DISHONEST ASSISTANCE IN A BREACH OF TRUST

Ian Geering QC and Matthew Parker of 3 Verulam Buildings examine a House of Lords decision on the test to determine dishonesty for the purposes of accessory liability for breach of trust

In Twinsectra Ltd v Yardley [2002] 2 All ER 377, the House of Lords considered two issues: (1) the circumstances in which a trust may arise upon the payment of money subject to an undertaking relating to its use, and (2) the requirement for dishonesty in a claim for dishonest assistance in a breach of trust.

Twinsectra agreed to lend £1m to Mr Yardley in connection with a property transaction.  The money was transferred to Mr Sims, a solicitor acting on behalf of Mr Yardley, subject to Mr Sims undertaking that he would retain it until it was applied solely in the acquisition of property on behalf of Mr Yardley and that he would repay the loan with interest within four months of receipt.  In fact, Mr Sims was borrowing the money from Twinsectra as principal, in order to repay a prior indebtedness to Mr Yardley.

The House of Lords agreed unanimously that the money paid to Mr Sims was held on trust for Twinsectra, with a power to apply it to Mr Yardley in accordance with the undertaking.  While the terms of the undertaking were very unusual, they were sufficiently certain for a trust to arise (see McPhail v Doulton [1970] 2 All ER 228).  Whether Twinsectra subjectively intended that a trust should arise was irrelevant.

Where money is lent for a specific purpose, a trust may arise until that purpose is carried out provided that, when viewed objectively, the parties did not intend that the money should be at the free disposal of the recipient (see Barclays Bank Ltd v Quistclose Investments Ltd [1968] 3 All ER 651).  Until the purpose is either carried out or becomes illegal or impossible to carry out, the money is held on trust for the lender.

Mr Sims transferred the money to Mr Leach, another solicitor acting for Mr Yardley who, in turn, paid out £357,720.11 to Mr Yardley’s order for purposes other than the acquisition of property.  Twinsectra claimed that Mr Leach was thereby responsible for dishonestly assisting in a breach of trust.  Mr Leach knew the terms of the undertaking and therefore all of the facts which made it wrongful for him to deal with the money without satisfying himself that it was for the acquisition of property.  The trial judge held that, in doing so, Mr Leach had 'shut his eyes' to some of the problems and had been 'misguided'.  He had, however, believed that he held the money for Mr Yardley without restriction and had therefore not acted dishonestly. The Court of Appeal reversed this finding and held that Mr Leach had been dishonest.

Lord Hutton (with whom Lords Steyn, Hoffmann and, apparently, Lord Slynn agreed) focussed upon the statement by Lord Nicholls in Royal Brunei Airlines Sdn Bhd v Tan [1995] 3 All ER 97 at 107 that 'the court will also have regard to the personal attributes of the third party, such as his experience and intelligence, and the reason why he acted as he did.'  He concluded that not only must the person’s acts be dishonest by the ordinary standards of honest people, but that he must have realised that by those standards his acts were dishonest.  Lord Hutton drew support from his view that a professional man, such as a solicitor, should not be branded dishonest if he did not know that what he was doing would be regarded as dishonest by ordinary people.  Similarly, Lord Hoffmann considered that liability required 'consciousness that one is transgressing ordinary standards of honest behaviour'.

In a powerful dissenting judgment, however, Lord Millett concluded that there was 'no trace' in Lord Nicholls’ 'magisterial opinion' that the defendant should be aware that he was acting contrary to an objective standard of dishonesty.  He noted that in Lord Nicholls’ assessment of the facts in Tan there was no suggestion that the defendant had appreciated that his conduct was dishonest.  In any event, the question was at large.  It should not be necessary for the defendant to have realised that his conduct was dishonest: such a requirement, while common in criminal law, has no part to play in civil law; it is not a necessary element of any economic tort and to introduce a difference between a claim in tort or equity would be undesirable.

The decision of the majority of the House of Lords appears inconsistent with Lord Nicholls’ statement in Tan (at 105-106) that '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.'  In Lord Nicholls’ opinion, an accessory to a breach of trust must be judged on the basis of his actual knowledge.  His conduct is to be judged against what an honest person, with that knowledge and in that position would have done at the time.  In this respect only is the test subjective (and is to be distinguished from the test to be applied in a criminal context: see R v Ghosh [1982] 2 All ER 689).  If an honest person should not have proceeded, or should have made further enquiries before proceeding, then the accessory acted dishonestly.

The effect of the House of Lords’ decision, however, is that the civil law (at least in relation to a claim for dishonest assistance) has effectively adopted the criminal law standard of dishonesty so simply set out twenty years ago by Lord Lane CJ in R v Ghosh.