LAW REPORT: Dishonest third party liable to beneficiary

A third party who dishonestly assists in a breach of trust but has received no trust property is liable as an accessory to the trustee's breach of trust to beneficiaries who suffer loss even if the trustee's conduct was not dishonest or fraudulent.

The Judicial Committee of the Privy Council allowed an appeal by Royal Brunei Airlines and restored the order of Sir Denys Roberts, the Chief Justice of Brunei, giving judgment for the airline.

The airline appointed Borneo Leisure Travel Sdn Bhd to act as its general agent for the sale of passenger and cargo transportation. BLT was required to account to the airline for all amounts received from sales of tickets. Under the agreement BLT was a trustee for the airline of the money. In practice BLT did not pay the money into a separate bank account. The respondent, BLT's managing director and principal shareholder, authorised the use of the money for BLT's ordinary business purposes. BLT became insolvent.

The airline brought an action against the respondent for unpaid money. The Chief Justice upheld a claim that the respondent was liable as an accessory to BLT's breach of trust and entered judgment for B$335,160. The Court of Appeal of Brunei Darussalam allowed the respondent's appeal.

Michael Beloff QC, Raymond Lam of the Brunei Bar and Murray Hunt (Norton Rose) for the airline; Daljit Singh Sandhu and Geoffrey Sim, both of the Brunei Bar (Denton Hall) for the respondent.

Lord Nicholls said that the issue on the appeal was whether the breach of trust which was a prerequisite to accessory liability must itself be a dishonest and fraudulent breach of trust by the trustee.

Beneficiaries were entitled to expect that third parties would refrain from intentionally intruding in trustee-beneficiary relationships and thereby hindering a beneficiary from receiving his entitlement in accordance with the trust. However beneficiaries could not reasonably expect that third parties should deal with trustees at their peril, to the extent that they should become liable to the beneficiaries even when they received no trust property and were unaware and had no reason to suppose they were dealing with trustees.

Given that in some circumstances a third party might be liable directly to a beneficiary but given also that the liability was not so strict that there would be liability even when the third party was wholly unaware of the existence of the trust, the touchstone of liability was dishonesty.

Acting dishonestly or with a lack of probity meant simply not acting as an honest person would in the circumstances. That was an objective standard. Carelessness was not dishonesty. The standard of what constituted honest conduct was not subjective. If a person knowingly appropriated another's property, he would not escape a finding of dishonesty simply because he saw nothing wrong in such behaviour.

All investment involved risk. Imprudence was not dishonesty, although imprudence might be carried recklessly to lengths which called into question the honesty of the person making the decision.

As to the question whether a honest third party who received no trust property should be liable to beneficiaries if he procured or assisted in a breach of trust of which he would have become aware had he exercised reasonable diligence, as a general proposition beneficiaries could not reasonably expect that all the world dealing with their trustees should owe them a duty to take care lest the trustees were behaving dishonestly.

Dishonesty was the necessary ingredient of accessory liability. It was also a sufficient ingredient. A liability in equity to make good resulting loss attached to a person who dishonestly procured or assisted in a breach of trust or fiduciary obligation. It was not necessary that, in addition, the trustee or fiduciary was acting dishonestly, although that would usually be so where the third party who was assisting him was acting dishonestly.

The money paid to BLT on the sale of tickets for the airlines was held by BLT on trust for the airline. BLT committed a breach of trust by using the money in the conduct of its business. The respondent accepted that he knowingly assisted in that breach of trust. He caused or permitted his company to apply the money in a way he knew was not authorised by the trust. His conduct was dishonest. The appeal should be allowed.