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

Learning Outcomes

This article examines liability of strangers to the trust, including:

• When third parties incur personal liability in equity and how knowing receipt differs from dishonest assistance
• The constituent elements for each claim and the thresholds for knowledge and dishonesty
• The modern tests: unconscionability in knowing receipt and objective dishonesty in assistance, applied to varied factual patterns
• Distinguishing personal claims from proprietary tracing claims and selecting appropriate remedies (equitable compensation, account of profits, reconveyance)
• Defences and limits, including bona fide purchaser for value without notice, limitation, laches, and the effect of Williams v Central Bank of Nigeria on time bars
• Liability by intermeddling as a trustee de son tort and its relationship to receipt/assistance
• Causation principles and quantification of equitable compensation, including interest, in third‑party breach of trust scenarios
• The requirement of beneficial receipt (not mere agency) for knowing receipt and the need for real assistance in dishonest assistance

SQE2 Syllabus

For SQE2, you are required to understand when and how strangers to a trust may incur liability in equity for interference with trust assets or enabling a breach of trust, with a focus on the following syllabus points:

• 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
• the levels of knowledge or dishonesty required for liability in each category
• the main equitable remedies available against third parties implicated in breaches of trust
• the distinction between liability as a trustee and as a “stranger” (third party)
• the 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.

While the terminology “constructive trustee” is often used, it is important to distinguish between:

• a true trustee (express or resulting/constructive in the institutional sense) who holds the legal or equitable title and is subject to the full fiduciary regime; and
• a “stranger” whose liability is fault-based (knowing receipt or dishonest assistance). The latter is commonly labelled a “constructive trustee” for remedial reasons but is not treated as a trustee for all purposes (for example, limitation).

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.

Modern authority assesses knowledge through the lens of unconscionability rather than strict categories. The court asks whether, on the facts known to the recipient at the time, it is unconscionable for them to retain the benefit of the receipt. Suspicious circumstances, wilful blindness, or a failure to make honest inquiries where the red flags are obvious can satisfy this standard. The receipt may be direct or indirect, provided the defendant received a beneficial interest (not merely as an agent or conduit). If a person innocently receives but later learns of the breach and then deals with the property inconsistently with the trust, liability can also arise from that point.

Key Term: Equitable proprietary claim
A claim to recover specific trust property or its traceable proceeds from a person in whose hands it can be identified, founded on the claimant’s continuing proprietary interest.

A claimant can pursue both a proprietary route (tracing into assets still in the defendant’s hands) and a personal knowing receipt claim. The proprietary route does not depend on the recipient’s knowledge but on the continuing proprietary interest; however, it will be defeated by a bona fide purchaser for value without notice.

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.

Worked Example 1.2

Scenario: A charity treasurer wrongfully transfers £200,000 of trust funds to SupplierCo as “advance payment”. The invoice looks irregular, but SupplierCo banks the money and uses it to pay down its overdraft. Its finance manager had noticed the charity’s name as payer and queried internally whether a grant was intended, but no inquiry was made.

Answer:
SupplierCo beneficially received trust funds. On these facts a court could find that the finance manager’s wilful failure to make inquiries in the face of obvious irregularities makes it unconscionable to retain the benefit. Knowing receipt is likely. If any of the trust funds (or traceable substitutes) remain in SupplierCo’s hands, a proprietary claim may also be available.

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. The trustee’s own dishonesty is not required; what matters is the assister’s dishonesty. Assistance may include executing documents, structuring transactions, or turning a blind eye to obvious misuse of trust assets. There must be real (not trivial) assistance, but it need not be the “but for” cause of the loss.

Worked Example 1.3

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.

Worked Example 1.4

Scenario: A bank officer processes multiple same‑day transfers from a trust account to the trustee’s personal crypto exchange wallet after the bank’s fraud system flags the pattern. The officer ignores the flags and approves the payments to “preserve the relationship”.

Answer:
Approving payments in the face of obvious red flags may amount to dishonest assistance if the officer’s conduct falls below the standards of honest people, given what the officer knew. If dishonesty is established and the payments facilitated a breach, the bank (via vicarious liability) may face a personal claim for equitable compensation.

Other ways strangers incur liability: intermeddling (trustee de son tort)

A person who, without appointment, assumes the functions of a trustee and deals with trust assets can be liable as a trustee de son tort. This is not knowing receipt or dishonest assistance but a separate route where the intermeddler’s conduct and control over trust assets attract trustee‑like obligations. If their actions cause loss, they may be personally liable to restore it.

Key Term: Trustee de son tort
A person who, without appointment, intermeddles in the administration of a trust and thereby assumes trustee‑like duties and liabilities for loss caused.

Worked Example 1.5

Scenario: A trustee’s sibling removes an antique held in the trust “to help” with a sale and sells it privately at an undervalue.

