Accessory Liability

Third Parties who participate in a Breach of Trust may be held personally liable in equity as a “knowing assistant” (if the assist in the breach) or as a “knowing inducer” (if they induce or procure the breach) {Flyer v Flyer (1841) 3 Beav 550;49 ER 216; Alleyne v Darcy (1854) 4 I Ch R 199; Eaves v Hickson (1861) 30 Beav 136; 54 ER 840; Farah Constructions Pty Ltd v Say Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 159}. Equity has a preoccupation with protecting beneficiaries, who are “vulnerable to abuse by the fiduciary due to the fiduciaries special opportunity to exercise power or discretion to the detriment of that other person” {Hospital Products Ltd v United States Surgical Corporation (1984) CLR 41, 97}

To attract liability under the 2nd limb of Barnes v Addy (1874) 9 Ch App 244 as a “knowing assistant” or “dishonest assistant“, a third party must have assisted in a Breach of Trust or a fiduciary obligation with knowledge of a “dishonest and fraudulent design on the part of the Trustee or fiduciary“.

Dishonesty” here is not used in the the same way as in “a criminal law context or actual fraud in the common law sense”

 

In Farah Constructions Pty Ltd v Say Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 159, the High Court of Australia confirmed that:

  • (1) actual knowledge
  • (2) a deliberate shutting of eyes to the breach
  • (3) a calculated abstention from making inquiries which an honest and reasonable person would make, or
  • (4) actual knowledge of the facts, that to a reasonable person would suggest a breach of trust or fiduciary obligations,

are each sufficient to establish the level of knowledge required to give rise to liability as a knowing assistant.

Mere knowledge of facts which would have put a reasonable person on inquiry will not attract liability.

The third party need not have received trust property or otherwise have profited from the transaction as is the case with “knowing receipt“, the 1st limb of Barnes v Addy.

Knowing assistants are jointly and severally liable with defaulting trustees and fiduciaries to pay equitable compensation for any loss suffered by the beneficiaries as a result of the breach {New Cap Reinsurance Corporation Ltd v General Cologne Re Australia Ltd [2004] NSWSC 781}.

Charles  Harpum, in The Stranger as Constructive Trustee (Part I)’ (1986) 102 Law Quarterly Review 114, concluded that a knowing inducer ‘bears the primary responsibility for any loss that ensues’, except if the trustees were ‘parties to a fraudulently induced breach of trust’, in which case the trustees may be ‘equally accountable and not merely answerable for what the inducer could not pay’. Although not clear, this suggests that while knowing inducers will be jointly and severally liable with the relevant trustees or fiduciaries, the courts may attempt to apportion the loss to reflect the defendant’s responsibility and culpability for the loss.

Unlike knowing assistance, third parties may still be liable for knowing inducement in the absence of a ‘dishonest and fraudulent design’ on the part of the trustee or fiduciary. Accordingly, the trustee or fiduciary may be innocent of any fraud or dishonesty.

See, eg, Eaves [1861] EngR 831; (1861) 30 Beav 136

In Farah Constructions [2007] HCA 22; (2207) 230 CLR 89, 159 (Gleeson CJ, Gummow, Callinan, Heydon and Crennan JJ), the High Court stated that this liability arises where the third party has ‘knowingly induced or immediately procured breaches of duty by a trustee’.

 

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