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.”

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…”