EQUITY, TRUSTS AND COMMERCE

This collection of essays, written by leading commentators from across the

­common law world, examines a range of topics concerning Equity and Trusts in
the commercial context. The essays investigate the way in which doctrines derived
from the equitable jurisdiction interact with and shape various areas of the law,
including company law, commercial law and agency law. Subjects considered
include the difficulties in identifying trust assets in the commercial context; the
court’s role in supervising the trust; and the remedies available in cases of fiduci-
ary or trustee wrongdoing. This book will be of interest to both academics and
practitioners working in these difficult areas of equity and commercial law.

Volume 24 in the series Hart Studies in Private Law

ii
Equity, Trusts and Commerce

Edited by
Paul S Davies and James Penner

OXFORD AND PORTLAND, OREGON

2017
 Hart Publishing
An imprint of Bloomsbury Publishing Plc

Hart Publishing Ltd Bloomsbury Publishing Plc

Kemp House 50 Bedford Square
Chawley Park London
Cumnor Hill WC1B 3DP
Oxford OX2 9PH UK
UK

www.hartpub.co.uk
www.bloomsbury.com
Published in North America (US and Canada) by
Hart Publishing
c/o International Specialized Book Services
920 NE 58th Avenue, Suite 300
Portland, OR 97213-3786
USA
www.isbs.com
HART PUBLISHING, the Hart/Stag logo, BLOOMSBURY and the
Diana logo are trademarks of Bloomsbury Publishing Plc
First published 2017
© Paul S Davies and James Penner 2017
Paul S Davies and James Penner have asserted their right under the Copyright, Designs and Patents Act 1988 to be
identified as Authors of this work.
All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means,
­electronic or mechanical, including photocopying, recording, or any information
storage or retrieval system, without prior permission in writing from the publishers.
While every care has been taken to ensure the accuracy of this work, no responsibility for loss or damage occasioned
to any person acting or refraining from action as a result of any statement
in it can be accepted by the authors, editors or publishers.
All UK Government legislation and other public sector information used in the work is Crown Copyright ©.
All House of Lords and House of Commons information used in the work is Parliamentary Copyright ©.
This information is reused under the terms of the Open
Government Licence v3.0 (http://www.nationalarchives.gov.uk/doc/
open-government-licence/version/3) except where otherwise stated.
All Eur-lex material used in the work is © European Union, http://eur-lex.europa.eu/, 1998–2017.
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library.

ISBN: HB: 978-1-50990-729-8

ePDF: 978-1-50990-731-1
ePub: 978-1-50990-730-4
Library of Congress Cataloging-in-Publication Data
Names: Davies, Paul S. (Law teacher), editor. | Penner, J. E. (James E.), editor.
Title: Equity, trust, and commerce / edited by Paul S. Davies and James Penner.
Description: Oxford [UK] ; Portland, Oregon : Hart Publishing, 2017. | Series: Hart studies in
private law ; v. 24 | Includes bibliographical references and index.
Identifiers: LCCN 2016057787 (print) | LCCN 2016058886 (ebook) |
ISBN 9781509907298 (hardback : alk. paper) | ISBN 9781509907304 (Epub)
Subjects: LCSH: Equity. | Trusts and trustees. | Commercial law.
Classification: LCC K795 .E68 2017 (print) | LCC K795 (ebook) | DDC 346/.004­—dc23
LC record available at https://lccn.loc.gov/2016057787
Typeset by Compuscript Ltd, Shannon

To find out more about our authors and books visit www.hartpublishing.co.uk. Here you will find extracts, author
information, details of forthcoming events and the option to sign up for our newsletters.
 PREFACE

In the first line of his judgment in AIB Group (UK) Plc v Mark Redler & Co,1 Lord
Toulson said: ‘140 years after the Judicature Act 1873, the stitching together of
equity and the common law continues to cause problems at the seams’. In many
ways, the essays in this collection work at these ‘seams’, investigating the way in
which doctrines derived from the equitable jurisdiction interact with and shape
areas of the law, such as company, commercial law and agency law, which reflect
not only common law doctrines of long standing, but significant statutory inno-
vation. The topics encompassed by ‘equity’, ‘trusts’ and ‘commerce’ are, to say the
least, many and varied, as this collection attests.
Our first essay by Tan Cheng-Han and Wee Meng-Seng, ‘Equity, Shareholders
and Company Law’, explores from a historical perspective the influence of equita-
ble doctrine on the relationships of shareholders. The authors consider this issue
through the prism of the ‘just and equitable winding-up doctrine’, examining the
way in which it constrained the power of majority shareholders and its relation
to the modern concept of unfair prejudice. In ‘Some Aspects of the Intersection
of the Law of Agency with the Law of Trusts’, Peter Watts considers the case of
agents who are also trustees, and deftly raises a host of questions concerning how
the authority of agents interacts with the authority of trustees. Tang Hang Wu
examines a different aspect of the way that equity may impinge upon commercial
transactions in ‘Equity in the Marketplace: Reviewing the Use of Unconscionabil-
ity to Restrain Calls on Performance Bonds’. Tang investigates the Singaporean
departure from the orthodox rule as applied in England, namely that there is no
room for considerations of unconscionability when commercial parties initiate
calls on performance bonds; restraints are only allowed on the very limited basis
of fraud. Tang argues that the exceptional Singapore experience represents a con-
scious policy choice of the courts which, on the basis of local imperatives, will act
to restrain calls that they regard as abusive.
Our next three essays revolve around the issue of intention and ‘certainty of
subject matter’ for the purposes of identifying trust assets in the commercial con-
text. Michael Bridge’s essay, ‘Certainty, Identification and Intention in Personal
Property Law’, explores the difficulties the law has encountered in identifying spe-
cific personal property interests, ranging over future property, property in sales of
goods cases, trust interests in the commercial context, and in the law of charges.

1 AIB Group (UK) Plc v Mark Redler & Co [2014] UKSC 58 , [2015] AC 1503 [1].
vi Preface

Robert Stevens’s focus in ‘Floating Trusts’ is narrower, interrogating in detail the

finding of trust interests in mixed funds in the complex ‘repo’ securities transac-
tions examined by the courts following the collapse of Lehman Brothers. James
Penner’s essay, ‘“Sort of ” Backwards Tracing’ raises issues about intention and the
subject matter of a trust in a different way. In the Privy Council decision in Brazil
v Durant International2 a Commonwealth court explicitly recognised for the first
time the claimant’s entitlement to an asset on the basis of ‘backwards’ tracing, but
Penner convincingly argues that a host of questions remain to be resolved before
the impact of that decision can properly be assessed.
Our next three essays take us back to more traditional issues in trusts, all of
which concern the special relationship that trusts as a legal device have with the
courts. Richard Nolan, in ‘Invoking the Administrative Jurisdiction: The Enforce-
ment of Modern Trust Structures’, shows that, whilst modern trusts often include
a wide range of trustee discretions, the traditional, well-established power of the
courts to ensure that a trustee complies with the trust terms can be adapted flex-
ibly and sensibly to modern trust structures, in particular in cases of breach of
trust. In ‘Trusts, Objectivity and Rectification’, Simon Douglas explores in detail
the relationship between a settlor’s intention in creating a trust and the power
of a court to intervene by rectifying the trust instruments. Douglas argues that,
despite some cases in which the court appeared to base its decision to rectify on
the settlor’s ‘subjective’ intention, the true and correct rule is that primacy is given
to the objective meaning of the settlor’s declaration of trust. Raising the issue of
the court’s special relationship to the administration of trusts from a very different
angle in ‘The Arbitrability of Trust Instruments: Why Not?’, Elaine Chew weighs
the various arguments in favour of—and against—the law allowing settlors to
require trustee–beneficiary disputes to be determined by arbitration, rather than
only through invocation of the court process.
Our last five essays all concern the best way in which to understand the rem-
edies available in cases of fiduciary or trustee wrongdoing. In ‘Bribery’, Paul Davies
points out that whilst much attention has been paid to the liability of the recipi-
ent of a bribe, the liability of the person making the bribe has been insufficiently
explored, and in this essay he makes up for that deficiency. Deborah DeMott,
in ‘Accessory Disloyalty: Comparative Perspectives on Substantial Assistance to
Fiduciary Breach’, compares American and English approaches towards accessory
liability. In the US, both breach of fiduciary duty and culpably assisting in the fidu-
ciary’s breach are characterised as tortious, and such characterisation is important
when determining the elements of accessory liability. Jamie Glister’s ‘Equitable

2 Brazil v Durant International [2015] UKPC 35.

 Preface vii

Liability of Corporate Accessories’ explores two models for understanding the

liability of a corporate entity that assists in the misapplication of another’s funds:
on the first, the wrongdoing fiduciary and the corporate accessory are so close,
that the two are treated as the same actor for the purposes of liability; on the sec-
ond, the corporate entity is regarded as a distinct ‘third-party’ accessory. In ‘The
Nature of “Knowing Receipt”’, William Swadling examines one by one the differ-
ent justifications for the liability of the recipient. Swadling concludes that the only
viable explanation is a liability occasioned by the defendant’s equitable wrong, and
argues that the fault requirement should be pitched high in terms of the defend-
ant’s knowledge, given the availability of a strict liability proprietary claim against
him as well as a strict liability personal claim against the defaulting trustees. Sarah
Worthington, in ‘Exposing Third-Party Liability in Equity: Lessons from the Limi-
tation Rules’, takes as her starting point the treatment of recipients and accessories
by the UK Supreme Court in Williams v Central Bank of Nigeria, which involved
the application of the Limitation Act 1980 to cases of breach of trust.3 Worthing-
ton’s central claim is that anyone who, for whatever reason, has property-holding
and/or property-managing duties with respect to the property of another is a true
trustee, and so the need to resort to ‘constructive’ trusteeship formulations in this
area of doctrine obscures the real issues at stake, not least for the law of limitations.
These essays were all first presented at the National University of Singapore on
12 and 13 April 2016. Each essay was presented by another contributor, and dis-
cussed for up to an hour. The debate was lively, and we are very grateful to all the
authors for making the workshop so enjoyable and for providing such thoughtful
comments on all the essays. We conclude by expressing our immense gratitude to
the National University of Singapore Centre for Law & Business and the Faculty of
Law, University of Oxford, for their generous support of that event without which
this publication would not have been possible. We are also very grateful to Jia
Wei Lee for his assistance in preparing the manuscript for publication, and to Bill
Asquith and the team at Hart Publishing for supporting this project so enthusias-
tically. Finally, we would like to thank Tan Cheng-Han who came up with the idea
of a conference in the first place, and without whose persistent encouragement
this book would never have been produced.

Paul S Davies and James Penner

September 2016

3 Williams v Central Bank of Nigeria [2014] UKSC 10; [2014] AC 1189 (SC).
viii
 CONTENTS

Preface�������������������������������������������������������������������������������������������������������������������������v
List of Contributors��������������������������������������������������������������������������������������������������� xi

1. Equity, Shareholders and Company Law���������������������������������������������������������1

Tan Cheng-Han and Wee Meng-Seng
2. Some Aspects of the Intersection of the Law of Agency with
the Law of Trusts���������������������������������������������������������������������������������������������29
Peter Watts
3. Equity in the Marketplace: Reviewing the Use of Unconscionability
to Restrain Calls on Performance Bonds�������������������������������������������������������51
Tang Hang Wu
4. Certainty, Identification and Intention in Personal Property Law���������������87
Michael Bridge
5. Floating Trusts�����������������������������������������������������������������������������������������������113
Robert Stevens
6. ‘Sort of ’ Backwards Tracing��������������������������������������������������������������������������123
James Penner
7. Invoking the Administrative Jurisdiction: The Enforcement
of Modern Trust Structures��������������������������������������������������������������������������151
Richard Nolan
8. Trusts, Objectivity and Rectification������������������������������������������������������������179
Simon Douglas
9. The Arbitrability of Trust Instruments: Why Not?�������������������������������������201
Elaine Chew
10. Bribery�����������������������������������������������������������������������������������������������������������225
Paul S Davies
11. Accessory Disloyalty: Comparative Perspectives on Substantial
Assistance to Fiduciary Breach���������������������������������������������������������������������253
Deborah A DeMott
x Contents

12. Equitable Liability of Corporate Accessories�����������������������������������������������275

Jamie Glister
13. The Nature of ‘Knowing Receipt’�����������������������������������������������������������������303
William Swadling
14. Exposing Third-Party Liability in Equity: Lessons from the
Limitation Rules��������������������������������������������������������������������������������������������331
Sarah Worthington

Index�����������������������������������������������������������������������������������������������������������������������361
 LIST OF CONTRIBUTORS

Michael Bridge is Professor of Law, National University of Singapore and Cassel

Professor of Commercial Law, London School of Economics and Political Science.
Elaine Chew is Lecturer in Law, National University of Singapore.
Paul S Davies is Associate Professor of Law, University of Oxford and Fellow of
St Catherine’s College.
Deborah A DeMott is David F Cavers Professor of Law, Duke University School
of Law.
Simon Douglas is Associate Professor of Law, University of Oxford and Peter
Clarke Fellow of Jesus College.
Jamie Glister is Associate Professor of Law, University of Sydney.
Richard Nolan is Anniversary Professor of Law, University of York.
James Penner is Professor of Law, National University of Singapore.
Robert Stevens is Herbert Smith Freehills Professor of Private Law, University of
Oxford and Fellow of Lady Margaret Hall.
William Swadling is Reader in the Law of Property, University of Oxford and
Fellow of Brasenose College.
Tan Cheng Han SC is Professor of Law, National University of Singapore.
Tang Hang Wu is Professor and Director, Centre for Cross-Border Commercial
Law in Asia, Singapore Management University.
Peter Watts QC is Professor of Law, University of Auckland.
Wee Meng-Seng is Associate Professor of Law, National University of Singapore.
Sarah Worthington QC is Downing Professor of the Laws of England, University
of Cambridge and Fellow of Trinity College.
xii
 1
Equity, Shareholders and
Company Law

TAN CHENG-HAN AND WEE MENG-SENG*

I. Introduction

Equity has played an important role in company law from its modern inception
when the Joint Stock Companies Act 1844 was enacted. This is unsurprising given
that prior to the Act of 1844, most joint stock companies were unincorporated
associations to which the law of partnership and trust law principally applied. The
only incorporated associations at the time were established by Royal Charter or by a
private Act of Parliament. These were not easily obtained. Accordingly, a substitute
developed as, by the end of the seventeenth century, some idea had been gleaned
of one of the primary functions of the company concept, namely the possibility
of combining the capitalist with the entrepreneur.1 This was effected through the
formation of large quasi-partnerships known as joint stock companies.2
The term ‘company’ in this context was of course a misnomer by modern
standards as it simply meant association, and joint stock companies were unin-
corporated associations,3 many of which were originally formed as partnerships
by agreement under seal, providing for the division of the undertaking into shares
which were transferable by the original partners.4 In essence they continued to
be partnerships and what distinguished them from a typical partnership was that
they generally consisted of many members, and the articles of agreement between

* We are grateful to Professor Hans Tjio, Professor James Penner and Professor Paul L Davies for

comments on an earlier draft, and to the participants at the conference, April 2016. The usual caveats
apply.
1 PL Davies, Gower’s Principles of Modern Company Law, 6th edn (London, Sweet & Maxwell,

1997) 23.
2 Re Agriculturist Cattle Insurance Co, Baird’s Case (1870) LR 5 Ch App 725, 733–34.
3 R Austin, I Ramsay and HAJ Ford, Ford, Austin & Ramsay’s Principles of Corporations Law, vol 1,

16th edn (Sydney, LexisNexis Butterworths, 2014) para 2.110.

