs, so as to borrow the sum of £1m, to which the plaintiffs requested that the loan agreement be underwritten by a qualified solicitor.
Upon consultation with the appellant his request was denied, and so with time against him he approached another law practice, whose second partner had a business history with the defendant, and through which the partner had become liable to the defendant to the sum of £1.5m.
In order to repay the debt owed, the partner then agreed to become principle debtor to the loan by way of its underwriting, while keeping the truth of their arrangement from the plaintiffs, and so when signing the loan agreement, they were now legally subject to its terms, in which sections 1 and 2 read:
“1. The loan moneys will be retained by us until such time as they are applied in the acquisition of property on behalf of our client.
2. The loan moneys will be utilised solely for the acquisition of property on behalf of our client and for no other purpose.”
While s. 4 further read that:
“We confirm that this undertaking is given by us in the course of our business as solicitors and in the context of an underlying transaction on behalf of our clients which is part of our usual business as solicitors.”
However once the money had been loaned, the partner contacted the appellant, and asked that he retain the funds in a client account until such time that the plaintiff required it. While both solicitors were aware that such a transfer was tantamount to a breach of s.1, the money was nonetheless accepted and then released by the appellant to the respondent with no proof that any of the money was being used for the purchase of properties, as per s. 2 of the agreement.
At the point of initial litigation, the plaintiffs sued for recovery of the funds following non-payment by the now dissolved partner on grounds of breach of trust, and for dishonest assistance on the part of the appellant when holding the money and paying it to the respondent upon his request, despite knowledge of the initial breach prior to his receipt of the funds from the partner.
While in the first instance the Court of the Queen’s Bench dismissed the claim on grounds that the appellant had merely acted recklessly in the course of his duties, the Court of Appeal reversed the judgment on grounds that the appellant had knowingly received money destined not for the purchase of property, and thereby in breach of s.2, and that he had wilfully closed his eyes to the facts when agreeing to both hold and transfer the funds to the respondent.
Upon appeal to the House of Lords, the appellant argued that his involvement in the matter was certainly naive and remiss but in no way unlawful, and so the House agreed to examine the details of the case for the purposes of clarity.
Turning first to Royal Brunei Airlines Sdn Bhd v Tan, the House noted that the Court of Appeal had explained how:
“A fraudulent and dishonest design is not confined to personal gain. It is sufficient if the stranger knowingly assists in the use of trust property in a way which is not permitted by the trust.”Royal Brunei Airlines Sdn Bhd v Tan
And that in its simplest form:
“[A] trust is a relationship which exists when one person holds property on behalf of another. If, for his own purposes, a third party deliberately interferes in that relationship by assisting the trustee in depriving the beneficiary of the property held for him by the trustee, the beneficiary should be able to look for recompense to the third party as well as the trustee.”Royal Brunei Airlines Sdn Bhd v Tan
Thus in its conclusion, the court had held that:
“[D]ishonesty 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.”Royal Brunei Airlines Sdn Bhd v Tan
And so it was clear that when the appellant acquiesced to the instructions of the partner, he had, whether intentionally or not, become complicit in the misuse of what was held to be trust property of the plaintiffs, while the House also also referred to Gilbert v Gonard in which the Court of Chancery had also held that:
“[I]f one person makes a payment to another for a certain purpose, and that person takes the money knowing that it is for that purpose, he must apply it to the purpose for which it was given. He may decline to take it if he likes; but if he chooses to accept the money tendered for a particular purpose, it is his duty, and there is a legal obligation on him, to apply it for that purpose.”Gilbert v Gonard
Although the House drew the distinction that unlike civil courts, equity relies less upon the mens rea of a man and more on his behaviour, and while the appeal was founded upon a breach of trust and dishonest assistance, there was insufficient evidence to suggest certainty as to the mind of the appellant when carrying out his part of the agreement. However, the House did conclusively note that under the circumstances there was ample grounds for a liability under wrongful interference with a contract and for assisting in a breach of trust, therefore the court of appeal judgment was upheld and reversed in part, while the House held that:
“[E]quity looks to a man’s conduct, not to his state of mind.”
“Where a third party with knowledge of a contract has dealings with the contract breaker which the third party knows will amount to a breach of contract and damage results, he commits an actionable interference with the contract…”