Remedies against third parties: recipient and accessory liability - Criteria for knowing receipt

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Overview

Understanding third-party liabilities in trust law is vital for aspiring solicitors, especially for the SQE1 FLK2 exam. This article explores recipient and accessory liabilities, emphasizing the criteria for knowing receipt. These ideas are key to understanding how third parties are accountable for trust breaches, a major area of assessment. By mastering these ideas, candidates will be better prepared to analyze complex trust scenarios and apply relevant legal principles effectively in exams and future practice.

Recipient Liability: Key Elements

Recipient liability occurs when a third party obtains property transferred in breach of trust. To prove this liability, three main elements must be met:

  1. Receipt of Trust Property: The third party must have received property traceable to a trust that was transferred improperly.

  2. Awareness: The recipient must have known or should have suspected that holding the property was wrong. This requirement varies and can take different forms.

  3. Unjust Retention: The recipient's retention of the property must be considered unjust based on what they knew at the time.

The Idea of Unjust Retention

Unjust retention is central to recipient liability, involving holding property in circumstances deemed unfair. The Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2001] Ch 437 case greatly influenced this:

  • The Court of Appeal recommended a flexible approach to determining unjust retention.
  • Lord Justice Nourse highlighted that the recipient's knowledge should make retention unfair.
  • This aligns liability more with fairness rather than strict knowledge categories.

Accessory Liability: Features and Requirements

Accessory liability involves third parties aiding breaches of trust. This liability requires:

  1. Breach of Trust: A breach by a trustee or fiduciary.

  2. Assistance: Active help or facilitation of the breach by the third party.

  3. Dishonesty: The third party must have acted dishonestly in their assistance.

Dishonesty in Accessory Liability

The notion of dishonesty has evolved through case law:

  • Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378: Dishonesty is assessed objectively.
  • Barlow Clowes International Ltd v Eurotrust International Ltd [2005] UKPC 37: The defendant's honesty standards matter.
  • Ivey v Genting Casinos (UK) Ltd [2017] UKSC 67: The test for dishonesty is objective, considering the individual's knowledge or belief about the facts.

Establishing Knowing Receipt: Detailed Analysis

Knowing receipt, central to recipient liability, involves different levels of awareness:

1. Actual Knowledge

Direct awareness of the breach of trust when receiving the property.

2. Willful Blindness

Intentionally ignoring obvious signs of the breach.

3. Constructive Knowledge

Situations where a reasonable person would investigate further.

The Baden Scale

Derived from Baden v Société Générale pour Favoriser le Développement du Commerce et de l'Industrie en France SA [1993] 1 WLR 509, this scale categorizes knowledge levels:

  1. Actual knowledge
  2. Ignoring the obvious
  3. Reckless failure to inquire
  4. Knowledge of circumstances indicating the facts to a reasonable person
  5. Knowledge prompting inquiry by a reasonable person

Practice Application: Case Studies

Example 1: Direct Knowledge and Unjust Retention

Emma, an art collector, buys a sculpture found to be misappropriated. Her liability depends on:

  • Her knowledge at receipt
  • The unfairness of keeping the sculpture after learning its origins
  • Any signs that should have prompted inquiry

Example 2: Constructive Knowledge in Business Transactions

XYZ Corporation receives a large payment from a charitable trust. Potential liability could arise if:

  • The payment seems suspicious and should prompt inquiry
  • The corporation fails to reasonably investigate

Example 3: Accessory Liability and Dishonesty

A solicitor, Sarah, drafts documents helping a trustee misuse trust property, knowing it breaches duties. Her liability depends on:

  • The trustee's breach
  • Her role in drafting
  • Whether her actions were dishonest, given her awareness

Conclusion

Understanding recipient and accessory liability, especially knowing receipt criteria, is essential for SQE1 FLK2 exam success. Key elements include:

  • Three elements of recipient liability: receipt of trust property, awareness, unjust retention
  • The evolution of dishonesty in accessory liability
  • Levels of knowledge in knowing receipt, from actual to constructive
  • The Baden scale for categorizing knowledge
  • Practical application in real scenarios

Awareness of these concepts prepares candidates for complex trust law questions in exams and future legal practice.