4 Davies (n 1) 21.
2 Tan Cheng-Han and Wee Meng-Seng

the parties were therefore usually very different.5 This structure was not without
its problems as partnership law was not well suited for a large association. For
example, each of the investors was liable for the joint stock company’s debts; each
investor had power to bind the others to a contract with outsiders; and if the joint
stock company wanted to sue a debtor, all investors had to be joined as plaintiffs.6
The converse was also true if the joint stock company was to be sued; all investors
had to be joined as defendants.
The transferability of shares allowed speculative activity to take place and the
early part of the eighteenth century saw a boom in company flotations and a great
bull market in joint stock trading. The English Parliament decided to intervene
to curb the gambling mania that ensued which led to the so-called ‘Bubble Act’
of 1720.7 It was intended to prevent persons from acting as if they were corporate
bodies, or to have transferable shares without any authority from Parliament.8
At the same time, the Act was also likely a piece of special interest legislation that
was intended to benefit the infamous South Sea Company which had drawn up
an ambitious scheme to acquire the national debt. Though the intention behind
the legislation failed and indeed backfired on the South Sea Company, it was the
prime force behind the passage of the Act.9 It has been said that throughout the
eighteenth century (and beyond) the shadow of 1720 retarded the development of
incorporated companies.10
Nevertheless, notwithstanding the Bubble Act, unincorporated joint stock com-
panies continued to exist. An important provision in the Act was to be found in
section 25 that exempted ‘trade in partnership’ that ‘may be lawfully done’. Given
that joint stock companies were in essence partnerships, there was considerable
scope to work around the Bubble Act. This manifested itself in the ‘deed of set-
tlement company’ which was linked to the two equitable forms of group asso-
ciation, the partnership and the trust.11 Many such ‘companies’ were established
during the period the Bubble Act was in force.12 In this incarnation, the ‘company’
would be formed under a deed of settlement (something approximating to a cross

5 W Watson, A Treatise of the Law of Partnership, 2nd edn (London, Butterworth, 1807) 3; see also

N Lindley, A Treatise on the Law of Companies, Considered as a Branch of the Law of Partnership, 5th edn
(London, Sweet & Maxwell, 1889) 608–09.
6 Austin et al (n 3) para 2.110.
7 6 Geo 1 c 18 (this is sometimes referred to as the Royal Exchange and London Assurance Cor-

poration Act 1719 because the Royal Exchange Assurance Corporation and the London Assurance
Corporation were incorporated under it).
8 CA Cooke, Corporation, Trust and Company: An Essay in Legal History (Manchester, Manchester

University Press, 1950) 80–82.

9 R Harris, ‘The Bubble Act: Its Passage and Its Effects on Business Organization’ (1994) 54 Journal

of Economic History 610, 623.

10 Davies (n 1) 28; see also WR Scott, The Constitution and Finance of English, Scottish and Irish

Joint-Stock Companies to 1720, vol 1 (Cambridge, CUP, 1912) 438; HAL Fisher (ed), The Collected
Papers of Frederic William Maitland, vol III (Cambridge, CUP, 1911) 390; cf Harris (n 9) 623–26.
11 Cooke (n 8) 85.
12 Davies (n 1) 30; R McQueen, A Social History of Company Law: Great Britain and the Australian

Colonies 1854–1920 (Farnham, Ashgate Publishing, 2009) 20.

 Equity, Shareholders and Company Law 3

between a modern corporate constitution and a trust deed for debentures or unit
trusts) whereby the subscribers would agree to be associated in an enterprise with
a prescribed joint stock divided into a specified number of shares; the provisions
of the deed would be variable with the consent of a specified majority of the pro-
prietors; management would be delegated to a committee of directors; and the
company’s property would be vested in a separate body of trustees, some of whom
would be directors also.13 The deed of settlement would also provide that the trus-
tees could sue or be sued on behalf of the company to get around the difficulty of
claims by or against an unincorporated body with a potentially large membership.
As James LJ described in Re Agriculturist Cattle Insurance Co:
A joint stock company … is an agreement between the owners of shares, or the owners
of stock, that they or their duly recognized assigns, the owners of the shares for the time
being, whoever they may be, shall be and continue an association together, sharing prof-
its and bearing losses. No shareholder in a joint stock company is, in the legal sense of
the word, any more a partner than the owner of bank stock is; he may not have the same
limit of liability, but in every other respect he is the same; he has the same right to take
part in public meetings of the body, he has the same right to elect or remove directors, he
has the same right to vote for or against the resolutions of the body, he has the same right
to such dividends as may be declared, and he has the same right to dispose of his share as
a separate and distinct piece of property, and no other rights in or over the association,
its assets, or its transactions, and if he is liable under any contracts or obligation, or in
respect of any act of the body, it is … because they are the contracts, obligations, and acts
of the quasi body corporate … by its properly constituted agents. It may be, and generally
is, no doubt, that the agents, the directors, are shareholders, and in that sense partners,
but it is certain that there may be a board of directors perfectly competent to bind the
whole body, although every one of them may have disqualified himself by parting with
every share.14
In addition, the deed would provide that each shareholder was to be liable only
to the extent of his share in the capital stock. Although such a provision could
only apply to the shareholders inter se and not be binding on third parties dealing
with the company,15 limited liability could be achieved if contracts between the
company and third parties stipulated that the other party to the contract could
only look to the common stock of the company and not the assets of individual
shareholders.16 A number of cases in the insurance context held that policyholders
were bound by the terms of the deed of settlement of the insurance company if
such terms were incorporated into the insurance contract.17

13 Davies (n 1) 29. See also Cooke (n 8) 86–87.

14 Re Agriculturist Cattle Insurance Co (n 2) 734–35.
15 Hallett v Dowdall (1852) 18 QB 2, 118 ER 1.
16 Austin et al (n 3) para 2.120; Cooke (n 8) 87.
17 Hallett v Dowdall (n 15); Re Waterloo Life Assurance Co, Carr’s Case (1864) 33 Beav 542, 55 ER

479; Re Family Endowment Society (1869–70) LR 5 Ch App 118; Re European Assurance Society, Hort’s
Case (1875) 1 Ch D 307.
4 Tan Cheng-Han and Wee Meng-Seng

Given the ineffectiveness of the Bubble Act in preventing persons from acting
as if they were corporate bodies, or such bodies having transferable shares without
any authority from Parliament, the Act was eventually repealed. Deed of settlement
companies continued to flourish after the repeal and even after the enactment of
the Joint Stock Companies Act 1844 which may be taken as the beginning of mod-
ern company law in England. The Act of 1844 provided, inter alia, for incorpora-
tion by registration without the need for a Royal Charter or Act of Parliament,
and required all new deed of settlement companies with more than 25 members,
or which had transferable shares, to be registered as incorporated companies. The
Act of 1844 did not, however, provide for limited liability. This only came about
through the Limited Liability Act 1855.
Notwithstanding these legislative developments, the unincorporated joint stock
company formed by a deed of settlement prior to the Act of 1844 continued to
coexist for many years after. In fact, the incorporated form did not take off ini-
tially as by 1885 limited companies accounted for at most 5 per cent and 10 per
cent of the total number of important business organisations.18 It was only from
the 1870s that the corporate form came to be adopted by a growing number of
unincorporated firms.19 Even so, by the mid-1880s the company as a legal organi-
sational form was very much subordinate to the partnership.20
In this brief historical introduction, it can be seen that at its outset modern
company law was heavily influenced by what had gone before. The unincorpo-
rated joint stock company with a deed of settlement was essentially the business
organisation that was adopted by the Act of 1844, though as a body corporate.
The deed of settlement used by corporate bodies did not differ greatly from that
which had evolved prior to the 1844 Act. It was still the repository of the rules
for the internal governance of the company. Although the Joint Stock Companies
Act 1856 introduced the memorandum and articles of association in place of the
deed of settlement, the articles of association originated from deeds of settlement
and the model articles which were found in the Act were based on widely used
precedents.21 Furthermore, as the business organisation that was adopted in early
company law was based on a fusion of partnership and trust law, together with the
law of agency,22 which were all heavily infused by equitable doctrines, company
law was susceptible to the influence of the law of equity. An instance of this was
the introduction very early on of the ‘just and equitable’ winding up ground in the

18 PL Payne, ‘The Emergence of the Large-scale Company in Great Britain, 1870–1914’ (1967)

20 Economic History Review 519, 520.

19 WJ Reader, ‘Versatility Unlimited: Reflections on the History and Nature of the Limited Liability

Company’ in T Orhnial (ed), Limited Liability and the Corporation (London, Croom Helm, 1982) 192.
20 P Ireland, ‘The Rise of the Limited Liability Company’ (1984) 12 International Journal of the

Sociology of Law 239, 244.

21 R Tomasic, S Bottomley and R McQueen, Corporations Law in Australia, 2nd edn (Sydney, Fed-

eration Press, 2002) para 1.3.5.

22 Agency law was relevant because it was intended that the acts of the directors of the joint stock

company should be binding on the body of shareholders.

 Equity, Shareholders and Company Law 5

Joint Stock Companies Winding Up Act of 1848 which was influenced by the then
uncodified law of partnership.23
It is suggested that a further major impetus to equity playing a significant role
in company law was the use of the corporate vehicle by small businesses that
resembled partnerships. These are sometimes referred to as ‘quasi-partnerships’
or ‘incorporated partnerships’. While they are incorporated entities, they resemble
partnerships in that they were formed on the basis of trust and confidence between
the shareholders who all expected to be involved in management, and there were
restrictive limits to the transferability of shares. It is the somewhat ironic con-
verse of the unincorporated joint stock company that sought to escape the shack-
les of partnership law; these were corporate bodies that sought the benefits of
limited liability but wanted to retain many features of a partnership structure. By
the 1890s, two-thirds of existing company registrations were of small ‘one-man’
type companies.24 Such ‘private companies’ partially accounted for the eventual
meteoric rise of the company as the predominant business vehicle.25 The early
legislation relating to companies was not originally envisaged for such small com-
panies.26 This necessitated developments in company law that were generally not
appropriate for large corporate enterprises with freely transferable shares. Equity,
as an instrument to mitigate the rigours of the common law, was well suited to
this gap-filling role, particularly given how the corporate form evolved in England.
One of the areas in which equity played an important role was to ameliorate the
position of minority shareholders against majority rule. This is the subject that
will be explored here and specific aspects that will be discussed are the just and
equitable ground in winding up; the modern unfair prejudice remedy; the limi-
tations placed on members when altering the corporate constitution; and other
non-statutory constraints on the majority. It will be suggested that there is a com-
mon element in all these areas that give rise to the intervention of equity. This
common element is an agreement or understanding between the shareholders of
the company, whether express or implied, and whether enforceable or not as a
matter of law.

II. Statutory Remedies: Just and Equitable Winding Up

and Unfair Prejudice

Although the ‘just and equitable’ ground for winding up was influenced by the law
of partnership, it was not at the time it was introduced in 1848 a discrete ground

23 PL Davies and S Worthington, Gower & Davies’ Principles of Modern Company Law, 9th edn

(London, Sweet & Maxwell, 2012) para 20-40.

24 McQueen, A Social History of Company Law (n 12) 273–74.
25 Ireland (n 20) 245.
26 ibid 241–44; McQueen, A Social History of Company Law (n 12) 274.
6 Tan Cheng-Han and Wee Meng-Seng

on which partnerships might be dissolved. No mention of such a ground is men-

tioned in an early treatise on partnership law though a breakdown in relations
between the partners, and the inability of the partnership to attain the purposes
for which it was entered into, are mentioned as grounds on which a partnership
might be dissolved.27 Today, these are regarded as falling within the just and equi-
table ground for partnership dissolution.28 Similarly, prior to 1890, Lord Lind-
ley makes no reference to just and equitable dissolution of partnerships in his
well-known work.29 This appeared for the first time in 1891 as a supplement to a
revised fifth edition30 in the context of the Partnership Act 1890 which introduced
the just and equitable ground for dissolution.31
It is therefore curious how the just and equitable ground was inserted into the
Act of 1848 which allowed a contributory to petition for dissolution or winding
up where ‘any other matter or thing shall be shown which in the opinion of the
court shall render it just and equitable that the company should be dissolved’.32
It is suggested that this came about because the Act was intended to apply to
both incorporated and unincorporated businesses. The preamble to the Act states
that it ‘shall apply to all companies, corporate or unincorporated’, and the word
‘company’ in the Act meant ‘any partnership, association, or company, corpo-
rate or unincorporated, to which this act applies’. Given that company law was
in its infancy, and an incorporated company was regarded as little more than an
extended form of partnership,33 it is likely that the ‘just and equitable’ phrase was
thought to express sufficiently the basis on which both incorporated and unincor-
porated joint stock companies might be dissolved or wound up as the case may be,
with the applicable principles being drawn from the law of partnership.
While the just and equitable ground in the context of company law has been
held by the courts to encompass a number of different circumstances,34 it has
been well observed that in the course of the twentieth century the ground has
been moulded by the courts into a means of subjecting small private companies
to equitable principles derived from partnership.35 Such a result can be regarded

27 Watson (n 5) 379–82.
28 See R Banks, Lindley & Banks on Partnership, 19th edn (London, Sweet & Maxwell, 2010) paras
24-89–24-90; G Morse, Partnership Law, 7th edn (Oxford, OUP, 2010) para 7.14.
29 N Lindley, A Treatise on the Law of Partnership, 5th edn (London, Sweet & Maxwell, 1888). The

grounds that are mentioned at 570 of volume II are fraud; the will of any partner; the impossibility
of going on in consequence of the hopeless state of the partnership business, insanity or misconduct;
illegality, death and bankruptcy. On misconduct, Lindley stated at 580 that the misconduct must have
led to some partners being excluded from the concern, or was such as to destroy the mutual confidence
that must exist between partners.
30 N Lindley, A Treatise on the Law of Partnership, With a Supplement Consisting of the Partnership

Act, 1890, 5th edn (London, Sweet & Maxwell, 1891).

