Core principles of trust law - Liability of strangers to the...

Learning Outcomes

After studying this article, you will be able to explain when a third party (stranger) to a trust incurs liability in equity, distinguish the basis for claims in knowing receipt versus dishonest assistance, identify when each form of liability arises, and outline the key elements and remedies for SQE2 exam scenarios. You will be able to apply these principles to resolve typical exam problems involving trust assets diverted to or by third parties.

SQE2 Syllabus

For SQE2, you must understand when and how strangers to a trust may incur liability in equity for interference with trust assets or enabling a breach of trust. In your revision, focus on:

• The basis and elements of liability for third parties (strangers) who are not trustees.
• The core requirements for claims in knowing receipt and dishonest assistance.
• What levels of knowledge or dishonesty are required for liability in each category.
• The main equitable remedies available against third parties implicated in breaches of trust.
• Distinguishing between liability as a trustee and as a “stranger” (third party).
• Common defences and limitations relevant to claims against third parties.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. What are the three essential elements required to establish liability for knowing receipt?
2. When will a third party's conduct amount to dishonest assistance?
3. State one key remedial outcome that may be ordered against a third party found liable in equity for misapplied trust assets.

Introduction

In trust law, only persons formally appointed as trustees owe the full range of fiduciary duties to beneficiaries in respect of trust property. However, the law recognises that strangers to the trust—meaning non-trustees—can still incur personal liability in limited but important scenarios. These scenarios arise when a third party is either implicated in a breach of trust by receiving trust assets, or actively participates in a breach. This article covers the two principal heads of third party liability—knowing receipt and dishonest assistance—as required for SQE2.

Key Term: Stranger to the trust
A person who is not, and never has been, a trustee, but who deals with trust property or participates in conduct associated with a breach of trust.

Liability of Strangers to the Trust: The Two Main Grounds

Equity intervenes to impose liability on third parties when it would otherwise be unjust for persons outside the trust to benefit from, or make possible, a breach by trustees. Key forms of third party (stranger) liability are:

Knowing Receipt

Knowing receipt applies where a person, not being a trustee, receives trust property in breach of trust and retains it for their own benefit with knowledge that it was misapplied.

Key Term: Knowing receipt
Equity imposes liability on a third party who receives (and benefits from) trust property transferred to them in breach of trust while knowing, or being taken to know, that the property was wrongfully dealt with.

To establish knowing receipt, a claimant must prove three elements:

1. There was a breach of trust involving misapplication or misappropriation of trust property.
2. The third party received trust assets for their own benefit.
3. The third party had actual, constructive, or wilfully blind knowledge that the property was transferred to them in breach of trust.

This does not require dishonesty, but the knowledge must be of such a degree as to make retention of the property unconscionable.

Key Term: Unconscionable
So morally blameworthy that equity will not allow the party to retain a benefit.

Worked Example 1.1

Scenario: Divya is paid £50,000 from a company trustee's account and uses it to purchase a car. Later, she learns the money was trust money misapplied.

Answer:
If Divya knew or should have realised at the time of receipt that the funds were trust property misapplied in breach of trust, she is liable as a knowing recipient and a claim can be made to recover the funds or their proceeds.

Dishonest Assistance

This liability arises where a third party, though not receiving trust property, becomes implicated through aiding a breach of trust, provided their conduct is dishonest.

Key Term: Dishonest assistance
Liability for a third party who assists, aids or abets a breach of trust by a trustee, acting dishonestly according to objective standards.

To establish dishonest assistance, a claimant must prove:

1. There was a subsisting breach of trust.
2. The third party assisted in or facilitated the breach.
3. The third party acted dishonestly—assessed by whether their conduct fell short of the standards expected of honest people, considering what they actually knew or suspected.

The threshold for dishonesty is objective but applies to the facts as the third party appreciated them.

Worked Example 1.2

Scenario: A client’s solicitor is aware that her client, as trustee, is not allowed to make loans from a trust but arranges for trust funds to be transferred to the client’s personal account anyway.

Answer:
The solicitor has knowingly assisted the client’s breach, and if her conduct is dishonest by the ordinary standards of honest people, she is liable as a dishonest assister.

Remedies Against Third Parties

If liability is proven—whether for knowing receipt or dishonest assistance—remedies are equitable and may include:

• An order for the stranger to restore the misapplied assets (accountable as if a constructive trustee for value retained or proceeds).
• Equitable compensation for loss occasioned by the breach.
• Account of profits for gains made from wrongful receipt or assistance.

Key Term: Equitable compensation
A monetary order obliging the wrongdoer to make good the loss caused by breach of equitable duty, including breach of trust or fiduciary obligation.

Defences and Limits to Liability

Liability will not arise if:

• The recipient acquired assets as a bona fide purchaser for value without notice (i.e. with no knowledge of the breach and for consideration).
• The third party’s conduct or assistance was merely negligent or inadvertent rather than dishonest.
• The claim is time-barred or subject to laches (undue delay).

Exam Warning

Liability as a stranger to a trust cannot arise merely because a third party handled trust property. There must be sufficient knowledge (for knowing receipt) or dishonesty (for assistance), and the recipient must obtain a personal benefit.

Summary

Key Point Checklist

This article has covered the following key knowledge points:

• Liability of strangers to a trust arises chiefly through knowing receipt and dishonest assistance.
• Knowing receipt requires proof of the defendant’s receipt and retention of trust property with knowledge of the breach.
• Dishonest assistance requires assistance in the breach and dishonesty assessed objectively on the facts as known to the third party.
• Equitable compensation and recovery of assets or profits are the core remedies.
• If a third party acts in good faith and for value without knowledge, no liability arises.

Key Terms and Concepts

• Stranger to the trust
• Knowing receipt
• Dishonest assistance
• Unconscionable
• Equitable compensation