Liability of strangers to the trust

Can You Answer This?

Practice with real exam questions

Morgan is a close friend of Linda, a trustee of the Blue Seas Trust. Linda, acting outside her authority, transfers £100,000 of trust funds to Morgan to fund a new restaurant venture. Morgan silently suspects Linda lacks the authority to transfer such a large sum but decides not to clarify. After the trust discovers the misappropriation, it demands that Morgan return the full amount. Morgan refuses, claiming that she has used the money for substantial renovations and no longer has the funds available.


Which of the following statements most accurately reflects Morgan's liability under trust law in this scenario?

Introduction

Liability of strangers to a trust addresses the legal principles under which individuals who are not trustees can be held accountable for involvement in a breach of trust. The key doctrines in this area are recipient liability and accessory liability. Recipient liability concerns those who receive trust property under circumstances that make it unconscionable for them to retain it. Accessory liability, on the other hand, pertains to individuals who assist in a breach of trust with knowledge or dishonesty. Understanding these principles is key for determining when third parties may be liable in trust law.

Understanding Recipient Liability: Unconscionable Receipt

Recipient liability arises when a person receives trust property in circumstances where it would be unjust for them to keep it. Picture unknowingly buying a stolen bicycle at a market. Once you discover it's stolen, wouldn't it be wrong to hold onto it? Similarly, in trust law, if someone comes into possession of trust assets and learns that they were transferred in breach of trust, they may be liable to return them.

Key Elements

  1. Receipt of Trust Property: The individual must have received property originally belonging to a trust.

  2. Breach of Trust by Trustee: The transfer occurred due to a trustee's breach of their duties.

  3. Knowledge of Breach: The recipient knew, or should have known, about the breach at the time of receipt or retention.

  4. Unconscionability: It would be unconscionable for the recipient to retain the property under the circumstances.

Evolution of Knowledge Requirements

In BCCI (Overseas) Ltd v Akindele [2001], the court clarified that the level of knowledge required is such that it would be unconscionable for the recipient to retain the benefit. This means the focus is on whether it is against conscience for the person to keep the property, considering what they knew or ought to have known.

Practical Example

Consider Jane, who receives £50,000 from her friend Tom, a trustee, to invest in a new business. If Jane knows that Tom is misappropriating trust funds, or the situation is such that she should inquire further, she may be liable to return the money to the trust.

Understanding Accessory Liability: Dishonest Assistance

Accessory liability comes into play when someone assists in a breach of trust, acting dishonestly. Picture aiding a friend in hiding something you know they stole—it's not just the theft that's wrong; aiding in the wrongdoing makes you accountable too.

Key Elements

  1. Existence of a Breach of Trust: There must be an actual breach committed by a trustee.

  2. Assistance in the Breach: The person must have assisted or participated in the breach.

  3. Dishonesty: The assistant acted dishonestly, judged by the standards of ordinary decent people.

The Standard of Dishonesty

Over time, courts have shaped the meaning of dishonesty in this context:

  • In Royal Brunei Airlines v Tan [1995], the court established an objective standard for dishonesty.

  • Twinsectra Ltd v Yardley [2002] introduced a combined objective and subjective test.

  • Later, Barlow Clowes International Ltd v Eurotrust [2005] reaffirmed the objective approach, focusing on societal standards.

Practical Example

Suppose Alex, a solicitor, helps a trustee move trust funds into a private account, knowing that the trustee doesn't have the authority to do so. Even if Alex personally believes it's acceptable, if society would view his actions as dishonest, he may be held liable for dishonest assistance.

Remedies and Possible Defenses

When third parties are found liable, the law provides remedies to restore the trust's position, and there are defenses that those parties might raise.

Remedies for Recipient Liability

  • Proprietary Claims: The trust may claim ownership of the specific property or its proceeds. If the property still exists or can be traced, they can recover it.

  • Personal Claims: If the property cannot be recovered, the trust can claim compensation equal to the value of the property received.

Remedies for Accessory Liability

  • Equitable Compensation: The assistant may be ordered to compensate the trust for the losses resulting from the breach.

  • Account of Profits: If the assistant profited from their participation, they may be required to account for those profits and hand them over to the trust.

Defenses

  • Change of Position: If the recipient has changed their position in good faith, relying on the receipt, they may have a defense.

  • Bona Fide Purchaser for Value Without Notice: A person who purchases the property in good faith, for value, without knowledge of the breach, is generally protected.

  • Limitation Periods: There are time limits within which claims must be brought. However, in cases of fraud, the limitation period may not apply.

Example Scenario

Think about Sam receiving trust funds and investing them in a venture, unaware of any wrongdoing. If, after learning of the breach, he has already significantly changed his position, he might argue the defense of change of position.

Equitable Compensation and Causation

When it comes to compensation, understanding how causation and the scope of duty affect the amount recoverable is essential.