31 Partnership Act 1890, s 35(f).
32 Joint Stock Companies Winding Up Act 1848, s 5(8).
33 BH McPherson, ‘Winding Up on the “Just and Equitable” Ground’ (1964) 27 MLR 282, 283.
34 See S Girvin, S Frisby and A Hudson, Charlesworth’s Company Law, 18th edn (London, Sweet

& Maxwell, 2010) paras 22.023–22.024; CH Tan (ed), Walter Woon on Company Law, 3rd rev edn
­(Singapore, Sweet & Maxwell, 2009) paras 17.52–17.76.
35 Davies and Worthington (n 23) para 20-40.
 Equity, Shareholders and Company Law 7

as serendipitous given that company legislation had for a long period not other-
wise provided for any means by which minorities may be protected from unfair
conduct that could not have been reasonably contemplated at the time the com-
pany was established or when they became shareholders. Two cases have been par-
ticularly influential. The first is Re Yenidje Tobacco Co Ltd,36 a case that involved a
private company that was described as being in substance a partnership.37 There
was a complete deadlock between the only two shareholders and directors and the
court ordered that the company be wound up on the just and equitable ground
even though the company was highly profitable. Lord Cozens-Hardy MR said that
circumstances which would justify the winding up of a partnership were circum-
stances that should justify the court in exercising its discretion to wind up the
company. More importantly, the court ought to apply ‘the analogy of the partner-
ship law and to say that this company is now in a state which could not have been
contemplated by the parties when the company was formed and which ought to
be terminated as soon as possible’.38
The second case is Ebrahimi v Westbourne Galleries Ltd39 which also involved a
company that was in substance a partnership. The appellant and N were partners
in a business that was subsequently taken over by a private company in which
the appellant and N were shareholders and directors. Soon after the incorpora-
tion of the company, N’s son also became a director and shareholder with N and
his son holding 60 per cent of the company’s issued capital. Sometime later, they
caused the appellant to be removed as a director, whereupon he commenced a
petition based on section 210 of the Companies Act 1948 or alternatively that
the company be wound up. The petition based on section 210 was dismissed but
the company was ordered to be wound up on the just and equitable ground. The
Court of Appeal set aside the order for winding up and the appellant appealed to
the House of Lords.
The House of Lords allowed the appeal. Lord Wilberforce, who delivered the
leading judgment, said that the respondents ‘were not entitled, in justice and
equity, to make use of their legal powers of expulsion’ and the just and equitable
course was to wind up the company.40 In an important passage, his Lordship said:
The words [just and equitable] are a recognition of the fact that a limited company is
more than a mere legal entity, with a personality in law of its own: that there is room

36 Re Yenidje Tobacco Co Ltd [1916] 2 Ch 426.

37 ibid 432.
38 ibid, and see also Re Wondoflex Textiles Pty Ltd [1951] VLR 458, 467. Singapore courts have cited

Re Yenidje Tobacco Co Ltd with approval, eg, Chua Kien How v Goodwealth Trading Pte Ltd [1992]
SGCA 29, [1992] 1 SLR(R) 870; Sim Yong Kim v Evenstar Investments Pte Ltd [2006] SGCA 23, [2006]
3 SLR(R) 827 [36].
39 Ebrahimi v Westbourne Galleries Ltd [1973] 1 AC 360. Ebrahimi has been cited by numerous

­Singapore cases, including Sim Yong Kim (n 38); Lim Swee Khiang v Borden Co (Pte) Ltd [2006] SGCA
33, [2006] 4 SLR(R) 745; Over & Over Ltd v Bonvests Holdings Ltd [2010] SGCA 7, [2010] 2 SLR 776;
Lim Kok Wah v Lim Boh Yong [2015] SGHC 211, [2015] 5 SLR 307.
40 Ebrahimi (n 39) 381.
8 Tan Cheng-Han and Wee Meng-Seng

in company law for recognition of the fact that behind it, or amongst it, there are indi-
viduals, with rights, expectations and obligations inter se which are not necessarily sub-
merged in the company structure. That structure is defined by the Companies Act and by
the articles of association by which shareholders agree to be bound. In most companies
and in most contexts, this definition is sufficient and exhaustive, equally so whether the
company is large or small. The ‘just and equitable’ provision does not, as the respondents
suggest, entitle one party to disregard the obligation he assumes by entering a company,
nor the court to dispense him from it. It does, as equity always does, enable the court to
subject the exercise of legal rights to equitable considerations; considerations, that is,
of a personal character arising between one individual and another, which may make it
unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way.41
Although the respondent could be removed under legislation relating to compa-
nies and the company’s articles of association, and must normally accept such
removal, the just and equitable ground would come to his rescue if he could point
to, and prove, some special underlying obligation of his fellow members in good
faith, or confidence, that he was entitled to participate in management as long as
the business continued, such that if this basic obligation was broken, the associa-
tion had to be dissolved, consistent with the principles that have been worked out
in partnership cases.42
While both the above cases involved quasi-partnerships, the just and equitable
ground of winding up is not limited to such companies.43
Although it is clear that equity is invoked to justify the court’s intervention,
the principle(s) of equity that is relied upon is not clearly stated. Perhaps this was
deemed unnecessary given that legislation has explicitly provided for recourse to
equitable principles,44 and all that the court perhaps needs to do is to set out the
considerations it will take into consideration in determining whether to intervene
to put an end to unjust, or inequitable, or unfair conduct through the mechanism
of winding up. Nevertheless, it is suggested that to ensure that the notion of injus-
tice or unfairness is not altogether too indefinite, vague or subjective,45 the basis
of equity’s intervention should be more clearly articulated.
It is suggested that the court’s discretion to wind up a company under the just
and equitable ground is grounded on the concept of fraud in equity. One exam-
ple of such equitable fraud is where a party improperly relies on his or her legal
rights46 as equity will not allow statute and common law to be used as an instru-
ment of fraud, in the sense that it will act in personam against the conscience of a

41
ibid 379.
42
ibid 380.
43
Loch v John Blackwood Ltd [1924] AC 783; Re Wondoflex Textiles Pty Ltd (n 38) 465; Chow Kwok
Chuen v Chow Kwok Chi [2008] SGCA 37, [2008] 4 SLR(R) 362.
44 Generally, see HW Tang, ‘Equity in the Age of Statutes’ (2015) 9 Journal of Equity 214.
45 Lord Hoffmann’s caution in O’Neill v Phillips [1999] 1 WLR 1092, 1098–99 in the context of the

UK unfair prejudice remedy.

46 JD Heydon, MJ Leeming and PG Turner, Meagher, Gummow and Lehane’s Equity: Doctrines and

Remedies, 5th edn (Chatswood, NSW, LexisNexis Butterworths, 2015) para 12-050.
 Equity, Shareholders and Company Law 9

defendant to prevent that person from taking inequitable advantage of another.47

Fraud in the context of equity is a broader notion than that at common law and
does not necessarily connote dishonesty.48
In cases where the courts order the winding up of a company because the court
considers it just and equitable to do so even though there has been compliance
by the defendant shareholder(s) with the companies legislation or the corporate
constitution, it does so because it will not allow such shareholder(s) to rely on his
strict legal rights to take inequitable advantage of the plaintiff(s). What makes the
conduct of the defendant subject to the scrutiny of equity is that there is an under-
lying obligation or expectation between the shareholders that a court of equity
will uphold. To allow the Companies Act and the corporate constitution to over-
ride such an obligation would be to allow the law to be used in an unjust fashion.49
In Asseinagon Asset Management SA v Irish Bank Resolution Corp Ltd,50
Briggs J expressed the view that the principle of equity applicable in just and equi-
table winding up51 was that which constrained all exercises of majority power,52
such as when a majority of shareholders or debenture holders respectively attempt
to alter the corporate constitution or modify the terms of the debenture issue. He
cited Blisset v Daniel where Page Wood V-C had said:
It must be plain that you can neither exercise a power of this description by dissolving
the partnership, nor do any other act for purposes contrary to the plain general mean-
ing of the deed, which must be this—that this power is inserted, not for the benefit of
any particular parties holding two-thirds of the shares, but for the benefit of the whole
society and partnership.53
It is submitted respectfully that if the stated basis is that shareholder power must
be exercised not for the benefit of the shareholder but for others, this is not the
correct principle that operates in a shareholder dispute (or that involving deben-
ture holders). This is because there is a fundamental difference in the relation-
ship between partners inter se and between partners and the partnership (which
is fiduciary), and between shareholders inter se or between shareholders and the

47 A Hudson, Equity and Trusts, 8th edn (Oxford, Routledge, 2015) para 1.4.13 and para 1.4.18. See

also Heydon, Leeming and Turner (n 46) para 12-100 on equity not allowing statutes as cloaks for
frauds.
48 Heydon, Leeming and Turner (n 46) para 12-005; Hudson (n 47) para 1.4.18.
49 This does not necessarily entail any wrongdoing at the corporate level. A deadlock might occur

because of a reasonable difference of opinion as to the strategic direction the company should take.
Where such a state of affairs is outside the expectations of the parties when the company was incor-
porated, the equitable fraud lies not in the different views of the shareholders per se, but in the desire
of one or more of the shareholders to keep the enterprise alive despite the deadlock being inconsistent
with the initial common understanding of the shareholders.
50 Asseinagon Asset Management SA v Irish Bank Resolution Corp Ltd [2012] EWHC 2090, [2013]

1 All ER 495.
51 And the unfair prejudice remedy which will be discussed below.
52 Asseinagon Asset Management SA (n 50) [41]–[45].
53 Blisset v Daniel [1853] 10 Hare 493, 523–24; 68 ER 1022, 1035.
10 Tan Cheng-Han and Wee Meng-Seng

company (which is not). Accordingly, and this will be discussed in greater detail
later when considering alterations of the corporate constitution, the test of a
power that must be exercised for the benefit of another is not an appropriate test
where shareholders are concerned. Furthermore, as explained in the immediately
following paragraphs, the key consideration in the just and equitable ground of
winding up is the existence of an agreement or understanding between the share-
holders even where such agreement or understanding does not give rise to any
legal rights.54 While Lord Wilberforce in Ebrahimi55 had referred to the principles
in Blisset v Daniel, it is suggested that his Lordship did so simply to illustrate how
an explicit power to expel could not be invoked where this was contrary to an
underlying obligation or expectation.
Taking as the starting point that the defendant shareholders have acted within
their strict legal rights, and given the drastic nature of the winding up remedy, any
power to wind up a company must not be exercised expansively and there should
be clear limits. It is suggested that a fundamental consideration is that the state of
the company is not what could reasonably have been contemplated by the parties
when the company was incorporated, or in appropriate cases when the complain-
ant became a shareholder, or because ‘there was a settled and accepted course of
conduct between the parties’.56 Or to put it slightly differently, the parties contem-
plated a very different state of affairs from that which subsisted at the time of the
complaint.57 This is what gives rise to the underlying obligations between share-
holders. The obligations or expectations came about either because of an express
agreement or understanding between the parties outside the corporate constitu-
tion, regardless of whether the agreement is enforceable,58 or the circumstances
are such that the law would usually regard such an obligation or expectation as
implicitly arising between the parties. An example of the latter is where a partner-
ship becomes incorporated. If the previous partners were all actively engaged in
the partnership, the courts will generally consider that each of them was entitled
to expect that he or she would be involved in the management of the corporate
entity.59 Similarly, where persons with a close personal relationship incorpo-
rate a business, the courts are likely to regard the existence of mutual trust and

54 In Asseinagon Asset Management SA (n 50) [46] Briggs J expressed the view that when such a

constraint is imposed on the majority debenture holders, it is because the limitation is an implied term
of the facility agreement. In this context no equitable principle is required because the implied term is
binding on the parties as a matter of contract. It is suggested that reliance on implied terms may not be
necessary if there is a general principle of law that constrains the exercise of majority power, perhaps
based on the proper purposes doctrine, as to which see the discussion below in the context of altera-
tions of the corporate constitution.
55 Ebrahimi (n 39) 380–81; see also O’Neill (n 45) 1100–01, where Lord Hoffmann states, inter alia,

that there is more than one theoretical basis on which Blisset v Daniel (n 53) can be explained.
56 Re Fildes Brothers Ltd [1970] 1 WLR 592, 596.
57 See also O’Neill (n 45) 1101–02.
58 Re Fildes Brothers Ltd (n 56) 596; O’Neill (n 45) 1101; Kam Leung Sui Kwan v Kam Kwan Lai

(2015) 18 HKCFAR 501 [46].

59 eg Ebrahimi (n 39) 380; Re a Company (No 002567 of 1982) [1983] 1 WLR 927; Re Guidezone Ltd

[2000] 2 BCLC 321, 355–56.

 Equity, Shareholders and Company Law 11

confidence as an element of the business relationship notwithstanding the sepa-

rateness of the corporate entity.60 These arise even though there was no agreement
or discussion between the shareholders.61 Thus, in Ebrahimi, Lord Wilberforce
said when the appellant and N incorporated their partnership business, the ‘infer-
ence must have been indisputable’ that they did so on the basis that the character
of the association remained the same.62 It is suggested that such an ‘inference’
arises in a manner analogous to what was described as ‘a term which the law will
imply as a necessary incident of a definable category of contractual relationship’.63
While the court is not in the corporate context implying a term in law as a matter
of contract, the court does form a view that certain types of associations or rela-
tionships within the corporate context generally give rise to certain obligations or
expectations as a necessary incident of such an association or relationship. This
is because some types of company have ‘peculiar characteristics’ and such char-
acteristics are relevant to the issue of whether a company may attract equitable
considerations.64 On the other hand, a large publicly listed company is not likely
to attract any such considerations as the general position for such companies must
be that the sum total of the shareholders’ rights are set out in the corporate consti-
tution and perhaps some of the rules of the stock exchange.65
This explains why, for example, winding up is justified where the purposes for
which the company was established cannot be fulfilled or where the company
engages in acts which are entirely outside what can fairly be regarded as having
been within the general intention and common understanding of the members
when they became members;66 where there is deadlock, exclusion from manage-
ment and generally a loss of mutual confidence and trust in companies where
the shareholders had envisaged a close working relationship based on trust;67
where the company’s business has been carried on in a fraudulent manner con-
trary to the expectations of shareholders;68 where the company’s capital has been
spent and there is nothing left with which the company can be resuscitated;69 or
where there has been misconduct or oppressive conduct.70 These examples of the

60 eg Re RA Noble & Sons (Clothing) Ltd [1983] BCLC 273; Re Bird Precision Bellows Ltd [1984]

Ch 419, 429–30 (affd [1986] Ch 658); Re London School of Electronics Ltd [1986] Ch 211; Re Citybranch
Group Ltd [2004] EWCA Civ 815, [2004] 4 All ER 735.
61 Though their subsequent conduct may give rise to an informal agreement, see O’Neill (n 45)

