ROYAL BRUNEI AIRLINES v TAN

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.”

RE PRYCE

When a number of parties choose to create multiple contracts across two generations, there will always be problems trying to control the flow of assets when the moment requires it.

In this matter, the sheer volume of trusts, contracts, covenants, wills and gifts left the trustees to one marriage agreement, confused as to exactly what they were under duty to do, and to whom any decided benefit belonged.

In 1887, a married couple entered into an agreement requiring that any property left by the husband upon death, was to be held in trust for their children, and would be thus managed by two appointed trustees.

The husband also contracted with his wife that any funds left for him in his father’s will, would then be held in the same trust and managed by the trustees.

In the terms of his father’s will, the husband was legally entitled to a one-third share of two large sums of money, which had been expressed by action of a family deed in 1849; while in a deed of gift in 1904, the husband then conferred that certain other properties would now be held upon trust for his wife’s enjoyment in a separate trust.

When his father died in 1891, the husband was duly paid his one-third share of the first of the two sums, although his wife and the trustees of the 1887 marriage contract had no knowledge of this, despite his prior acquiescence to the terms of his gift.

The husband later died in 1907, leaving them no children to benefit from the 1887 marriage trust; after which, the specific properties and his other one-third share of money came into his possession through the death of his mother in 1913.

These assets were subsequently held by the appointed trustees of his parents own 1889 agreement and the family deed created in 1849.

By this time, the residue of the 1887 marriage trust was now held in trust by the trustees, while the property and monies from his parents wills and 1849 deed, were now held on absolute trust, despite his passing.

At this point, the 1887 marriage agreement trustees sought to claim the property and monies held in absolute trust, in order that they now became part of the 1887 trust, while asking whether by virtue of the fact that no children were created during the lifetime of their marriage, the 1849 deed funds were now held upon trust for the benefit of the widow’s next of kin upon her death.

When considered by the court, the equitable maxim ‘equity will not assist a volunteer’ was put to good effect when explaining that despite any suggestion of default to the widow’s relatives, it did not fall to the judges, or the appointed trustees, to attempt enforcement of the 1887 agreement, when the widow was legally entitled to benefit from the funds and property now held upon trust by the parent’s trustees.

It was also noted that despite not having children of their own, no evidence of a declaration of trust could be manufactured between the respondent and her next of kin, so there could be no argument of a breach to the contrary, while the court reminded the parties that:

“[V]olunteers have no right whatever to obtain specific performance of a mere covenant which has remained as a covenant and has never been performed.”

RE MONTAGU

Aristocracy and the burden of constructive trusteeship, are brought to bear when the misinterpretation of an appointed solicitor allows for the sale of valuables designated a place within the family trust. 

By the actions of a family re-settlement drafted in 1923 by Viscount Mandeville (the future tenth Duke of Manchester), for the purposes of himself and each successive Duke, it was stated under clause 14 that the existing trustees to the estate were required, upon death of the ninth Duke of Manchester, to compile an inventory of goods deemed inheritable by the Viscount, prior to including them into the settlement, while paragraph B further expressed they should be held:

“Upon trust after the death of the present Duke or (if and so far as may be found practicable and convenient) during his lifetime to select and make an inventory or inventories of such of the chattels hereby assigned as the trustees in their absolute discretion may consider suitable for inclusion in the settlement hereby made (which selected chattels are hereinafter called ‘the selected chattels’) and to hold the residue (if any) of the said assigned chattels in trust for Viscount Mandeville absolutely.”

After the ninth Duke’s passing, the trustees handed the Viscount a number of items with the intention that he would look to sell them; yet, he failed to compile a list of valuables for retention into the settlement for future Dukes.

When the tenth Duke died in 1977, those items remaining came into possession by his widow, the Dowager Duchess of Manchester, whereupon in 1979, the eleventh Duke of Manchester issued a writ for breach of trust by the surviving trustees of the 1923 settlement, on grounds of having delivered the property to the deceased in the knowledge of their duties under clause 14 of the 1923 settlement.

And so, by virtue of his having sold them, the tenth Duke was also held accountable as a constructive trustee, and liable for payment of the proceeds to the value of those items sold, as was his widow. It was also argued that failure to compile the list resulted in all items of value falling within the scope of the settlement, and that both repossession of those items and recompense for any property sold was due.

Heard over a lengthy ten-day hearing, judge Megarry V-C took pains to explore the definition of constructive trustees, along with the term ‘notice’, as had been claimed by the eleventh Duke.

When the chain of communication was examined, it became apparent that during the lifetime of the tenth Duke, his solicitor had written to him to explain his obligations, but in way that failed to fully embrace the limitations of the settlement, as illustrated below:

“I had a long conversation with Nicholl on Thursday last, and the trustees have agreed that the heirlooms should be released, except the pictures. Under the resettlement executed by you on 20 December 1923 there is a clause by which the trustees can in their discretion release a large quantity of heirlooms and make a new list of such articles as are to remain as heirlooms. The amount obtained for the sale of any articles will be your personal property and the proceeds of sale will not have to be considered as capital trust money.”

From this it was easily construed that the lack of legal knowledge on the part of the tenth Duke would have left him reliant upon the professional expertise of his solicitor, who on this occasion had neglected to mention that the trustees were under a lawful obligation to draft a comprehensive list prior to any passing of estate property.

This meant that prima facie, the deceased was by extension, a constructive trustee by imputation.

However, his ignorance of the facts raised strong argument for his exemption, with particular regard to the five principles of ‘knowing’ as set down by Gibson J in Baden, Delvaux and Lecuit v Société General pour Favoriser le Développement du Commerce et de l’Industrie en France SA; which included actual knowledge, wilfully shutting one’s eyes to the obvious, wilfully and recklessly failing to make honest and reasonable enquiries as to the facts, reasonable and honest knowledge of circumstances indicative of the facts and, honest and reasonable knowledge of circumstances as to cause inquiry.

While the claimants preferred to impute the knowledge of clause 14 upon the Duke, it was clear by the evidence presented, that the deceased was largely ignorant to his legal requirements, and instead wholly dependent on the instructions of his acting solicitor.

It was also noted that sections 199 and 205 (1)(xxi) of the Law of Property Act 1925 specifically exempts beneficiaries under trust from the powers of constructive notice; which left the court little recourse other than to hold that in this instance, the tenth Duke of Manchester was not liable as a constructive trustee, and therefore no action against him could be sustained, while the court reminded the parties that:

“In determining whether a constructive trust has been created, the fundamental question is whether the conscience of the recipient is bound in such a way as to justify equity in imposing a trust on him.”

TWINSECTRA v YARDLEY

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 section 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 section 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.”

And:

“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…”