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3rd Party Liability - Coggle Diagram
3rd Party Liability
Introduction
What is a 3rd party?
- "[Those] who are not properly trustees if they are... actually participating in any fraudulent conduct of the trustee... [and they] 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 trustee..."
- This does not mean they are trustees or fiduciaries!!! - Dubai Aluminum [2003]
Types of Liability:
- Accessorial v Receipt Based
- (1) Accessorial Liability:
- Where the 3rd party actively aids the trustee in the breach of trust
- Sometimes called "Dishonest" or "Knowing" Assitance
- (2) Receipt Based Liability:
- Where a 3rd party receives the property Unconscionably or Knowingly
Unconscionable Receipt
3rd Party Liability
What, When and Why?
- If we think of Accessorial Liability as helping someone commit a breach of trust, then Unconscionable Receipt looks at receiving property resulting from a breach
- While D needs to have received property, they do not need to retain it
- This will lead to a personal remedy
- Useful when we cannot establish a proprietary claim via tracing or following, and/or the trustee has absconded
How do we establish this?
- D must receive trust property
- The property is a result of a breach
- There is a benefit to the D
- Fault - D knew they should not have received the property resulting from the breach AND SO it would be unconscionable to retain it
Once again we return to the Baden Scale of knowledge:
- (1) Actual knowledge
- (2) Nelsonian blindness
- (3) Willfully and recklessly failing to make inquiries
- (4) Knowledge that would indicate the facts to an honest and reasonable person
- (5) Knowledge that would put an honest and reasonable person on inquiry
- Plus of course, no knowledge at all
Akindele [2001]:
- "The recipient's state of knowledge must be such that it would be unconscionable for him to retain the benefit of the receipt" - Nourse LJ
- This quote is important for 2 reasons
- Firstly, defences
- Secondly, link to unconscionability
Bona Fide Purchaser W/O Notice:
- Considering defences, we can see in Akindele that the recipient must have knowledge
- This then precludes bona fide purchasers without notice from being liable. Why?
- Because if they have no notice, they will have no knowledge
Link to Unconscionability:
- Clearly then, there is some level of knowledge required in order to establish unconsionability (makes sense)
- Baden Scale is useful in some cases
- Re Montagu's Settlement Trust [1987] suggests that knowledge in categories 1- 3 will almost certainly be sufficient to show knowledge
- (1) Actual knowledge
- (2) Nelsonian blindness
- (3) Willfully and recklessly failing to make inquiries
How useful is Baden? Judicially debatable:
- Useful, potentially determinative:
- Armstrong DLW GmBH v Winnington Networks Ltd
- Useful but not determinative:
- Re Montagu's Settlement Trust [1987]
- Aqip (Africa) [1990]
- Aqip (Africa) [1991] dicta by Fox LJ
- Not that useful:
- Polly Peck [1992]
- Akindele [2000]
- How then do we use Baden?
- Should we entirely dismiss it?
- Clearly it isn't totally determinative
Maybe a place to start?
- As discussed 3PL requires an element of fault
- For unconcionability receipt, fault is found via unconscionability
- Kind of obvious considering the name...
Byers v Saudi National Bank [2022]
- Per Newey LJ:
- "Unconscionability must coincide with possession of trust property for liability to arise
Fault
Fault and 3rd Parties:
- In any claim of 3rd party liability, fault must be considered
- There is a lot of conjecture as to whether this area should be fault-based or strict liability
- There is some consideration as to how we can measure fault
Knowledge:
- The Baden Scale
- (1) Actual knowledge
- (2) Nelsonian blindness
- (3) Willfully and recklessly failing to make inquiries
- (4) Knowledge that would indicate the facts to an honest and reasonable person
- (5) Knowledge that would put an honest and reasonable person on inquiry
Why is this important?
- Establishing knowledge allows us to then establish:
- (1) Whether they were assisting in a breach of trust, or;
- (2) They were aware that the property they received stems from a breach of trust
- Either of these points then attributes liability to the 3rd party
Accessorial Liability
Elements of Liability:
- Must be a breach of trust (else there will have been no 'injury' to the beneficiary)
- The 3rd party must have assisted in the breach
- There must be fault (i.e. the 'mental' element)
Breach:
- Simply without breach, there is no injured party requiring a remedy
- Cattle v Pollard [2006]
- This is why its sometimes called an 'Equitable Tort'
Assistance:
- Lots of ways to assist in a breach
- Includes covering up, inducing and encouraging, but mere presence is insufficient
- So, the 3rd party cannot simply be there when the breach happens, but must actively assist in it
- Importantly, its not a requirement to show that the assistance directly caused the loss, but that but for the breach, the loss would not have occurred
Fault:
- In considering fault, we need to ask 2 questions:
- (1) Is the test for fault "knowledge" or "dishonesty"?
- (2) Is this a subjective or objective test
- The cases are fucking inconsistent
Pre Tan - Just the Baden Classification:
- Touchstone was the 'knowledge'
- (1) Actual knowledge (turning a blind eye, pretending you don't know)
- (2) Nelsonian blindness
- (3) Willfully and recklessly failing to make inquiries (very strong suspicion)
- (4) Knowledge that would indicate the facts to an honest and reasonable person
- (5) Knowledge that would put an honest and reasonable person on inquiry (they're very bad at their job to know)
(1) Tan [1995] - Two Stage Test
- Changed 'knowledge' to 'dishonesty', but dishonesty is measured using this test:
- (1) What did D know about the circumstances at the time of the breach?
- (2) Would be an honest, reasonable consider D's actions to be dishonest?
- It is a subjective where it considers what D knew (including the characteristics of D such as the intelligence), but the decisions as to whether that would amount to unconscionability is objecitve
(2) Twinsectra [2002]:
- Some key differences
- (1) Its HL not PC like Tan
- (2) The metric is still dishonesty
- (3) But the test is different
- So what's the test?
- (1) Pure objective: assessed only against the standards of the reasonable person
- (2) Pure subjective: assessed only against what D actually considered to be dishonest
- (3) Hybrid: conduct assessed against those of a reasonable person BUT liability only accrues if D knew it would be dishonest by those standards
- Test used was the hybrid test
- Test is the same as those used in theft or fraud
- Its also suggested that this was the test used in Tan but its wrong as they explicitly reject the criminal standard in this case
Barlowe Clowes [2005]
- In essence, the Court in this case returned to the test in Tan is that it is objective
- But, the main consideration is that Hoffman LJ seemed to indicate that there is no issue with precedent as the Tan test and the Twinsectra test are indeed the same
- Really?
Ivey v Genting Casinos UK Ltd [2018]:
- The initial thought in this case was that the test was the same as in Ghosh (whether D's actions were objectively dishonest and whether D realised they would be objectively dishonest
- But they eventually suggested that the standard was applicable was what would the reasonable person say based on the facts D actually knew
Knowledge v Dishonesty:
- The main consideration that is found in a significant portion of academic debate is whether or not the basis should be knowledge or dishonesty
- Even if we do consider the main point to be dishonesty, does this necessarily mean we do away with knowledge?
- After all how can you be dishonest about something you have no knowledge of?
- And if we do have to consider knowledge, is the Baden Scale useful?
Group Seven Ltd v Notable Services LLP [2019] - THE CURRENT SITUATION:
- Confirmed that the touchstone of liability is dishonesty
- What did D know at the time and then would the reasonable person find that dishonest
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