1101.
62 Ebrahimi (n 39) 380.
63 Scally v Southern Health and Social Services Board [1992] 1 AC 294, 307.
64 Kam Leung Sui Kwan (n 58) [46].
65 This is in part because the shareholder composition of public listed companies changes fre-

quently and it is therefore unlikely that there will be any agreement or understanding common to all
shareholders (but see Luck Continent Ltd v Cheng Chee Tock Theodore [2013] 4 HKLRD 181 for a case
where there was such a common understanding). It would be wrong to regard some members only as
being entitled to certain expectations that other members do not share.
66 Re German Date Coffee Co (1882) 20 Ch D 169; Re Tivoli Freeholds Ltd [1972] VR 445.
67 Re Yenidje (n 36); Ebrahimi (n 39); Chow Kwok Chuen (n 43).
68 Re Thomas Edward Brinsmead & Sons Ltd [1897] 1 Ch 406.
69 Re Diamond Fuel Co (1879) 13 Ch D 400, 410.
70 Loch (n 43); Re Wondoflex Textiles Pty Ltd (n 38).
12 Tan Cheng-Han and Wee Meng-Seng

scope of the remedy potentially overlap, for example, a variety of conduct such as
oppression of minority shareholders or carrying out the business in a fraudulent
manner can lead to a loss of mutual trust and confidence. The common thread
running through them is that reasonable shareholders would not generally con-
template the occurrence of such circumstances within companies of which they
are members (even though there was no express discussion or agreement between
them on such matters) and equity will therefore not allow the exercise of strict
legal rights to maintain this uncontemplated status quo. Winding up brings such
a state of affairs to an end if it is sought by a shareholder.
The just and equitable ground of winding up was for a long period the only
statutory remedy available to shareholders. Its weakness was that the remedy was
a drastic one. In Singapore, a recent legislative amendment has sought to pro-
vide the court with an alternative outcome, namely that instead of winding up
the company when it has been established that it would be just and equitable to
do so,71
the Court may if it is of the opinion that it is just and equitable to do so, make an order
for the interests in shares of one or more members to be purchased by the company or
one or more other members on terms to the satisfaction of the Court.72
The Singapore High Court has cautioned against seeing this provision as a means
for a shareholder to exit at will. If this was the intention for commencing a wind-
ing-up petition, and there was no real interest in the company being wound up, it
may amount to an abuse of process.73 In the UK, section 125(2) of the Insolvency
Act 1986 provides that a court need not wind up a company on such ground if it is
of the opinion that some other remedy is available to the petitioners and they are
acting unreasonably in seeking to have the company wound up instead of pursu-
ing that other remedy.74
An obvious alternative remedy in the UK is the statutory unfair prejudice rem-
edy in the Companies Act 2006, section 994(1)75 which provides that a mem-
ber may petition to the court for relief where ‘the company’s affairs are being or
have been conducted in a manner that is unfairly prejudicial to the interests of

71 Companies Act (Cap 50, 2006 Rev Ed) (Singapore), s 254(1)(i).

72 ibid s 254(2A). Even in the absence of such a provision, a court may order a stay of the winding-
up order for a specified period to allow the parties to consider if they can come to an arrangement
that would avoid the winding up of the company, see Sim Yong Kim (n 38) [50]; Kam Leung Sui Kwan
(n 58) [64].
73 Ting Shwu Ping v Autopack Pte Ltd [2016] SGHC 7, [2016] 2 SLR 152 [17].
74 No such provision exists in Singapore and the Court of Appeal in Sim Yong Kim (n 38) [38] has

said that a court would not be precluded from ordering winding up on the just and equitable ground
simply because a s 216 remedy would otherwise be available. Nevertheless, the Court also said at [39]
that a shareholder who prefers the just and equitable winding-up remedy in order to harass the com-
pany will risk having his application struck out as being vexatious. Given that there are more moderate
remedies available under s 216, a court may take the view that a claimant is motivated by spite where
such claimant seeks winding up even though the relief the claimant seeks can be satisfied by some
other remedy.
75 The predecessor provision was the Companies Act 1985, s 459.
 Equity, Shareholders and Company Law 13

members generally or of some part of its members (including at least himself)’ or

‘that an actual or proposed act or omission of the company (including an act or
omission on its behalf) is or would be so prejudicial’. In Singapore the equivalent
is section 216(1) of the Companies Act which allows a member to seek relief where
the affairs of the company are being conducted or the powers of the directors are
being exercised in a manner oppressive to one or more of the members in dis-
regard of his or their interests as members, or that some act of the company has
been done or is threatened or that some resolution has been passed or is proposed
which unfairly discriminates against or is otherwise prejudicial to one or more of
the members or holders of debentures (including himself).76
In the context of the UK unfair prejudice remedy, Lord Hoffmann has in O’Neill
v Phillips77 held that the basis for the remedy is equitable and moreover is similar
to that underlying just and equitable winding up.78 His Lordship said that one of
the traditional roles of equity was to restrain the exercise of strict legal rights in
certain relationships in which it considered that this would be contrary to good
faith. Such a principle has been carried over into company law as a result of the
influence of the law of partnership, and would lead to the conclusion that there
will be cases in which equitable considerations make it unfair for those conducting
the affairs of the company to rely on their strict legal powers.79 Lord Hoffmann
agreed80 with the statement in another case that,
in order to give rise to an equitable constraint … what is required is a personal relation-
ship or personal dealings of some kind between the party seeking to exercise the legal
right and the party seeking to restrain such exercise, such as will affect the conscience of
the former.81
A useful cross-check according to his Lordship was to ask whether the exercise of
the power in question would be contrary to what the parties, by words or conduct,
have actually agreed.82 This more ‘contractual’ approach83 lends support to the
earlier proposition in the context of just and equitable winding up that the court
can in appropriate circumstances imply an agreement or understanding between

76 The Singapore courts have held that the four individual limbs of oppression, disregard of a mem-

ber’s interest, unfair discrimination or otherwise prejudicial conduct are not to be read disjunctively.
The common thread underpinning the entire provision is the element of unfairness, see Over & Over
Ltd (n 39); Lim Kok Wah (n 39) [97].
77 O’Neill (n 45).
78 ibid 1099.
79 ibid 1098–99; see also Kam Leung Sui Kwan (n 58) [43]–[44].
80 O’Neill (n 45) 1101.
81 Re Astec (BSR) Plc [1998] 2 BCLC 556, 588; see also Grace v Biagioli [2005] EWCA Civ 1222,

[2006] 2 BCLC 70 [61] where Patten J in the Court of Appeal said that the rights and obligations of
members that are usually enshrined in the articles of association and any collateral agreements between
them ‘are subject to established equitable principles which may moderate the exercise of strict legal
rights when insistence on the enforcement of such rights would be unconscionable’.
82 See also Grace v Biagioli, ibid.
83 Davies and Worthington (n 23) para 20-13.
14 Tan Cheng-Han and Wee Meng-Seng

shareholders,84 for example, that certain obligations or expectations are generally

a necessary incident of particular types of company which have ‘peculiar charac-
teristics’. Lord Hoffmann was at pains to make it clear that unfair prejudice did not
only arise out of a breach of promise or undertaking. He gave an example, being
an event which puts an end to the basis on which the parties entered into the asso-
ciation, likening it to contractual frustration.85 It is also possible to understand
this as being outside the implied understanding of the parties given the associa-
tion in question that was contemplated by them. That this is consistent with the
analogy of contractual frustration mentioned by Lord Hoffmann is clear from the
factors to be taken into account in determining if a contract has been frustrated:
Among the factors which have to be considered are the terms of the contract itself, its
matrix or context, the parties’ knowledge, expectations, assumptions and contempla-
tions … as at the time of contract, at any rate so far as these can be ascribed mutually and
objectively, and then the nature of the supervening event, and the parties’ reasonable and
objectively ascertainable calculations as to the possibilities of future performance in the
new circumstances.86
Lord Hoffmann’s adoption of the reasoning in Ebrahimi on just and equitable
winding up for the unfair prejudice remedy has given rise to the interesting and
difficult question of the relative scope of the two provisions. Judicial opinion has
been divided. In Re Guidezone Ltd,87 a case decided shortly after O’Neill v Phillips,
Jonathan Parker J rejected the submission that the just and equitable winding-up
jurisdiction is wider than the unfair prejudice jurisdiction. But in Re Neath Rugby
Ltd (No 2),88 the Court of Appeal overruled Re Guidezone Ltd on this point for
two reasons. It held that Jonathan Parker J had misinterpreted Lord Hoffmann’s
brief remarks in O’Neill v Phillips on the relationship between the two jurisdic-
tions, and it gave two examples of circumstances, viz, deadlock between the share-
holders and loss of substratum, which in appropriate cases would fall within the
just and equitable winding-up jurisdiction but may not without more amount
to unfairly prejudicial conduct. Earlier, in Sim Yong Kim v Evenstar Investments
Ltd,89 the Singapore Court of Appeal was of the same view. The Singapore Court
of Appeal has also expressed agreement with Lord Hoffman’s view that the basis
for the section 216 remedy is equitable and similar to that underlying just and
equitable winding up.90 This is not the place to discuss this issue fully, which has

84 See also Re a Company (No 002015 of 1996) [1997] 2 BCLC 1, 18 (the existence of complex writ-

ten agreements between the members did not exclude the possibility of some other express or implied
arrangements or understanding between them); Lim Kok Wah (n 39) where the court in dismissing an
action under s 216 found that there was neither any express or implied agreement or understanding
that would justify relief.
85 O’Neill (n 45) 1101.
86 Edwinton Commercial Corp v Tsavliris Russ (Worldwide Salvage & Towage) Ltd (The Sea Angel)

[2007] EWCA Civ 547, [2007] 2 Lloyd’s Rep 517 [111].

87 Re Guidezone Ltd (n 59).
88 Re Neath Rugby Ltd (No 2) [2009] EWCA Civ 291, [2009] EWCA Civ 261, [2009] 2 BCLC 427.
89 Sim Yong Kim (n 38) [85].
90 Lim Swee Khiang (n 39) [82].
 Equity, Shareholders and Company Law 15

surprisingly attracted little commentary,91 but three observations are in order.

First, although deadlock and loss of substratum have traditionally been expressed
as distinct instances of the just and equitable jurisdiction, they may readily be seen
as illustrations of the principle expressed in Ebrahimi, ie, the situation that has
arisen is outside what the parties contemplated by the arrangement they entered
into, or what has been done is contrary to the assumptions which are the founda-
tion of their agreement. Indeed, writing in 1964, in an age when the profession and
the courts were more familiar with the just and equitable winding-up jurisdiction,
McPherson (who became McPherson JA of the Queensland Court of Appeal) sug-
gested that, if the principle expressed in Re Wondoflex Textiles Ltd,92 which was
approved and adopted in Ebrahimi
is, indeed, the underlying principle which governs the making of orders on the just and
equitable ground, then it may be that it amounts to little more than the application, in
the field of company law, of the contractual doctrines of discharge by frustration and
discharge by breach.93
Although a contractual approach has judicial support, it operates only by analogy
and it must not be forgotten that the basis of the court’s jurisdiction lies in equity.
Any contractual analysis must ultimately be able to support relief in equity.
Second, while it may be thought that some element of blameworthiness in
bringing about the underlying disagreement between the parties should be an
important distinguishing factor between the statutory remedies, an issue which
overlaps with the third point, Lord Hoffmann expressed in dicta in O’Neill v Phil-
lips that unfair prejudice could be established where some event puts an end to the
basis on which the parties entered into association with each other, the unfairness
arising from one party insisting on maintaining the association in circumstances
contrary to the original understanding of the parties.94 If this is correct, there is no
reason why a deadlock situation or loss of substratum cannot equally fall within
unfair prejudice. Thus, even if it is correct to recognise a distinction between both
remedies, the distinction is a relatively thin one with the additional element of
blameworthiness potentially arising from the desire to continue the uncontem-
plated situation the shareholders now find themselves in. Third, there is the issue
which has been termed ‘no fault divorce’, ie, a minority shareholder is entitled to
exit at will where the relationship of trust and confidence between the sharehold-
ers in an incorporated partnership has broken down. In O’Neill v Phillips, Lord
Hoffmann rejected the argument that unfair prejudice encompasses the notion of
no fault divorce. However, the just and equitable winding-up jurisdiction, as stated
in Ebrahimi, is broad enough to encompass such no fault divorce. Moreover, it is

91 eg B Clark ‘Just and Equitable Winding Up: Wound Up?’ (2001) 12 Scots Law Times 108; S Acton,

‘Just and Equitable Winding Up: The Strange Case of the Disappearing Jurisdiction’ (2001) 22 Com-
pany Lawyer 134.
92 Re Wondoflex Textiles Ltd (n 38) 467.
93 McPherson (n 33) 305.
94 O’Neill (n 45) 1101–02.
16 Tan Cheng-Han and Wee Meng-Seng

also arguable that as the distinction between both remedies is a thin one, and the
insistence of the majority on maintaining the association when the relationship of
trust and confidence between the parties has broken down could constitute unfair
conduct, it would take very little for unfair prejudice to come close to encompass-
ing no fault divorce.
From the foregoing, it seems clear that generally, in determining if just and
equitable winding up is potentially applicable, or if relief should be granted for
unfair prejudice, the circumstances faced by the complainants must be contrary to
some express or implied agreement or understanding between the parties (bearing
in mind the type of company) and this includes a state of affairs that an objective
and reasonable shareholder would not have contemplated at the time the com-
pany was established. This is what lies at the heart of the statutory equitable juris-
diction of the courts to prevent shareholders of companies from taking advantage
of their strict legal rights. This approach is also consistent with good economic
theory. Companies enhance investment and entrepreneurship by allowing the easy
pooling of resources, asset partitioning and limited liability. However, this is con-
ditional on company law as a whole providing a proper framework of rules that
do not allow majorities to take unfair advantage of minorities thereby providing
a degree of confidence that investments will not be easily diminished by sharp
practice. If the law does not place any constraints on majority rule when such
constraints can be said from an objective standpoint to have been agreed upon
either expressly or by implication, it would ultimately undermine the utility of the
corporate vehicle as an instrument for enterprise and diminish its social value.95
One final point can be made. The courts have variously used phrases such as
‘legitimate expectations’96 or ‘commercial unfairness’97 to denote when the unfair
prejudice and section 216 remedy will be granted. In an early case on section
181(1) of the Malaysian Companies Act 1965, which is in pari materia with sec-
tion 216, Lord Wilberforce speaking for the Privy Council used the phrase ‘visible
departure from the standards of fair dealing and a violation of the conditions of
fair play which a shareholder is entitled to expect’ as the test to be applied. Such
terms are vague and of second order relevance, as they do not in themselves pro-
vide explanations for why certain expectations are legitimate, or the reasons for
why conduct has been commercially unfair or a visible departure from standards
that a shareholder can expect. As Lord Hoffmann said in O’Neill v Phillips,98 it may
not be ideal to use the term ‘legitimate expectation’ (and by extension other terms
such as ‘commercial unfairness’) to describe a concept which is sufficiently defined

95 See also DD Prentice, ‘The Theory of the Firm: Minority Shareholder Oppression: Sections

459–461’ (1988) 8 OJLS 55.

