CONSTRUCTIVE TRUST

STRANGERS AS CONSTRUCTIVE TRUSTEE

WHO IS A STRANGER

Third party who is not appointed as trustee. May incur liability if they receive or deal

with trust property with actual/constructive notice.

The trust property is transferred in breach of trust.

3 TYPES OF STRANGERS

1) Stranger under no liability (BFPWOWN)

2) Innocent volunteer

3)Liable as constructive trustee @ trustee de son tort

- Knowing receipt or dealing

- Knowing assistance

TRUSTEE DE SON TORT

Where a person knows that the property which he has received is trust property then he will be liable as constructive trustee.

It is also known as trustee de son tort.

MARA V BROWNE [1896] 1 Ch 199 Al Smith LJ

“What constitutes a ‘trustee de son tort.’ It appears to me if one, not being a trustee and not having authority from a trustee take upon himself to intermeddle with trust matters or to do acts characteristic of the office of trustee, he may thereby make himself what is called in law a trustee of his own wrong (trustee de son tort)

Halsbury Law of Malaysia

A person who, not being a trustee and not having authority from a trustee takes upon himself to intermeddle with trust matters or to do acts characteristic of the office of trustee makes himself a trustee de son tort that is a trustee by virtue of his own wrongdoing, or, as such person is also called, a constructive trustee. The responsibility which attaches to a trustee may extend in equity to a person who is not properly a trustee, if he either makes himself as a trustee de son tort or actually participates in any fraudulent conduct of a trustee to the injury of the beneficiaries

Ungoed- Thomas J in Selangor United Rubber Estates v Cradock (No 3) [1968] 2 All ER 1073 at 1095.

Two different kinds of so-called constructive trustee.

1) Person though not appointed trustee, take on themselves to act as such and to possess and administer trust property for the beneficiaries, - trustees de son tort.

2) Person whom a court of equity will treat as trustee by reason of their action, of which complaint is made.

1 )Knowing receipt or dealing(Recipient liability)2) Knowing assistance (Accessory Liability)

The liability is divided to two categories above. Based on the dictum of Lord Selbourne in

BARNES v ADDY [1874] LR 9 CH App 244

“…Strangers are not to be made constructive trustees merely because they act as agents of trustees in transactions within their legal powers, transactions, perhaps, of which a court of equity may disapprove, unless those agents:

A) receive and become chargeable with some part of the trust property

B) they assist with knowledge in a dishonest or fraudulent design on part of trustee.

Knowing Assistance

A stranger may be liable to make good when he fraudulently participates with the trustee in the breach of trust

- Sometimes known as accessory liability / dishonest assistants.

Soar v Ashwell (1893) 2 QB 390

Bowen LJ; “A person not nominated as trustee may be

bound to liability as if he were a nominated trustee, namely where he has knowingly assisted a nominated trustee in fraudulent/dishonest disposition of trust.”

Trust funds was misapplied by sole trustee. The defendant is a solicitor who has advised on the appointment of trustee. Beneficiary sued the solicitor Held : Not liable

Lord Selbourne’s formula :

They assisted with knowledge

in a dishonest and fraudulent design on the

part of the trustee. 

Barnes v Addy (1879) 9 Ch App 244

Privy Council Decisions

Lord Nicholls in Royal Brunei Airlines Sdn. Bhd. v Tan [1995] 2 AC 378 at 385 declined to apply Lord Selbourne’s rule : claimant did need not to show that the breach of trust assisted by the defendant had been a dishonest breach.

Affirmed by HOL Twinsectra Ltd. v Yardley [2002] 2 A.C 164

State of mind

Changes in courts’ attitude towards the defendant’s state of mind. Compare the two cases.

