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Summary Third Party Liability
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Tutorial notes for third party liability. 1st class student.
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Equity & TrustsTutorial 8
Third Party Liability (Accessory and Recipient Liability)
Essential reading
o Virgo - Chapter 20
NOTES
This personal liability of third parties may take two forms:
(1) Receipt-based liability Where a third party has received property in which the claimant
has an equitable proprietary interest, but the third party no longer has that property or its
traceable substitute, the third party may be liable to the claimant for the value of the property
received if it was transferred following a breach of trust or fiduciary duty. It is not necessary
to show that the third party has retained the property or its substitute, and, if the claimant
could establish this, they would be likely to seek a proprietary remedy. It follows that
personal liability of the third party is relevant where the property has been received and then
dissipated without obtaining an identifiable substitute.
(2) Accessorial liability Where the third party has encouraged or assisted breach of trust or
fiduciary duty, they may be personally liable to the beneficiaries or principal for the loss
arising from the breach or consequent gain made by the defendant from the encouragement
or assistance. It is irrelevant for accessorial liability that the third party had not received any
property that was transferred in breach of trust or fiduciary duty. This is because accessorial
liability is founded on the commission of a wrong by virtue of the third party’s association
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with the trustee’s or fiduciary’s breach of duty.
The lack of clarity of the law is a major weakness of third- party personal liability.
Amy is a trustee, who misappropriated £50,000 from the trust fund. She gave £20,000 to her
daughter, Belinda, who used the money to buy shares. She gave £20,000 to her son, Carl,
who lost all of the money whilst gambling at a casino. Amy retained £10,000, which she
spent on a holiday that was booked by her personal assistant, David. Amy has just been
declared bankrupt. The beneficiaries of the trust seek your advice as to any claims that they
might have.
In this problem, four claims can be identified:
(1) Amy will be liable for breach of trust and so will be liable to reconstitute the trust by
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repaying £50,000. Amy is, however, bankrupt and so the beneficiaries will rank with her
general creditors, since there is no property in Amy’s possession into which the beneficiaries
can trace the value of the trust property that was misappropriated.
(2)
Belinda will hold the shares on constructive trust for the beneficiaries. This is because
they will be able to trace the money that was misappropriated from the trust into the shares
that she had purchased. As we saw in the last chapter, Belinda will be liable to transfer the
shares to the trust even if she was unaware that her mother had transferred the money to
her in breach of trust. Since the shares were given to her, she cannot plead the defence that
she was a bona fide purchaser for value.(3) Carl may be personally liable to the beneficiaries
, by virtue of his receipt of trust property that has been transferred following a breach of trust.
The beneficiaries will not be able to bring a proprietary claim against him, because he no
longer has any property that represents the value of the trust property. If Carl is liable for his
receipt of the trust property, he may be required to repay the value of the property that he
received, namely £20,000 plus interest. The conditions for establishing receipt-based liability
5
will be considered later in this chapter. (4) Although David did not receive any trust property,
he might be considered to have assisted Amy to breach the trust by booking her holiday,
which was purchased with funds from the trust. If David is liable for assisting a breach of
trust, he will be liable to compensate the trust for the loss that it had suffered arising from his
assistance, which would amount to £10,000. The conditions for establishing accessorial
6
liability will be considered later in this chapter.
General principles of receipt-based liability
1. Claimant must show proprietary base
2. Claimant must show that they can follow the property or trace value
3. Claimant must seek to assert personal claim to recover value even if third party has
not retained property or substitute
Substitute property claims founded on reversal of D’s unjust enrichment or vindication of the
claimant’s property rights? The key difficulty of analysing these cases as being founded on
unjust enrichment is that, where the claimant’s property has been misappropriated by a
trustee or fiduciary and then transferred to the third party, it is not possible to conclude that
the third party has been enriched at the expense of the claimant; rather, they will have been
enriched at the expense of the trustee or the fiduciary.
The practical significance of analysing these claims as founded on the vindication of property
rights is that the claimant does not need to establish the elements of an unjust enrichment
claim; it is enough that the claimant can trace value from the property in which they have a
proprietary interest into the property that was received by the defendant.
COMMON LAW CLAIMS
(i) Action for money had and received
Where the defendant has received property in which the claimant has retained a legal
proprietary interest, the claimant can recover the value of the property received by means of
(p. 594) a claim traditionally called the ‘action for money had and received’. It is sufficient
that the defendant received the property in which the claimant has a legal proprietary
interest; it is not necessary to show that the defendant has retained this property or anything
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representing the property. It is also not necessary to show that the defendant was at fault
in any way in receiving the property.
The leading case that illustrates this type of claim is Lipkin Gorman (a firm) v Karpnale
24
Ltd.
Some commentators have suggested that the ground of restitution was that the claimant was
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ignorant that its money had been stolen. An alternative view is that this claim was simply
concerned with the vindication of the claimant’s property rights in the money, those rights
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having been retained because the money had been stolen. The latter is the preferable
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view and is supported by the recognition of the House of Lords in Foskett v McKeown of
28
the vindication of proprietary rights principle.
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