96 eg Re Saul D Harrison & Sons plc [1995] 1 BCLC 14, 19; Ng Sing King v PSA International Pte Ltd

(No 2) [2005] SGHC 5, [2005] 2 SLR(R) 56; Sim Yong Kim (n 38) [40]; Over & Over Ltd (n 39) [78];
Lim Kok Wah (n 39) [103].
97 eg Over & Over Ltd (n 39) [81]; Ng Kek Wee v Sim City Technology Ltd [2014] SGCA 47, [2014]

4 SLR 723 [34].

98 O’Neill (n 45) 1102.
 Equity, Shareholders and Company Law 17

in other terms. It is suggested that it would be better for the courts to explicitly
develop the law along the equitable principles discussed here and use such terms
only where they are useful catchphrases for circumstances giving rise to equitable
intervention.99 As an example, the term ‘legitimate expectations’ could be a con-
venient reference to agreements or understandings that have arisen informally or
implicitly.100

III. Altering the Corporate Constitution

Moving beyond statutory provisions that expressly incorporate equitable con-

cepts, we may now consider how the courts have brought equitable principles into
company law. An early example relates to alterations of the corporate constitution.
Legislation relating to companies typically allows the corporate constitution to
be altered subject to the proposed alteration being approved by a super-majority
present and voting at the shareholders’ meeting. This super-majority is often set at
75 per cent.101 Given that alterations of the constitution are made more onerous
than normal resolutions, it might be thought that if shareholders can overcome
the threshold the alteration will be conclusive. This is not the position as the courts
have retained the discretion to set aside changes to the constitution even when
there has been compliance with the requirements for alteration.102
The first case that must be considered is Allen v Gold Reefs of West Africa Ltd103
where the articles were altered to allow the company to have a lien on fully paid
shares for any indebtedness by a member to the company. Prior to such amend-
ment the company only had a lien on shares that were not fully paid up. The
executors of a deceased insolvent member who held both fully paid-up shares (he
was the only such holder) and shares not fully paid up brought an action to set
aside the amendment. Lindley MR (with whom Romer LJ agreed) expressed the
view that the power to alter was subject to certain conditions beyond those found
in the Act:104
The power thus conferred on companies to alter the regulations contained in their arti-
cles is limited only by the provisions contained in the statute and the conditions con-
tained in the company’s memorandum of association. Wide, however, as the language of
s 50 is [providing for alteration by special resolution], the power conferred by it must,

99 See also Lim Kok Wah (n 39) [102] where Coomaraswamy J said that the starting point in a s 216

action was not to show unfairness but to show that the company was subject to equitable considera-
tions which has thereby made it unfair for the majority to rely on their strict legal rights.
100 eg Sim Yong Kim (n 38); Over & Over Ltd (n 39).
101 Companies Act 2006, s 21(1) read with s 283; Companies Act (Cap 50, 2006 Rev Ed) (Singapore),

s 26(1) read with s 184(1).

102 Note also s 33 of the Companies Act (Cap 50, 2006 Rev Ed) (Singapore) which allows alterations

of the company’s objects clauses (if any) to be challenged in court.

103 Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656.
104 ibid 671.
18 Tan Cheng-Han and Wee Meng-Seng

like all other powers, be exercised subject to those general principles of law and equity
which are applicable to all powers conferred on majorities and enabling them to bind
minorities. It must be exercised, not only in the manner required by law, but also bona
fide for the benefit of the company as a whole, and it must not be exceeded. These condi-
tions are always implied, and are seldom, if ever, expressed.105
In upholding the alteration in Allen, although the fact that only the complaining
member was affected and this might raise questions as to the bona fides of the
company, the court held there was no bad faith on the part of the directors106 as
the altered articles would apply to all shareholders even if practically the deceased
member was the only holder of fully paid-up shares who at the time was in arrear
of calls.107
What is noteworthy about the approach is that the court in Allen subjected the
power to alter to equitable principles, in particular that the power must be exer-
cised ‘bona fide for the benefit of the company as a whole’.108 It is non-controversial
that where a majority genuinely believes that they are acting to advance the inter-
ests of the company, it is unlikely that such decision can be challenged. What is
controversial is why there should be any restraint on the power of alteration given
the clear statutory language. Should a shareholder not be entitled to vote in favour
of an alteration even if such shareholder did not have the interests of the company
in mind? Additionally, by requiring the power to be exercised bona fide for the
benefit of the company, the court appears to have imposed fiduciary obligations
on shareholders when exercising their voting rights in cases involving alterations
to the constitution. Not only do members almost never owe fiduciary obliga-
tions to the company, given that a member’s vote is an incident of such person’s
property in the shares he owns, it is not clear how a fiduciary obligation can arise
when exercising one’s property rights. It is well established that shareholders are
entitled to vote in their personal interests.109 The test also does not appear help-
ful if the alteration is one that only affects shareholders but has no impact on
the company.110 For example, a resolution that affects the pre-emptive rights of
members might cause unhappiness to certain members but is not a matter that

105 Such a constraint on majority power has been applied in other contexts, eg, in British America

Nickel Corporation v O’Brien [1927] 1 AC 369 and Asseinagon Asset Management SA (n 50) where the
issue was whether resolutions passed by the requisite majority of debenture holders were binding on
the dissenting minority.
106 This is likely a reference to the directors putting the alteration to the shareholders in a general

meeting.
107 Allen (n 103) 675.
108 Cases citing this test include Brown v British Abrasive Wheel Co [1919] 1 Ch 290; Sidebottom

v Kershaw, Leese and Co [1920] 1 Ch 154; Dafen Tinplate Co Ltd v Llanelly Steel Company [1920] 2
Ch 124; Shuttleworth v Cox Bros & Co (Maidenhead) Ltd [1927] 2 KB 9; Southern Foundries (1926) Ltd
v Shirlaw [1940] 1 AC 701, 713; Greenhalgh v Arderne Cinemas Ltd [1951] 1 Ch 286; Smith v Croft (No
2) [1988] 1 Ch 114; Citco Banking Corp NV v Pusser’s Ltd [2007] UKPC 13, [2007] BCC 205; Re Char-
terhouse Capital Ltd [2015] EWCA Civ 536, [2015] 2 BCLC 627.
109 North-West Transportation Co Ltd v Beatty (1887) 12 App Cas 589.
110 Peters’ American Delicacy Co Ltd v Heath (1939) 61 CLR 457, 481; Citco Banking Corp NV (n 108)

[18]; Re Charterhouse Capital Ltd (n 108).

 Equity, Shareholders and Company Law 19

particularly affects the company as a separate entity.111 The same point may be
made in relation to the payment of dividends or the power to dispose of shares.112
Nor is the issue rendered clearer by equating the company with the body of share-
holders113 as shareholders do not generally owe fiduciary duties to each other.
This may explain Evershed MR’s attempt in Greenhalgh v Arderne Cinemas Ltd
to reformulate, in the context of a dispute over the rights of shareholders only,
what is meant by ‘the company as a whole’, when he said:
[T]he phrase … does not (at any rate in such a case as the present) mean the company as
a commercial entity, distinct from the corporators: it means the corporators as a general
body. That is to say, the case may be taken of an individual hypothetical member and it
may be asked whether what is proposed is, in the honest opinion of those who voted in
its favour, for that person’s benefit.114
This is so vague that it is singularly unhelpful. It must generally be the case that the
majority voting in favour of an alteration are themselves individual hypothetical
members who no doubt voted in favour of the constitutional amendment because
they considered it to be for their benefit. Perhaps realising this Evershed MR added
a further gloss which will be discussed in the following paragraph.
In Shuttleworth v Cox Bros & Co (Maidenhead) Ltd,115 an important gloss was
added to Lindley MR’s test. In that case, the articles of association provided that
the plaintiff and four others were to be ‘permanent’ directors. The articles were
altered to add an additional ground for the removal of directors, after which the
plaintiff was removed and he brought an action claiming that the dismissal was
wrongful. Atkin LJ framed the limitation in the following terms: ‘whether or not
the shareholders, in considering whether they shall alter articles, honestly intend
to exercise their powers for the benefit of the company’.116 He then went on to say
that the ‘circumstances may be such as to lead to one conclusion only, that the
majority of the shareholders are acting so oppressively that they cannot be acting
in good faith’.117 Similarly, Bankes LJ said that ‘the test is whether the alteration of
the articles was in the opinion of the shareholders for the benefit of the company’
and the ‘alteration may be so oppressive as to cast suspicion on the honesty of
the persons responsible for it, or so extravagant that no reasonable men could
really consider it for the benefit of the company’.118 Similarly, Evershed MR in
Greenhalgh stated that the issue was whether the effect of the amendment caused
discrimination in that it offered to majority shareholders an advantage denied
to the minority. When the cases were examined, this was the ground on which
resolutions have been successfully attacked. Persons voting for a special (or indeed

111 eg Greenhalgh (n 108).

112 See Peters’ American Delicacy Co Ltd (n 110); Citco Banking Corp NV (n 108) [18].
113 As in Re Imperial Chemicals Ltd [1936] 1 Ch 587, 619–20.
114 Greenhalgh (n 108) 291.
115 Shuttleworth (n 108).
116 ibid 26.
117 ibid 27.
118 ibid 18.
20 Tan Cheng-Han and Wee Meng-Seng

ordinary) resolution need not dissociate themselves altogether from the prospect
of personal benefit.119 Thus, the effect of the alteration becomes relevant as it may
cast doubt on the good faith of the majority. Nevertheless, the key issue is still
whether reasonable shareholders could have considered that the amendment was
for the benefit of the company120 and if this is the case the alteration is valid.
This test has rightly met with scepticism in Australia where the alteration relates
only to conflicting interests between shareholders.121 It is suggested respectfully
that while the courts in England rightly saw any limitation on the power to alter as
being founded on equitable principles, it was incorrect to regard such limitation
as being founded on, or analogous to, fiduciary obligations. Indeed the basis for
reliance on fiduciary duty is unclear. It is speculated that given the history of cor-
porate law, the underlying rationale may have come about by analogy with articles
of partnership.122 For example, where the articles of partnership allowed a partner
to be expelled upon a vote of two-thirds of the partnership shares, such a power
‘is inserted, not for the benefit of any particular parties holding two-thirds of the
shares, but for the benefit of the whole society and partnership, it being considered
to be an advantage to all that there should be this particular power’.123 And where
a power to alter the partnership agreement is subject to terms, the power must be
exercised in good faith.124 This is unsurprising given that the relationship between
partners is a fiduciary one.
As the relationship between shareholders is not fiduciary, in the context of alter-
ations of the corporate constitution it is suggested that the better basis in equity
when an alteration is regarded as objectionable is to regard the particular altera-
tion as an improper exercise of power. This rule is well recognised as being appli-
cable to the exercise of powers by directors.125 The rule, as Lord Sumption (with
whom Lord Hodge agreed) put it in the context of directors’ duties, has its origin
in the equitable doctrine of ‘fraud on a power’,126 which simply meant that the
power had been ‘exercised for a purpose, or with an intention, beyond the scope of
or not justified by the instrument creating the power’.127 As the scope of the proper
purpose rule is concerned with abuse of power, the test is subjective and the state
of mind and motive of those who acted are important.128

119 Greenhalgh (n 108) 291. See also Peters’ American Delicacy Co Ltd (n 110).
120 As reiterated in Citco Banking Corp NV (n 108) [24]–[25].
121 Peters’ American Delicacy Co Ltd (n 110); Gambotto v WCP Ltd (1995) 182 CLR 432, and this has

been acknowledged in Re Charterhouse Capital Ltd (n 108) [90], [96].

122 See also Peters’American Delicacy Co Ltd (n 110) 502–03 (Dixon J).
123 Blisset v Daniel (n 53) 524; 1035; see also Asseinagon Asset Management SA (n 50).
124 Banks (n 28) para 10-13.
125 For a recent case discussing this, see Eclairs Group Ltd v JKX Oil & Gas plc [2015] UKSC 71,

[2016] 1 BCLC 1; noted H Tjio, ‘The Proper Purpose Rule’ [2016] Lloyd’s Maritime and Commercial
Law Quarterly 176.
126 Eclairs Group Ltd (n 125) [15].
127 Vatcher v Paull [1915] AC 372, 378.
128 Eclairs Group Ltd (n 125) [15]. There is an objective aspect as well in the sense of the court having

to identify the purpose(s) underlying the power, see [30] and [32] (Lord Sumption SCJ); and Howard
Smith Ltd v Ampol Petroleum Ltd [1974] 1 AC 821, 835.
 Equity, Shareholders and Company Law 21

There is some authority that the proper purpose rule applies to alterations of
the corporate constitution. In Dafen Tinplate Co v Llanelly Steel Co, Petersen J,
while setting out the bona fide test, also said that the alteration ‘must not exceed
the limits of the power conferred by the statute’.129 Dixon J in Peters’ American
Delicacy Co Ltd v Heath has expressed the principle as follows:
The chief reason for denying an unlimited effect to widely expressed powers such as that
of altering a company’s articles is the fear or knowledge that an apparently regular exer-
cise of the power may in truth be but a means of securing some personal or particular
gain, whether pecuniary or otherwise, which does not fairly arise out of the subjects dealt
with by the power and is outside and even inconsistent with the contemplated objects
of the power. It is to exclude the purpose of securing such ulterior special and particular
advantages that Lord Lindley used the phrase ‘bona fide for the benefit of the company
as a whole’.130
Further Australian authority can be found in Gambotto v WCP Ltd where the court
said that in relation to alterations that gave rise to a conflict of interests and advan-
tages between shareholders, the bona fide in the best interests of the company test
was inappropriate. In such cases, the general approach was that an alteration was
valid unless it was, inter alia, ‘beyond any purpose contemplated by the articles’.131
A power to alter had to be exercised for a proper purpose and its exercise should
not operate oppressively in relation to minority shareholders.132
The decision in Redwood Master Fund Ltd v TD Bank Europe133 is also instruc-
tive, involving as it does a group that did not owe fiduciary responsibilities to each
other, though in this case the proper purpose rule was implied as a term of the
contract. The case involved a group of lenders and the claimants brought an action
to set aside a variation to the facility agreement that had been passed by a sufficient
majority of the lenders. The claimants’ case was that the majority lenders abused
their position and breached their duty to act bona fide in the interests of the lend-
ers as a whole. Rimer J accepted that while the case did not involve a company, the
principles outlined by Evershed MR in Greenhalgh applied to a case where a class
of lenders conducts itself in relation to matters that affected the entire class.134
However, taking reference from Dixon J in Peters’ American Delicacy Co Ltd as
well as Howard Smith Ltd v Ampol Petroleum Ltd (where it was held that directors
had exercised the power to issue shares for improper purposes),135 Rimer J said
that where there were conflicting interests between the different classes of lenders,
it was misplaced to apply the bona fide test (in this instance to the lenders as a
whole). Instead, the vice against which control on the exercise of majority power

129 Dafen Tinplate Co Ltd (n 108) 139.

130 Peters’American Delicacy Co Ltd (n 110) 511.
131 Gambotto (n 121) 444.
132 ibid [445]; see also McHugh J [453].
133 Redwood Master Fund Ltd v TD Bank Europe Ltd [2002] EWHC 2703 (Ch), [2006] 1 BCLC 149;

see also Asseinagon Asset Management SA (n 50).