Peter Gibson in Baden Delvaux and Lecuit v Sociėtė Generale (1983)

Privy Council decision in Royal Brunei Airlines Sdn Bhd v. Tan [1995] 3 WLR 64

BADEN DELVUX ND LECUIT SOCIETE GENERLE

[1983] BCLC 325 : Knowledge comprises

5 different mental states

1) Actual knowledge

3) Wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make

4) Knowledge of circumstances which

would indicate the facts to an honest and reasonable man

2) Wilfully shutting one’ eyes to the obvious- Nelsonian Knowledge

5)Knowledge of circumstances which

would put an honest and reasonable man on inquiry

Peter Gibson : Type (ii)- (v) = imputed or constructive knowledge

His classifications formed the starting point for discussions

Cases after Baden Delvaux.ppt

Baden Delvaux and Lecuit v Sociėtė Generale (1983)

Peter Gibson stated that there are four elements to liability for ’knowing assistance’:

1)      existence of a trust 2)     existence of a dishonest and fraudulent design

on part of the trustee of that trust 3)   the assistance by the stranger in that design and 4)      the knowledge of the stranger.

Royal Brunei Airlines Sdn. Bhd v Tan

Lord Nicholls : Courts were led into tortuous convolutions in their efforts to investigate the sort of knowledge possessed by the defendants.

Determined a fresh start and the best way is to avoid knowledge as a defining ingredient of liability

Law adopted by PC in Royal Brunei

Dishonesty on the part of the third party is a prerequisite for liability

Dishonesty is also a sufficient ingredient The breach of trust by the trustee need not

itself be dishonest and fraudulent.

Lord Nicholls

“…dishonestly is a necessary ingredient of accessory liability. It is also a sufficient ingredient. A liability in equity to make good resulting loss attaches to a person who dishonestly procures or assists in a breach of trust or fiduciary obligation. It is not necessary that, in addition, the trustee or fiduciary was acting honestly, although this will usually be so where the third party who is assisting him is acting dishonestly, “Knowingly” is better avoided as a defining ingredient of the principle, and in the contest of this principle the Baden scale of knowledge is best forgotten

Adopted by James Fong in Industrial Concreate Products Bhd v Concrete Engineering Products Bhd [2001] 2 AMR 2151

HOL in Twinsectra v Yardley [2002] 2 AC 164 followed th PC decision in Royal Brunei case

Knowing Receipt or Dealing

-Where stranger receives trust property knowing that his possession is in breach of trust or where he receives trust property without knowledge of any breach of trust but subsequently he becomes aware of the trust but acts in a manner inconsistent with it.

Three situations

He receives trust property with the knowledge that it is in breach of trust.

He receives trust property without the knowledge and subsequently becomes aware of the trust and act in an inconsistent manner

He receives trust property knowing it to be such but without breach of trust and subsequently deals with it in a manner inconsistent with the trust

Essentials of knowing receipt liability

1. A disposal of the plaintiff’s assets in breach of fiduciary duty

2. The beneficial receipt by the defendant of assets which are traceable as representing the assets of the plaintiff; and

3.The defendant’s knowledge that the said assets are traceable to the breach of fiduciary duty

Requirement of Knowledge.

Cases on receipt have adopted the five fold classification of Peter Gibson.

As to whether it falls under either categories i-v : there is no clear allignment.

Cases

Selangor United Rubber Estate v Craddock (1968) 1 WLR 1555 – constructive as well as actual knowledge could suffice.

Belmont Finance Corporation Ltd v Williams Furniture Ltd (1979) 1 All ER 118

Requirement for actual knowledge. Buckley LJ: The knowledge of that design on the part

of the parties sought to make liable may be actual knowledge. If he wilfully shuts his eyes to dishonesty or wilfully or recklessly fails to make such inquiries, he may be found to have involved himself in the fraudulent character of the design.

Developing Law

B.C.C.I (Overseas) Ltd v Akindale [2001] Ch 437, Nourse L.J sought classification by Peter J: dishonesty will suffice but is not required to make the defendant liable where he has received and dealt with misapplied trust property for his own benefit.

General rule: defendant will be liable whenever his state of knowledge is … such as to make it unconscionable for him to retain the benefit of the receipt