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Equity and Trusts Law - Third-Party Liability
- Institution
- Kings College London (KCL)
Comprehensive notes on Equity and Trusts Law in the UK - Third-Party Liability.
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EQUITY AND TRUSTSREVISION NOTES
INTRODUCTION:
WHAT IS THIRD-PARTY LIABILITY?
Where there is a breach of trust, the trustee will tend to be the natural target for
liability. They will be personally liable to the beneficiaries or principal, to
compensate for the loss suffered or to give up any gain they may have made.
However, others may be involved in the breach. Where the trustee has
misappropriated the trust property and that property/ its traceable
substitute has been transferred to a third party, the claimant may have a
proprietary claim against that third party. This is the case, even where the
party was unaware of the claimant’s proprietary right.
Blythe v Fladgate: third parties are ‘intermeddling strangers.’
Bank of Credit and Commerce International (Overseas) Ltd v Akindele: here,
the third party was the individual who knowingly received trust property transferred to
him by the trustee, in breach of trust.
Third-party liability can take two forms (Seldon LC, Barnes v Addy):
1. RECEIPT-BASED LIABILITY: where a third party has received property, following
a breach of trust/ fiduciary duty, in which the claimant has an equitable
proprietary interest in, but the third party no longer has that property/ its
traceable substitute and thus, they may be liable to the claimant for the value of
the property received.
*Receipt-based liability is not examinable and thus, will not be explored
further.
2. ACCESSORIAL LIABILITY: where the third party has encouraged or
assisted a breach of trust/ breach of fiduciary duty, they may be personally
liable to the beneficiaries/ principal to compensate for the loss arising from
the breach or to compensate for any consequent gain they made from their
encouragement/ assistance.
! It does not matter if the third party did not receive any property transferred
in breach. Their mere commission of a wrong by associating themselves with the
trustee’s/ fiduciary’s breach of duty is enough.
The identification of such third parties may be particularly important to sue in
certain instances, such as where the trustee is insolvent and not worth suing
or if the trustee has fled the jurisdiction.
! There is also a third form of third-party liability, known as trustees de son tort: this is
where the third party’s actions render them a trustee.
WHY WILL THIRD PARTIES BE LIABLE?
Beneficiaries/ fiduciaries are entitled to expect that third parties will refrain
from intentionally intruding on the relationship.
, EQUITY AND TRUSTS
REVISION NOTES
Third parties should not undermine the institution of the trust or fiduciary
relationship. Third-party liability encourages deterrence of this.
As previously stated, sometimes, it will not be worth suing the trustee.
! However, this gives rise to the danger of beneficiaries ‘cherry-picking’ their
remedies, based on which party has more money.
Lord Nicholls, Royal Brunei Airlines v Tan: when a stranger intermeddles with the
trustee-beneficiary relationship, they are causing a wrong. It follows that they should be
liable for their own wrong.
WHAT DEGREE OF FAULT IS REQUIRED BY THE THIRD PARTY TO ESTABLISH
LIABILITY?
Traditionally, accessorial liability has required proof of knowledge.
In assessing the levels of fault, reference is often made to the ‘Baden
classification of fault.’ This classification refers to the requisite proof of
knowledge and identifies five different types of knowledge:
BADEN CLASSIFICATION:
1. Actual knowledge.
2. Wilfully shutting one’s eyes to the obvious, i.e. ‘wilful blindness’ or ‘Nelsonian
blindness.’
3. Wilfully and recklessly failing to make inquiries as an honest and
reasonable person would have made.
4. Knowledge of circumstances that would indicate the facts to an honest
and reasonable person.
5. Knowledge of circumstances that would put an honest and reasonable
person on inquiry.
! Categories 2-5 are often referred to as ‘constructive knowledge’, because the
court can impute knowledge of facts to the defendant, even though the defendant lacked
actual knowledge of the facts.
CRITICISM OF CLASSIFICATION:
The classification should be treated with caution.
The classification only refers to knowledge as the relevant fault concept
but other concepts of fault have been suggested and recognised by the
courts.
The distinction between the categories of knowledge may be difficult to draw in
practice and may be too refined.
SHIFT TO DISHONESTY:
There are several levels of fault. Nowadays, the courts look to dishonesty to
find third parties liable.
1. DISHONESTY
2. TAKING RISKS
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