134 Redwood Master Fund Ltd (n 133) [84].
135 Howard Smith Ltd (n 128).
22 Tan Cheng-Han and Wee Meng-Seng

was directed is ‘the potential for a dishonest abuse of that power. The starting point
in assessing the validity of its exercise must be to assess … whether the power is
being exercised in good faith for the purpose for which it was conferred’.136
In Re Charterhouse Capital Ltd the Chancellor expressed the view that the limi-
tations on the exercise of the power to amend a company’s articles arise because,
as in the case of all powers, the manner of their exercise is constrained by the
purpose of the power and because the framers of the power of a majority to bind
a minority will not, in the absence of clear words, have intended the power to be
completely without limitation. These principles may be characterised as principles
of law and equity or as implied terms.137 Allen138 and Asseinagon Asset Manage-
ment SA139 were cited in support. It is suggested that implied terms in this con-
text does not mean terms implied as a matter of contract. While Asseinagon Asset
Management SA was a case involving the implication of such a limitation as a
matter of contract, constitutional alterations are about a power conferred by stat-
ute. Thus, when Lindley MR in Allen said that the limitation on a majority to alter
the articles of association was a condition that was always implied and seldom, if
ever, expressed,140 he simply meant that the limitation was not one that had been
expressly recognised by the Act. The limitation is implied within the terms of a
legislative provision and is not a matter of contractual implication. It was as Lord
Watson observed:
In a Court of Law or Equity, what the Legislature intended to be done or not to be done
can only be legitimately ascertained from that which it has chosen to enact, either in
express words or by reasonable and necessary implication.141
If the proper purpose rule is the real basis for the restriction on the right of share-
holders to alter the corporate constitution, the cases immediately assume greater
coherence. First, as the power to alter is very widely expressed in legislation, and
shareholders are not under a fiduciary duty when exercising their vote, the start-
ing point must be that it will be difficult to argue that a particular exercise of the
power is for an improper purpose.
Second, the power to amend is subject to an implied limitation and any exercise
of the power beyond such limitation constitutes an abuse of such power. What
then is the scope of the limitation that will cause equity to restrain a particular
exercise of the power? It is suggested that the particular mischief that the limita-
tion is directed at is discriminatory treatment between shareholders. An alteration
that will cause a differentiation in the rights and obligations of members post-
amendment will therefore generally not be permitted. Majorities should not make

136 Redwood Master Fund Ltd (n 133) [105].

137 Re Charterhouse Capital Ltd (n 108) [90].
138 Allen (n 103).
139 Asseinagon Asset Management SA (n 50).
140 Allen (n 103) 671.
141 Salomon v Salomon [1897] AC 22, 38.
 Equity, Shareholders and Company Law 23

presents of the company’s assets to themselves,142 or expropriate the shares of the

minority.143
Third, it is suggested that discriminatory treatment will not be an improper
exercise of the power where the interests of the company are clearly served, ie,
where the harm to the minority is clearly outweighed by the benefit to,144 or the
harm avoided by, the company. Accordingly, in Sidebottom v Kershaw, Leese & Co
Ltd,145 an alteration allowing the directors the power to buy out at a fair price any
member who competed with the company’s business was upheld. As Warrington
LJ put it: ‘[T]he fact that there was this competitor, and probably the knowledge
that he was doing harm to the company, awoke the directors to the disadvantage
in which they were placed by having such a man as one of their shareholders’.146
By contrast, in Gambotto,147 although there were tax and administrative savings,
and the basis for expropriation was to be on fair terms, the amendment to insert
a compulsory acquisition clause into the constitution was rejected. In the court’s
view, an expropriation may be justified where it is reasonably apprehended that
the continued shareholding of the minority is significantly detrimental to the
company, its undertaking or the conduct of its affairs—resulting in detriment to
the interests of the existing shareholders generally—and expropriation is a reason-
able means of eliminating or mitigating that detriment.148 It was not sufficient
that there was a benefit to the company given the proprietary nature of a share;
that the benefit of it would only inure to the remaining shareholders; and it would
deprive minorities of the protection offered to them in resisting compromises,
reconstructions, schemes of arrangement, etc.149
Since the majority in Gambotto made it clear that the benefit-detriment distinc-
tion was made in the context of determining whether an expropriation was valid,
the distinction should not be taken to be of general application. Having said this,
it is suggested that the benefit-detriment dichotomy is difficult to justify.150 The
avoidance of a detriment also confers a benefit on a company. Gambotto therefore
stands at the highest for the proposition that expropriation is so drastic an action
that any benefit to the company that might justify such an act must be very signifi-
cant. The benefit of avoiding material harm to the company crosses the threshold
but not if the benefit merely leads to a different corporate structure that gives rise
to commercial advantages.151

142 Peters’ American Delicacy Co Ltd (n 110) 504.

143 Dafen Tinplate Co Ltd (n 108); Brown (n 108); Gambotto (n 121).
144 Though see the discussion in text to n 147 on Gambotto, where the court was of the view that
only the avoidance of significant detriment to the company would justify compulsory acquisition;
benefit to the company alone would not suffice.
145 Sidebottom (n 108).
146 ibid 171–72.
147 Gambotto (n 121). Gambotto has attracted various criticisms, which are outlined in H Tjio,

P Koh and PW Lee, Corporate Law (Singapore, Academy Publishing, 2015) para 05.071.
148 Gambotto (n 121) [26]–[27].
149 ibid [28].
150 In Gambotto (n 121), McHugh J demurred forcefully on this point: [14].
151 ibid [27].
24 Tan Cheng-Han and Wee Meng-Seng

Finally, it is suggested further that the above glosses to a seemingly untram-

melled power is rooted, similarly with the statutory remedies discussed earlier,
in the implicit understanding among shareholders that there are expectations
and obligations that are not submerged in the company structure. All these are
instances of equity intervening where there is fraud in the equitable sense. It is
readily understandable that while shareholders appreciate fully that the corporate
constitution is not writ in stone, it is at the same time implicitly understood that
alterations will not be effected so as to discriminate between shareholders unless
a significant benefit is conferred on the company that clearly outweighs any harm
to dissenting shareholders and such shareholders are treated as fairly as possible.

IV. Constraining Shareholder Action beyond

Alterations of the Corporate Constitution

The general rule in company law is that where a wrong is done to a company the
company is the proper plaintiff and a shareholder of a company may not sue to
enforce rights belonging to the company.152 This ‘proper plaintiff rule’ is a mani-
festation of the broader principle that a company is a legal entity separate from its
shareholders. As such, the decision whether to bring a claim against a wrongdoer
is one that should be resolved internally, usually by the board and sometimes the
shareholders.153 One important exception to this general rule is where there has
been a ‘fraud on the minority’. Essentially, where the wrongdoers are in control
of the company and therefore in a position to prevent the company from assert-
ing its rights, the court will in certain circumstances allow a shareholder to bring
an action on behalf of the company against such wrongdoers. A usual example of
such a situation is where the majority has attempted to appropriate to themselves
money, property, or advantages which belong to the company, or in which the other
shareholders are entitled to participate.154 Such actions by the minority are com-
monly referred to as ‘derivative actions’ as they are derived from the company.155
The juristic basis for this exception is in equity. In Nurcombe v Nurcombe
Browne-Wilkinson LJ said that where the technicality of the proper plaintiff rule

152 Foss v Harbottle (1843) 2 Hare 461, (1843) 67 ER 189.

153 It seems that under the common law, where the board refuses to act, the shareholders may in
some circumstances by ordinary resolution decide to take action. See Davies and Worthington (n 23)
para 17-3. For Singapore, see Chan Siew Lee v TYC Investment Pte Ltd [2015] SGCA 40, [2015] 5 SLR
409.
154 Burland v Earle [1902] AC 83, 93; Wallersteiner v Moir (No 2) [1975] 1 QB 373, 390; Sinwa SS

(HK) Co Ltd v Morten Innhaug [2010] SGHC 157, [2010] 4 SLR 1.

155 This remedy has now been put into statutory form in the UK and replaces the ‘common law

derivative action’ (see Companies Act 2006, ss 260–64), unless the matter relates to a ‘multiple’ or ‘dou-
ble’ derivative action, see Universal Project Management Services Ltd v Fort Gilkicker Ltd [2013] EWHC
348 (Ch), [2013] Ch 551. In other jurisdictions such as Singapore, the common law derivative action
coexists with the newer statutory derivative action (Companies Act (Cap 50, 2006 Rev Ed), s 216A).
 Equity, Shareholders and Company Law 25

would lead to manifest injustice, the courts of equity permitted a person interested
to bring an action to enforce the company’s claims.156 Again, ‘fraud’ in this context
is to be understood in the equitable sense and not in the more limited common
law meaning of the word.157 Templeman J said the principle is that a minority
shareholder who has no other remedy may sue where directors use their powers,
intentionally or unintentionally, fraudulently or negligently, in a manner which
benefits themselves at the expense of the company.158 In Estmanco (Kilner House)
Ltd v Greater London Council Megarry VC explained the basis of the exception as
such:
[T]he essence of the matter seems to be an abuse or misuse of power. ‘Fraud’ in the
phrase ‘fraud on a minority’ seems to be being used as comprising not only fraud at
common law but also fraud in the wider equitable sense of that term, as in the equitable
concept of a fraud on a power.159
Under the ‘fraud on a minority’ exception, equity does not allow majority share-
holders to prevent an action by a minority shareholder where a wrong has been
done to the company and the majority stand to benefit from preventing such
an action being brought. The law will also regard any attempt by the majority
to ratify the wrongdoing as being improper. Any such attempt by the majority to
exercise their voting rights will be regarded as an improper exercise of power.160
On the other hand, there will be no improper exercise of such power if a major-
ity of independent shareholders who do not stand in any way to benefit from the
absence of an action vote in favour of ratifying the wrongful act, or where it is
abundantly clear that such an independent majority are against the bringing of
an action. Accordingly, where a general meeting has been called, and a majority
of all shareholders (including the wrongdoers) with full disclosure vote in favour of
ratifying the wrong, and after disregarding the votes of the wrongdoers (and those
associated with them), it is clear that a majority of the remaining ­(independent)
votes were in favour of ratification, the resolution to ratify or waive the wrong-
doing must be taken to have been carried. The approach taken in Smith v Croft
(No 2) was therefore correct.161
It can be seen that two interrelated factors are at play here. The law is constrain-
ing majority power because of the need to prevent opportunistic conduct and a

156 Nurcombe v Nurcombe [1985] 1 WLR 370, 378. See also Roberts v Gill & Co [2010] UKSC 22,

[2011] 1 AC 240 [56], [110]; Sinwa SS (HK) Co Ltd (n 154) [69].

157 Daniels v Daniels [1978] Ch 406; Estmanco (Kilner House) Ltd v Greater London Council [1982]

1 WLR 2; Konamaneni v Rolls Royce Industrial Power (India) Ltd [2002] 1 WLR 1269.
158 Daniels v Daniels, ibid, 414; cited in Ting Sing Ning v Ting Chek Swee [2007] SGCA 49, [2008]

1 SLR(R) 197 [13].

159 Estmanco (Kilner House) Ltd (n 157) 12.
160 Similarly with the limitation imposed on the power to alter the corporate constitution, it must

be the implicit understanding of all shareholders that they are entitled to be treated equally and not be
discriminated against. This is the objective standard by which the actions of the majority in preventing
a claim being brought, or ratifying the wrongful act, are judged.
161 Smith v Croft (No 2) (n 108) 185. See also Ting Sing Ning (n 158).
26 Tan Cheng-Han and Wee Meng-Seng

conflict of interest. It would seem though that the disqualification of the major-
ity shareholder-directors from voting at the shareholder meeting is principally
premised on opportunistic conduct, namely that it would otherwise result in their
unfair appropriation of an item of property (including corporate opportunities)
belonging to the company which other shareholders have an indirect interest in.
In other circumstances, shareholders who are directors may fully participate in
shareholder resolutions that seek to waive breaches of fiduciary duty.162 In North-
West Transportation Co Ltd v Beatty,163 the Privy Council held that a director was
entitled to use his votes as a shareholder to ratify a sale of property to the company.
It was accepted that the purchase of the steamer from the director was essential
to the company’s business, it was not possible to purchase any other steamer that
was as well suited to the business, and the price was not excessive or unreasonable.
Beyond the foregoing non-statutory instances of limits on majority shareholder
action, might there be a more general rule constraining majorities? If the foregoing
instances are manifestations of the fraud on a power principle, there is no reason
why limits on majority rule cannot be imposed in other instances. For example,
where legislation relating to companies requires shareholder approval for the
issue of shares,164 and approval is given with a view to preventing a takeover or to
dilute certain shareholders, it would not be difficult in principle to consider this an
improper exercise of the power.165 An attempt to fashion a more general approach
was made in Clemens v Clemens Bros Ltd166 which involved an attempt to issue
additional shares which would have had the effect of diluting the plaintiff ’s inter-
est in the company to below 25 per cent. Foster J found that while the majority
shareholder would genuinely like to see the other directors of the company have
shares and have a trust set up for long-service employees, the resolutions were
framed so as to give her and her fellow directors complete control of the company
at the expense of the plaintiff who was the only other shareholder. After referring
to cases involving fraud on the minority, cases where the articles of association
were being altered, and Ebrahimi, Foster J said that the defendant was not entitled
to exercise her majority vote in whatever way she pleased. The difficulty was in
finding a suitable principle that underpinned this. He ultimately said it would be
unwise to try to do so as the circumstances of each case are infinitely varied. Quot-
ing Lord Wilberforce in Ebrahimi, Foster J said that the defendant’s exercise of her
votes was subject to ‘equitable considerations’.167 The resolutions to, inter alia, allot
more shares were therefore set aside.

162 In Sinwa SS (HK) Co Ltd (n 154) [52], Andrew Ang J considered that the scope of fraud on the

minority was amenable to further consideration.

163 North-West Transportation Co Ltd v Beatty (n 109). See also Burland (n 154) 93–94.
164 Companies Act 2006, s 551; Companies Act (Cap 50, 2006 Rev Ed) (Singapore) s 161.
165 This has been held to be the case in the context of directors exercising such a power: see Hogg

v Cramphorn Ltd [1967] 1 Ch 254; Howard Smith Ltd (n 128).

166 Clemens v Clemens Bros Ltd [1976] 2 All ER 268.
167 ibid 282.
 Equity, Shareholders and Company Law 27

Foster J’s decision does not appear to have been adopted in the UK or Singa-
pore. Although it is respectfully suggested that his intuition was correct, the failure
to articulate a principled basis for the broader application of equitable considera-
tions represented a weakness in the authoritativeness of the case. In addition, the
apparent inability or unwillingness of the courts to fashion a broader remedy at
common law to protect minorities led to the statutory unfair prejudice remedy
which in turn appears to have relieved the courts of the need to further do so.168
Nevertheless, it is submitted that there is a strong basis for the courts outside the
unfair prejudice remedy to fashion additional remedies for minority shareholders
should there be a need to do so in future.