Answer:
By intermeddling and causing loss, the sibling is liable as a trustee de son tort and must account to the trust for the shortfall.

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.

Key Term: Account of profits
An order requiring the defendant to disgorge profits made through the wrong, to prevent unjust enrichment from a breach of equitable duty.

Important distinctions:

• Knowing receipt generally gives rise to a personal claim measured by restoring value wrongfully retained; where the property (or its traceable proceeds) remains with the recipient, a proprietary claim may also be pursued.
• Dishonest assistance is a personal claim; the usual remedy is equitable compensation for loss caused by the assisted breach. Account of profits can be ordered in appropriate cases where profits were made by the assister from the wrongdoing.
• Quantification of equitable compensation aims to reconstitute the trust fund to the position it should have been in but for the breach; foreseeability limits do not apply in the same way as at common law. Causation still matters, but equity is concerned with restoring the trust estate, and compound interest is commonly awarded where needed to achieve full restitution.

Worked Example 1.6

Scenario: A knowing recipient receives £300,000 and uses it to acquire listed shares that rise in value to £360,000. The trust sues.

Answer:
The court may order either (i) reconveyance of the shares (proprietary claim) or (ii) a personal order to account for £360,000 (reflecting the value now held), together with interest. If the shares have been sold and the proceeds dissipated, equitable compensation for the loss to the trust will be ordered.

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).

Key Term: Bona fide purchaser for value without notice
A person who acquires legal title for value in good faith without notice (actual or constructive) of any adverse equitable interest, and so takes free of that interest and cannot be made to account for it.

Limitation and laches

• Claims against express trustees for breach of trust are subject to special limitation rules. However, actions against strangers for knowing receipt or dishonest assistance are generally subject to the standard six‑year limitation period for equitable wrongs, unless there is fraud or deliberate concealment postponing time. The courts have confirmed that the no‑limitation rule which can apply to true trustees in cases of fraud or property in their hands does not automatically extend to third party “strangers” liable for knowing receipt or dishonest assistance.
• In addition, equitable relief remains discretionary. Undue delay that prejudices the defendant or makes a fair trial difficult can lead to refusal of relief under the doctrine of laches.

Further practical limits and defences

• Mere handling of trust property is not enough. For knowing receipt there must be beneficial receipt; for dishonest assistance there must be assistance plus dishonesty.
• A recipient who acts purely as an agent and promptly pays over to a principal without beneficially receiving the property ordinarily avoids knowing receipt (although other theories of liability may be relevant on different facts).
• A stranger cannot invoke the trustee’s statutory relief for honest and reasonable conduct; that protection applies to trustees, not to third parties.
• Proprietary claims can be defeated by a bona fide purchaser; personal claims (knowing receipt/assistance) are not.

Worked Example 1.7

Scenario: A gallery buys a painting from a trustee and pays fair market value, believing the trustee has power to sell. The painting was trust property.

Answer:
The gallery is a bona fide purchaser for value without notice; a proprietary claim is defeated and no knowing receipt liability arises. The beneficiaries’ remedy lies against the trustee and any other culpable third party.

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.

Additional guidance on applying the tests

• Knowing receipt: articulate the three‑stage structure—(i) breach and misapplication, (ii) beneficial receipt, (iii) knowledge rendering retention unconscionable. Analyse the recipient’s position at the time of receipt and any subsequent knowledge before they deal with the property.
• Dishonest assistance: identify the breach, the acts of assistance, and then test the defendant’s conduct against objective standards of honesty, taking into account what the defendant knew or suspected.
• Tracing versus personal claims: if assets or their traceable proceeds remain identifiable in the defendant’s hands, consider a proprietary claim in addition to (or instead of) a personal claim.
• Quantification: in dishonest assistance, quantify equitable compensation by reference to the loss caused by the assisted breach. Interest (often compound) may be awarded to achieve full restoration. In knowing receipt combined with a proprietary claim, consider account of profits where the recipient made profits from the property.

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 so as to make retention unconscionable; a proprietary claim may also be available if assets remain identifiable.
• Dishonest assistance requires assistance in the breach and dishonesty assessed objectively on the facts as known to the third party.
• Equitable compensation (often with compound interest), restoration of assets and account of profits are the core remedies; select between personal and proprietary routes appropriately.
• Bona fide purchaser for value without notice defeats proprietary claims and precludes knowing receipt.
• Claims against strangers are generally subject to a six‑year limitation period, with time extended in cases of fraud or deliberate concealment; laches may bar stale claims.
• Intermeddling can attract liability as a trustee de son tort where the stranger assumes control of trust assets and causes loss.

Key Terms and Concepts

• Stranger to the trust
• Knowing receipt
• Unconscionable
• Dishonest assistance
• Equitable compensation
• Account of profits
• Bona fide purchaser for value without notice
• Trustee de son tort
• Equitable proprietary claim