Breach of trust by a third party to a trustee, is something that while frustrating at common law, becomes punishable under equity where sufficient evidence is presented.
On this occasion, the director of a travel agent privy to a fiduciary relationship with a leading airline, took it upon himself to mingle trust assets with those of his company, in order to balance the books and keep his own affairs in order.
Royal Brunei Airlines entered into an agreement with Borneo Leisure Travel on the proviso that the agent would secure bookings for both passenger and cargo flights in exchange for a commission.
In addition to this, it was decided that the now respondents were to hold the booking payments in a standalone bank account, before paying the funds to the appellants every thirty days.
Having agreed to operate under those terms, the respondent chose instead to keep the money either in his sole deposit account, or his company account, while using the capital for disbursements that profited his firm.
After six years, the appellants terminated their agreement with the respondent, and began litigation on grounds that the director himself had acted in breach of trust as a third party, and that the travel agents had also acted in breach of their duties as trustees to the airline.
The footing of the claim rested upon the long-standing statement by Lord Selbourne LC in Barnes v Addy, who stipulated that:
“[The responsibility of a trustee] may no doubt be extended in equity to others who are not properly trustees, if they are found . . . actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust. But. . . strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions, perhaps of which a court of equity may disapprove, unless those agents receive 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.”BARNES v ADDY
This translated that even though the respondent was acting outside the duties of the trustee company, he was equally liable under law for the process which the agent had dishonestly employed when using trust funds for unintended purposes.
Such a position was further strengthened by the words of Thomas J in Powell v Thompson, who stressed:
“Once a breach of trust has been committed, the commission of which has involved a third party, the question which arises is one as between the beneficiary and that third party. If the third party’s conduct has been unconscionable, then irrespective of the degree of impropriety in the trustee’s conduct, the third party is liable to be held accountable to the beneficiary as if he or she were a trustee.”POWELL v THOMPSON
In the first instance, the court awarded in favour of the airline; yet in the Court of Appeal, the judgment was reversed on grounds that a mere breach of trust was no indication of dishonesty; and so, unless such conduct was proven, there could be no justifiable reasons for imputing dishonesty for the sake of remedy.
Having then appealed before the Privy Council, the facts were reconsidered along with the objective standards of honesty.
Here it was once again found that despite protestations of accidental misplacement of trust funds, the respondent had admitted to a breach of trust, and although he intended to repay the appellants the princely sum of $335,000, there had been sufficient knowledge shown by the respondent that his improper use of trust property was wrong, and that his actions had been critical to the travel agent’s breach of trust, therefore the original judgment was restored with costs, while the court reminded the parties that:
“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.”