V. Conclusion

The overlap between just and equitable winding up and the unfair prejudice rem-
edy has already been noted. Similarly, where the constitution has been amended
in a discriminatory fashion, or there has been fraud on a minority, the statutory
remedies may be engaged. This should not be surprising if the element common
to them is that of an express or implied agreement or understanding even though
as framed they have different purposes.
One of the objectives of company law is to provide a set of default rules that
can conveniently and with relatively little cost be adopted by parties seeking the
benefits of incorporation. To this end, model constitutions have been a feature
of corporate legislation. As these are default rules, it is open to parties to modify
or exclude them. This is often done, particularly where the parties are sophisti-
cated commercial organisations seeking to use the corporate vehicle to pursue
joint ventures with others. In the great majority of instances though, this is not
done because the corporate vehicle is also used by small businesses that will often
incorporate without the benefit of legal advice.169 Indeed, in Singapore the desire
to reduce business costs and allow quick incorporation has led to most company
registrations being done online in accordance with default provisions. Given
this, it is understandable that the corporate constitution will not truly reflect
the intentions or expectations of the incorporators or all shareholders. At law
such intentions or expectations where not reduced to an enforceable agreement
have no effect. Equity is not similarly constrained, for example, in promissory

168 The predecessor of the unfair prejudice remedy was enacted on the recommendation of the

Cohen Committee, which wanted to strengthen the position of minority shareholders of a private
company in resisting oppression by the majority shareholders or the controllers of a company: Report
of the Committee on Company Law Amendment (Cmnd 6659, 1945) [60].
169 To this extent, at least in Singapore, it is not true that persons who incorporate companies do so

‘with legal advice and some degree of formality’: O’Neill (n 45) 1098 (Lord Hoffman).
28 Tan Cheng-Han and Wee Meng-Seng

estoppel.170 Accordingly, equity constrains shareholders from acting within their

strict legal rights to the inequitable disadvantage of other shareholders, and pre-
vents powers from being used for improper purposes. Equity does so to prevent
a fraud on such powers. As these constraints on the majority flow from this prin-
ciple, it is not surprising that there is a common element in their application. In
essence, the scope of these constraints depends on what the courts regard as being
within the reasonable contemplation of shareholders in the type of company in
question.

170 Indeed, the Alabama Supreme Court in Mazer v Jackson Insurance Agency, 340 So 2d 770, 772

(Ala 1976) stated that the ‘purpose of equitable estoppel and promissory estoppel is to promote equity
and justice in an individual case by preventing a party from asserting rights under a general technical
rule of law when his own conduct renders the assertion of such rights contrary to equity and good
conscience’, thereby seeing estoppel as having roots in equitable fraud which similarly underlies the
corporate statutory remedies discussed in this chapter. If this is correct, it is another aspect of the con-
tractual approach that can be employed to determine the operation of the statutory remedies.
 2
Some Aspects of the Intersection
of the Law of Agency with
the Law of Trusts

PETER WATTS*

I. Introduction

Lawyers are regularly charged with making the law unnecessarily complex. This
charge is most commonly levelled at the diction of those documents routinely
drafted by lawyers, to wit statutes and other legal instruments.1 But judge-made
rules can also attract such criticism. A legal system that acquires, like England did,
more than one set of judges, each set following in varying degrees its own lines of
thought, creates a recipe for complexity, certainly, and for incoherence, potentially.
One subject that, in parts, descends into incoherence is the English law relating
to group decisions. This has quite a lot to do with the fact that three sets of courts
generated rules in this area that were not fully co-ordinated. A small corner of this
topic takes up three-quarters of this chapter, but the most incoherent aspects have
been sketched then avoided. This has been possible by limiting the scope of the
chapter to the intersections between the law of agency and the law of trusts. This
is a topic more complex than incoherent. One would expect a reasonable degree
of coherence because the law of trusts was designed to work with the rules of
the common law. While the trust was the brainchild of those working outside the
common law, its creators were at least conscious that they were adding a layer on
top of the law’s basic rules. In this aspect of equity, to seek to fuse the two existing

* The author is grateful to the Leverhulme Trust and to the NUS and Oxford Law Faculties for their

support to write this chapter, and to Richard Nolan, Matthew Conaglen and Jamie Glister for their
helpful comments on a draft of it.
1 cf the ‘purgatorial complexity’ of the documents before the Supreme Court in Belmont Park Invest-

ments PTY Ltd v BNY Corporate Trustee Services Ltd [2011] UKSC 38, [2012] 1 AC 383 [138] (Lord
Mance).
30 Peter Watts

bodies of law would not work: the one is parasitic on the other. A reformer would
perhaps do better to create an entirely new set of rules.
The body of law that deals with disputes that arise out of the deployment of
intermediaries (generally ‘agents’) has been predominantly developed at com-
mon law. Although equity’s fiduciary law has had a large role to play as between
principal and agent, it is possible for agencies to operate without engaging with
the law of trusts. Equally, it is possible for trusts to operate without engaging the
law of agency. Sometimes the courts have allowed themselves to confuse the two
sets of rules in ways that are illegitimate. We will see examples of this in section
IV of this chapter. Another recent example that will not be pursued in this chap-
ter has involved a court wrongly treating trustees as if they were agents of their
beneficiaries.2
But the two bodies of law do sometimes quite legitimately come into contact
with one another, and from opposite directions. On the one hand, trustees may
on occasions find it necessary, or convenient, to delegate tasks to agents.3 This
chapter is mostly absorbed with the consequences of delegations that exceed per-
missible bounds. On the other hand, principals sometimes require their agents to
hold moneys provided to them (either by the principals themselves or by a third
party) on trust for the relevant principal. These situations too give rise to particu-
lar legal problems. These issues will be more briefly addressed in the last section
of the chapter.

II. Three Models of Decision-Making Amongst Groups

As indicated, the rules for decision-making by groups in their dealings with out-
side parties are derived historically from three different sets of courts—common
law, equitable and ecclesiastical. Usually such groups will have powers of disposi-
tion over property, either as co-owners, or as co-agents on behalf of an owner or
owners. But the group may also be running a business together that may or may
not deal in tangible property. In general, the rules, at least where one is concerned
with authorised decision-making, are presumptions only. They are therefore sub-
ject to contrary arrangement so long as designated mechanisms for deviation are
met. Each of the three major models has subcategories, but the principal features
of the models are as follows.

2 See Wishart v Credit and Mercantile Plc [2015] EWCA Civ 655, [2015] 2 P & CR 15, criticised by

J Sampson, ‘Estoppel and the Land Registration Act 2002’ (2016) 75 CLJ 21; M Dixon, ‘The Boland
Requiem’ [2016] Conveyancer and Property Lawyer 284; A Televantos, ‘Trusteeship, Ostensible Author-
ity, and Land Registration: the Category Error in Wishart’ [2016] Conveyancer and Property Lawyer 181.
3 Where the trustee is an incorporation the trustee, on a traditional analysis anyway, is going to have

to operate through agents. Nothing more is said on this topic in this chapter.
 Intersection of Agency and Trusts 31

First, the species making up the common law genus are characterised by:
(a) majority decision-making; and (b) subject to context, the ability to delegate.
Members of the group may be liable to their colleagues, or where they are co-
agents to their principal, for carelessness in their decisions or in their choice of
delegates, but they and their delegates would usually have actual or, where the
standard requirements of agency law are met, apparent authority to effect a dispo-
sition of property under their charge. They may also have such authority to bind
themselves or their common principal to the terms of a contract extending beyond
any disposition of property. A good example of a group which is made up of co-
principals is the partnership, and of a group that is made up of co-agents is the
board of a company. Both operate on a presumption of majority rule.4
Second, the equity genus largely comprises the trust. Here, in contrast to the
common law model, the decision-makers are: (a) supposed to act unanimously;
and (b) may not delegate, except in respect of the implementation of decisions
they have already made.5 The position is different with charitable trusts, where
majority rule is the presumption,6 and majority rule is the norm for trusts in gen-
eral in Scottish law.7 There may be some variation too in powers of delegation
both by type of trust, and by virtue of statute, by jurisdiction.8
The third genus, that derived from ecclesiastical law,9 comprises executors and
administrators (though there is some doubt whether the rules of dealing were
exactly the same for both categories). In this genus, decision-makers can act uni-
laterally to bind their colleagues in relation to a relevant disposition of personalty,
including leases of land. By statute in some jurisdictions, this rule can extend to
dispositions of other interests in land.
If one places the three models on a spectrum, one gets the remarkable result
that in respect of dispositions of many types of property: (a) single execu-
tors can bind their colleagues without consulting them; (b) partners and other
co-agents, such as company directors, can usually make decisions by majority rule,
and a ­delegate from them might have actual or apparent authority to bind; but
(c) trustees must act unanimously and may not, in general, delegate.

4 eg Partnership Act 1893 (UK), s 24(8); Partnership Act 1908 (NZ), s 27(h); Companies (Model

Articles) Regulations 2008 (UK), sch 1, cl 17 and sch 3, cl 13; Companies Act 1993 (NZ), sch 3, cl 5.
5 D Hayton, P Matthews and C Mitchell, Underhill and Hayton: Law of Trusts and Trustees, 18th edn

(London, LexisNexis, 2010) Arts 51 and 52; cf J Getzler, ‘Duty of Care’ in P Birks and A Pretto (eds),
Breach of Trust (Oxford, Hart Publishing, 2002) 60–67.
6 See Re Whiteley [1910] 1 Ch 600. Presumably, this reflects the fact that charitable trusts have tra-

ditionally had larger numbers of trustees than private trusts.

7 See Trusts (Scotland) Act 1921, s 3(c). For a fuller picture, see Scottish Law Commission, Report on

Trust Law (Law Com No 239, 2014) Part 5.

8 An open-ended unqualified power of appointment can be tantamount to ownership, and in which

case the power can be delegated: Fonu v Merrill Lynch Bank and Trust Company (Cayman) Ltd [2011]
UKPC 17, [2012] 1 WLR 1721 [53]. See also Clayton v Clayton [2016] NZSC 29, [2016] 1 NZLR 551.
9 For a useful overview, see E Haertle, ‘The History of the Probate Court’ (1962) 45 Marquette Law

Review 546.
32 Peter Watts

The foregoing account is only the starting point of the complexity. There are
other layers to it. There are two main types of complication at the next level. First,
as already noted, the trust works as an attachment to common law ownership, and
though the courts have sometimes lost sight of the point, the two sets of rules oper-
ate in tandem. Second, it is not only possible for an executor to also be a trustee
in some respects, but it can be difficult too to tell when someone has ceased to be
an executor and become solely a trustee.10 Hence, there have been cases where an
act has been held invalid in equity because not all trustees concurred in it, when it
might have been valid if the same personnel had effected it while still executors.11
Below this, there is yet further complexity. This chapter does not propose to
address the regime for executors, but the complexity there borders on the dia-
bolical, and cries out for statutory simplification.12 Just by way of an example, a
leading case explains that while executors can generally ride solo, if they expressly
purport to act with the consent of their colleagues but do not have that consent,
then they will not bind their colleagues, though they may be personally liable for
breach of warranty of authority.13
At the same time, it would be wrong to suggest that all the divergence in the var-
ious approaches to group decision-making is the accident of history. In particular,
the non-delegation principle in the law of trusts is not irrational, and probably
derives from the family context of the traditional trust where a settlor personally
selected the trustees, knowing that one might need to act as a brake on the others.
With this background, we can turn to look in more detail at the role of agency
law in the making of contracts and dispositions by trustees.

III. Trustees: Their Contracts and Dispositions

The main argument being made in this chapter in relation to contracts and dispo-
sitions by trustees is that whether co-trustees become bound to a contract, and to
any transaction that effects a disposition of property of a type that is recognised
by the common law, is prima facie governed by common law rules, not ­equitable
ones.14 It follows that if some trustees wrongly delegate decision-making to

10 See C Sherrin, ‘Aut Ovis Aut Capra: Personal Representative or Trustee?’ (1995) 25 Hong Kong Law

Journal 239; see also Re King’s WT [1964] Ch 542; Porteous v Rinehart [1998] WASC 270.
11 eg Attenborough v Solomon [1913] AC 76 (pledge of chattels).
12 eg Succession Act 1981 (Qld), s 49.
13 See Fountain Forestry Ltd v Edwards [1975] Ch 1; and Birdseye v Roythorne & Co [2015] EWHC

1003 (Ch) [33]. Joshua Getzler has suggested to the writer that the rules developed to reflect the need
often to dispose quickly of the chattels of estates, especially in rural areas when formerly communica-
tion was not easy.
14 See too M Conaglen and R Nolan, ‘Contracts and Knowing Receipt: Principles and Application’

(2013) 129 LQR 359, 360, who argue (at least in relation to a trust of legal property) that a trustee’s
powers all come from the common law, and that the deployment of them consistently with the trust
simply gives the trustee an immunity.
 Intersection of Agency and Trusts 33

the remaining trustees or if the trustees delegate to some other agent, they will
commit a breach of trust but they will have conferred actual authority on those
delegates. Any resulting contract or disposition of trust property will be effective
at law as a result of the ordinary operation of the (common) law of agency. The
starting point of the common law is that whatever can be done personally can be
done by an agent: this is one of the renditions, admittedly loose, of the expression
qui facit per alium, facit per se.15 The common law does, presumptively, inhibit the
power of an agent to sub-delegate,16 but trustees are principals, not agents.
If the outside party knows that its counterparties are trustees and knows that
there has been a breach of the delegation rules, the contract will still impose obli-
gations on the trustees personally, but equity will permit neither the trustees nor
the outside party to have recourse to any trust assets in execution of the contract.17
An injunction would issue (usually at the behest of a beneficiary) to prevent any
trust assets being transferred, and any property already transferred is likely to be
held by the outside party on constructive trust. The fact that the transaction is
defective only at equity, and not at law, is in such circumstances not going to mat-
ter much to that party. Either way, that party is in difficulty,18 save as to rights to
damages it may have in contract against the trustees. But, absent that knowledge,
the outside party would be safe. The breach of trust would sound only against the
relevant trustees themselves.
Trustees may also become bound by the conduct of some of their number, or
by the conduct of other agents, through the operation of the common law rules
of apparent authority. The position is relatively straightforward where the outside
party is unaware that its counterparties are trustees. Where the trustees are simple
co-owners of the trust assets, the outside party would usually need to show some
fact-specific holding out, because there is no usual authority of one co-owner at
law to bind the others.19 But where, as is not uncommon, trustees are running a
business they will often be partners at common law. In such circumstances, there
will be usual apparent authority at common law for one partner to bind the others
in relation to ‘any act for carrying on in the usual way business of the kind carried
on by the firm’.20

15 See P Watts and F Reynolds (eds), Bowstead & Reynolds on Agency, 20th edn (London, Sweet

& Maxwell, 2014) para 2-017; G Dal Pont, Law of Agency, 2nd edn (London, LexisNexis 2008) paras
3.16–3.19.
16 See Watts and Reynolds (n 15) Art 44.
17 As to whether a breach of trust makes a disposition under a contract void or voidable at equity,

see R Nolan, ‘Controlling Fiduciary Power’ (2009) 68(2) CLJ 293; Watts and Reynolds (eds) (n 15)
paras 8-219–8-220.
18 An outside party who knows that its counterparties are asking for a contract to be performed in

a way that would involve a breach of trust may be justified in declining to meet the directions of the
counterparty: see Re Flower and Metropolitan Board of Works (1884) 27 Ch D 592.
19 See Kennedy v De Trafford [1897] AC 180, 188; as to an estoppel, see Doueihi v Construction Tech-

nologies Australia Pty Ltd [2016] NSWCA 105 [222].