Key Principles

  • Scope of Duty: Compensation is linked to the specific duties breached by the trustee or accessory.

  • But-For Causation: The loss must be a direct result of the breach. Would the loss have occurred but for the breach?

  • Remoteness: The loss must not be too remote; it should be a foreseeable consequence of the breach.

Relevant Cases

  • In AIB Group (UK) plc v Mark Redler & Co Solicitors [2014], the Supreme Court emphasized that equitable compensation aims to put the trust in the position it would have been in if the breach had not occurred, within the scope of the duty breached.

  • The decision in Manchester Building Society v Grant Thornton UK LLP [2021] further clarified the approach to calculating losses.

Practical Illustration

Suppose a trustee misappropriates £1 million of trust funds to invest in high-risk stocks without authorization, leading to significant losses. An accountant fails to detect this during an audit. The trust might claim compensation from the accountant, but their liability would depend on whether detecting such misappropriation was within the scope of their duties and whether their failure directly caused the loss.

Conclusion

Liability of strangers to a trust involves complex interactions between recipient and accessory liability. Recipient liability focuses on whether it is unconscionable for someone to retain trust property they have received, considering their knowledge of the breach. Accessory liability examines the actions of those who assist in a breach, judged by the objective standard of dishonesty established in cases like Royal Brunei Airlines v Tan. These principles work together to hold third parties accountable and protect the integrity of trust property.

Analyzing cases requires careful consideration of the recipient's knowledge, the assistant's conduct, and the causation of loss. For instance, a person who knowingly helps a trustee divert funds may be liable for dishonest assistance, while someone who innocently receives trust assets but then learns of the breach may face recipient liability if retaining the assets would be unconscionable.

Thorough understanding of these doctrines is important for practitioners in trust disputes. Awareness of the requirements and the interplay between recipient and accessory liability allows for effective enforcement of trust obligations and the appropriate application of remedies when breaches occur.

The answers, solutions, explanations, and written content provided on this page represent PastPaperHero's interpretation of academic material and potential responses to given questions. These are not guaranteed to be the only correct or definitive answers or explanations. Alternative valid responses, interpretations, or approaches may exist. If you believe any content is incorrect, outdated, or could be improved, please get in touch with us and we will review and make necessary amendments if we deem it appropriate. As per our terms and conditions, PastPaperHero shall not be held liable or responsible for any consequences arising This includes, but is not limited to, incorrect answers in assignments, exams, or any form of testing administered by educational institutions or examination boards, as well as any misunderstandings or misapplications of concepts explained in our written content. Users are responsible for verifying that the methods, procedures, and explanations presented align with those taught in their respective educational settings and with current academic standards. While we strive to provide high-quality, accurate, and up-to-date content, PastPaperHero does not guarantee the completeness or accuracy of our written explanations, nor any specific outcomes in academic understanding or testing, whether formal or informal.

Job & Test Prep on a Budget

Compare PastPaperHero's subscription offering to the wider market

PastPaperHero
Monthly Plan
$10
Assessment Day
One-time Fee
$20-39
Barbri SQE
One-time Fee
$3,800-6,900
BPP SQE
One-time Fee
$5,400-8,200
College of Legal P...
One-time Fee
$2,300-9,100
Job Test Prep
One-time Fee
$90-350
Law Training Centr...
One-time Fee
$500-6,200
QLTS SQE
One-time Fee
$2,500-3,800
University of Law...
One-time Fee
$6,200-22,400

Note the above prices are approximate and based on prices listed on the respective websites as of December 2024. Prices may vary based on location, currency exchange rates, and other factors.

Get unlimited access to thousands of practice questions, flashcards, and detailed explanations. Save over 90% compared to one-time courses while maintaining the flexibility to learn at your own pace.

Practice. Learn. Excel.

Features designed to support your job and test preparation

Question Bank

Access 100,000+ questions that adapt to your performance level and learning style.

Performance Analytics

Track your progress across topics and identify knowledge gaps with comprehensive analytics and insights.

Multi-Assessment Support

Prepare for multiple exams simultaneously, from academic tests to professional certifications.

Tell Us What You Think

Help us improve our resources by sharing your experience

Pleased to share that I have successfully passed the SQE1 exam on 1st attempt. With SQE2 exempted, I’m now one step closer to getting enrolled as a Solicitor of England and Wales! Would like to thank my seniors, colleagues, mentors and friends for all the support during this grueling journey. This is one of the most difficult bar exams in the world to undertake, especially alongside a full time job! So happy to help out any aspirant who may be reading this message! I had prepared from the University of Law SQE Manuals and the AI powered MCQ bank from PastPaperHero.

Saptarshi Chatterjee

Saptarshi Chatterjee

Senior Associate at Trilegal