Liability of Strangers to the Trust

Strangers become constructive trustees or are accountable to the trust if they exceed their authority and intermeddle with the affairs of the trust. This is the case if

  1. they act as trustees de son tort; or
  2. they knowingly receive the trust property
  3. the participate in a breach of trust with knowledge of the breach without receiving trust property.

One of the leading cases in this context is Barnes v Addy (1874) LR 9 Ch App 244, HL.

The two limbs of liability as laid down by Lord Selbourne in Barnes v Addy relate to strangers who:

  1. receive and become chargeable with some part of trust property; or
  2. assist with knowledge in a dishonest or fraudulent design on the part of the trustees

Under both limbs of liability, the defendant is required to possess an element of knowledge of the circumstances. Peter Gibson J in Re Baden Delvaux and Lecuit v Societe General pour Favoriser le Developpement de Commerce et de I’lindustrie en France SA [1993] BCLC 325, HC enumerated the various kinds of knowledge which are relevant in this context.

  1. actual knowledge;
  2. wilfully shutting one’s eyes to the obvious;
  3. wilfully and recklessly failing to make such enquiries which would indicate the facts to an honest and reasonable man;
  4. Knowledge of circumstances which would indicate the facts to an honest and reasonable man;
  5. knowledge of circumstances which would put an honest and reasonable man on inquiry.

The first three categories of knowledge involve a subjective or partly subjective inquiry, whereas categories (iv) and (v) require a purely objective assessment of the circumstances.

Actual knowledge within category (1) concerns such facts of which the stranger is aware, positively and consciously. Wilfully shutting one’s eyes to the obvious within category (2) is a common law notion involving abstinence from making inquiries because the defendant knows what result will entail.

Similarly, knowledge within category (3) embraces circumstances when the defendant foresees  or suspects the likelihood of a serious risk of loss of trust property if reasonable inquiries are not made, but is indifferent as to the consequences of failing to make such inquiries.

Knowledge within categories (4) and (5) involves a wholly objective inquiry in that the reasonable man would have made reasonable inquiries or would have been put on inquiry.

The leading Australian cases are:

Consul Developments Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373

Farah Constructions Ptd Ltd v Say-Dee Pty Ltd [2007] HCA 22; 230 CLR 89; 81 ALJR 1107; 236 ALR 209

A third party will be liable if they have knowledge on any of the first four points of the Baden scale {For both limbs of Barnes v Addy}.

Liability is imposed from the time the party becomes aware of the breach. So a recipient of money from a fiduciary who spends some of the money prior to becoming aware of the fiduciary’s breach will not be accountable for the amount spent {Re Blundell (1988) 40 Ch D 370}.



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