20 Partnership Act 1890 (UK), s 5; Partnership Act 1908 (NZ) s 8.
34 Peter Watts

The position becomes more complex if the outside party needs to rely on appar-
ent authority because there has been no actual delegation, and knows there is a
trust but does not know there has been a breach. Does the outsider’s knowledge
that the counterparties are trustees hinder, or even foreclose, a plea of apparent
authority? To put the matter another way, would it be reasonable for an outsider
to assume that putative promisors would willingly have exposed themselves to
an action for breach of trust by forgoing their deliberative role? The main reason
for resisting the automatic integration of the common law and equity in relation
to the making of contracts is that trusts are designed to operate ‘under the radar’,
and for that reason it would be unjust to have unknowing parties affected by their
(express or implied) terms. That rationale ceases to apply, or at least is not so com-
pelling, where the outside party is aware of the trust. The relationship between the
common law and equity is not absolutely one of oil and water. Given that there is
nothing that precludes the express terms of a contract from recognising ­equitable
rights and duties, it may not be inappropriate when determining whether a repre-
sentation of conferral of authority to contract has been made by a putative princi-
pal to consider whether it is likely that the principal would have put him or herself
in a position of breach of trust.
However, the question is not made simpler by the fact that equity’s own posi-
tion in relation to third parties who do not have actual knowledge of a breach of
trust is unstable around the Commonwealth. There may be more than one test
to be applied, depending on whether the third party still has possession of the
relevant trust property. And it is unclear just what those tests are; is the test one of
dishonesty, or unconscionable conduct, or one of unreasonable failure to perceive
the breach of trust?21 It would be surprising if the concept of apparent authority at
law operated more restrictively than equity itself.22 There is a lot to be said for both
law and equity applying a commercial reasonableness standard in this context,23
but these difficult issues need not be pursued here.

IV. Modern Case Law, Much of it Problematic

Perhaps because the above thesis as to the interrelationship of law and equity is
widely shared by lawyers, there has until recently been little case law in leading
Commonwealth jurisdictions addressing the effect on outside parties of wrongful

21 On the last of these tests, see Westpac Banking Corp v Savin [1985] 2 NZLR 41, where a good

discussion of older English authority can be found.

22 See also Conaglen and Nolan (n 14).
23 The author has written on this subject elsewhere: as to reasonableness within apparent authority,

see P Watts, ‘Some Wear and Tear on Armagas v Mundogas: The Tension Between Having and Wanting
in the Law of Agency’ [2015] Lloyd’s Maritime and Commercial Law Quarterly 36, 48–56; and within
equity, P Watts, ‘Tests of Knowledge in the Receipt of Misapplied Funds’ (2015) 131 LQR 511.
 Intersection of Agency and Trusts 35

delegations by trustees.24 In this regard, one should note that some jurisdictions
have enacted legislation permitting (unless the trust deed otherwise provides)
delegations by trustees of some types of decision-making either to some of their
number or to other agents. However, such legislation rarely cauterises the issues
covered in this chapter, because qualifications are usually attached to the powers.
Hence, Part IV of the Trustee Act 2000 that applies in England and Wales permits
broad delegations of ‘asset management powers’ but only where the delegation is
in writing and the trustees have created a ‘policy statement’ guiding the exercise
of the delegation. In many cases, these requirements will not have been complied
with.25
The relatively sparse case law on the subject has over the last 15 years or so
been added to by a swathe of New Zealand cases. Unfortunately, the New Zealand
courts have in many instances lost sight of the fact that the law of trusts works in
combination with the common law, not as a substitute for it. Since it is not incon-
ceivable that these errors might be repeated elsewhere, this chapter takes this case
law as its focus.
Before turning to the New Zealand cases, one can note one older case where the
court got the general principles correct. In McLellan Properties Ltd v Roberge,26 a
decision of the Supreme Court of Canada, a trustee granted a power of attorney
in relation to his trust powers. The attorney purported to exercise the power by
entering into a contract of sale of some trust land. The Court accepted that the
delegation was a breach of trust but held that it was not void at law. On the facts,
however, there had also been a ratification of the contract by the trustee, which
would have been effective both at law and equity.27
As to New Zealand, signs of misunderstanding can be found in earlier cases,28
but the principal source of confusion has been the decision of the Court of Appeal
in 2001 in Niak v Macdonald.29 Before outlining the facts, we can note that the
Court may have been beguiled into eliding law and equity by the fact that a separa-
tion of the two sets of rules may not have made a difference to the outcome on the
facts of the case. The dangers are still there.
In Niak, the relevant trust had three trustees: M, his wife S and W, a solicitor.
The principal assets on settlement of the trust were derived from an inheritance
by S. She was also the principal beneficiary of the trust, but one infers from the
way the case was argued that she was not the only beneficiary. A yacht was pur-
chased by M using trust funds. M intended to take title to the yacht in his personal

24 Perhaps too in some jurisdictions it has been more routine for trust deeds to provide for majority

rule and to permit delegation.

25 s 24 of the Act provides that failure to meet the Act’s requirements does not invalidate the delega-

tion, but at the same time the Act does not generally validate improper delegations at equity.
26 McLellan Properties Ltd v Roberge [1947] SCR 561.
27 See further text to n 40.
28 eg Rodney Aero Club Inc v Moore [1998] 2 NZLR 192.
29 Niak v Macdonald [2001] 3 NZLR 334.
36 Peter Watts

c­ apacity. At the time, S and W appear to have generally condoned M’s using the
funds of the trust for private purposes, but they did not specifically authorise the
purchase of the yacht (though S certainly knew that M was buying it). M and S
separated some six months later, and it appears that the wife at some stage thereaf-
ter asserted that the yacht belonged to the trust. More than two years after that, M
mortgaged the yacht to a bank to secure a loan to him. Very shortly thereafter, M
was removed as a trustee, and the new trustees (‘the plaintiffs’) asserted that their
claim to the yacht was superior to the bank’s.
The Court held that the free hand S and W had given M was in breach of the
unanimity and non-delegation rules, and that therefore M had no authority at law
to purchase the yacht.30 Thus, the seeds of future misunderstanding were sown.
But on the facts of the case itself this conclusion, if argued for by the plaintiffs, did
not suit them because they still wanted to treat the yacht as a trust asset. They pro-
ceeded to concede that if the yacht was to be subject to the trust, they could then
defeat the bank’s mortgage only if the bank was aware of the wrongful delegation.
This concession was probably inevitable, because even if the Court was right
that the purchase of the yacht was unauthorised at law, that would not have pre-
vented legal title in the yacht passing to M as a result of the intention of the seller,
who was completely unaware of the trust. The husband as legal owner was then
able to give a legal mortgage to the bank,31 and did so before the other trustees
had taken any stance, by ratification, or by asserting rights to trace at law (assum-
ing those mechanisms of the law would have achieved anything). The Court pro-
ceeded to hold that the plaintiffs had failed to show that the bank knew of the
plaintiffs’ rights.
As it happens, this last conclusion was another controversial feature of Niak.
The evidence was that the bank’s solicitor had gained knowledge of the plaintiffs’
claim to the yacht before the mortgage took place, albeit in his capacity of acting
for M in his matrimonial property dispute with S. The Court held that this knowl-
edge was not imputable to the bank,32 but this conclusion may not be consistent
with older case law. This issue will not be pursued here, but it should be noted
that the broad statutory protection against imputation of an agent’s knowledge
conferred in England by the Law of Property Act 1925, section 199, has a much
narrower equivalent in New Zealand.

30 See especially, ibid [18].

31 See Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548, 573; Foskett v McKeown [2001] 1 AC 102.
See further, P Birks, Unjust Enrichment, 2nd edn (Oxford, OUP, 2005) 198; R Chambers, ‘Tracing
and Unjust Enrichment’ in J Neyers, M McInnes and S Pitel (eds), Understanding Unjust Enrichment
(Oxford, Hart Publishing, 2004) 302–05; cf Branwhite v Worcester Works Finance Ltd [1969] AC 552;
Smith v Cunningham (1915) 34 NZLR 392; Spangaro v Corporate Investment Australia Funds Manage-
ment Ltd [2003] FCA 1025, 47 ACSR 285.
32 It is beyond the scope of this chapter to address this point, but the writer considers that principle

would support the imputation of knowledge on the facts of the case. See P Watts, ‘Imputed Knowledge
in Restitutionary Claims: Rationales and Rationes’ in S Degeling and J Edelman (eds), Unjust Enrich-
ment in Commercial Law (Sydney, Lawbook Co, 2008).
 Intersection of Agency and Trusts 37

The thesis of this chapter would have provided a cleaner solution to Niak than
the one adopted. The consent of the trustees would have put pay to any claims
based on lack of authority, leaving the matter to be solved solely at equity.33
The potential difficulties with the reasoning in Niak would have been much
more acute had the husband purported to sell a chattel belonging to the trust, say
a yacht, rather than buying one. On the Court’s reasoning that the relevant del-
egations were invalid at law, the buyer of the yacht would not have obtained legal
title, under the principle nemo dat quod non habet. In contrast, on the thesis of this
chapter the buyer would have obtained legal title and could have been subject to a
trust claim only if sufficiently aware of a breach of trust.
In ASB Bank Ltd v Davidson,34 another decision of the New Zealand Court of
Appeal, the reasoning in Niak was assumed to be correct, but the case was decided
on the particular wording of a contract that all trustees had signed with the claim-
ant bank. Nonetheless, the decision should be noted for a brief dictum of Glaze-
brook J,35 who gave the lead judgment, that the bank could not rely on allegations
of a holding out of authority by two trustees of a delegation to the third, in a way
which would affect the trust assets, when the bank knew they were all trustees.
This dictum did not result from deliberation on the point, but nonetheless does
suggest that a deemed knowledge of equity might undermine a holding out, at
least insofar as the putative contract was held to affect trust assets.
The Court of Appeal returned to the issue in Ponniah v Palmer.36 Here two
trustees who owned three apartments in a complex afflicted with ‘leaky building
syndrome’ instructed a firm of solicitors to conduct litigation against the builder
and a local authority in relation to the defects in the apartments. They delegated
to the settlor of the trust, S, the management of the litigation and it was he who
had the day-to-day dealings with the solicitors. Some three years later, the solici-
tors became concerned about receiving payment for their work in conducting the
litigation and therefore procured from S, purportedly on behalf of the owners,
agreement to give a mortgage to the firm over the apartments. The trustees then
denied S’s authority to give the mortgage, a denial which provoked these pro-
ceedings. It was held at first instance that no actual authority was given by the
trustees to mortgage the trust property. This was probably all that needed to be
decided. Moreover, it appears that the solicitors knew that the owners were trus-
tees. However, the judge went on to find that the trustees had no power at law to
delegate under the trust deed and that fact would also have prevented the firm
obtaining a mortgage. These findings were upheld by the Court of Appeal, relying
on Niak. The Court also used Niak to rule that a plea by the solicitors against the
­trustees in estoppel could not succeed. This cause of action was essentially one

33 Pilcher v Rawling (1872) LR 7 Ch App 259.

34 ASB Bank Ltd v Davidson (2005) 8 NZBLC 101, 597.
35 ibid [33]; see also Thorpe v Hannam (2010) 11 NZCPR 471 [24].
36 Ponniah v Palmer [2012] NZCA 490.
38 Peter Watts

based on apparent authority. The Court peremptorily ruled it out on the basis that
‘no assumption of powers by [S] which are ultra vires can be validated by raising
an estoppel’.37
It is respectfully submitted that again the Court mixed up questions of author-
ity at common law with breach of trust. It is one thing to say that courts should not
lightly find a holding out of authority by trustees when that would involve them
in breach of trust. It is another to disempower them at law from estopping them-
selves. It is clear from the leading text on estoppel—Spencer Bower on Estoppel38—
that the principle that one cannot raise an estoppel in respect of what would be
ultra vires action on the part of the person estopped is concerned with cases where
the assertion is being made against a person (usually a public authority or a cor-
poration) that lacks legal capacity to do the thing asserted. The trustees here did
not lack legal capacity.
Again, it is not that the result in Ponniah was wrong. S lacked authority at com-
mon law to give the mortgage, and that was the short answer. Even if there had
been a finding that carte blanche had been given to S, including to give security to
the solicitors, the solicitors’ knowledge of the existence of the trust was likely to
have made the mortgage subject to challenge in equity. The correct parties to raise
such a plea would ordinarily have been the beneficiaries of the trust, but there is
also authority that would support permitting trustees to disown their own con-
duct or, more usually, that of their predecessors, by seeking a declaration that they
or their predecessors acted in breach of trust.39
Another case applying Niak, and eliding law and equity, is Finnigan v Butcher
(No 2).40 Here the issue was the validity of a resolution to liquidate a company, X
Ltd, most of the shares in which were divided between the trustees of two fam-
ily trusts. Both trusts had three trustees, and they shared one of their trustees in
common (a trustee company, Y Ltd, the shares in which were held by a solicitor
who advised both trusts). Only two of the three trustees of each trust signed the
written resolution, Y Ltd not being involved. The liquidators whose appointment
was now being challenged argued that the solicitor had on behalf of Y Ltd given
his clients a general authority to act on behalf of the trusts in the affairs of the
company. This argument was peremptorily rejected by the judge on the basis of
the non-delegation principle. He went on to hold, nonetheless, that the solicitor
on behalf of Y Ltd had subsequently ratified the decision to liquidate X Ltd, refer-
ring both to ratification within the common law of agency and to the principle

37 ibid [28].
38 P Feltham, D Hochberg and T Leech, Spencer Bower’s The Law Relating to Estoppel by Representa-
tion, 4th edn (London, LexisNexis, 2004) ch VII 6.1.
39 The leading case, much discussed, is Young v Murphy [1996] 1 VR 279; see also Equiticorp Indus-

tries Group Ltd v The Crown (No 47) [1998] 2 NZLR 481, 545–46; Agricultural Land Management Ltd
v Jackson (No 2) [2014] WASC 102, (2014) 285 FLR 121 [331]; Dalriada Trustees Ltd v Woodward
[2012] EWHC 21626 (Ch) [37].
40 Finnigan v Butcher (No 2) [2012] NZHC 2463.
 Intersection of Agency and Trusts 39

that allows a trustee to ratify in equity decisions of his or her co-trustees that they
made without consultation.41
The judge, it is respectfully suggested, was wrong to conclude that the resolu-
tion was prima facie invalid because of the non-delegation principle. If there had
indeed been a general delegation, then subject to one argument, that delegation
would have been effective at law, even though a breach of trust would have been
involved. Under New Zealand law, as in many other jurisdictions, companies are
generally interested in the rights of legal owners of shares only, and are not con-
cerned with the equitable duties of those owners. So, section 89(2) of the Compa-
nies Act 1993 provides that a company may treat the registered holder of a share
as the only person entitled to exercise the rights attaching to the share. Section
92 forbids the entry on the share register of notice of a trust in respect of shares.
Moreover, clause 11 of Schedule 1 to the 1993 Act provides that:
where 2 or more persons are registered as the holder of a share, the vote of the person
named first in the share register and voting on a matter must be accepted to the exclusion
of the votes of the other joint holders.
While this clause is designed to provide a solution for cases where joint holders
have differing views as to how a vote should be cast, it would seem to apply just as
much to cases where more junior co-shareholders are not consulted at all or are in
agreement as to how to vote.
This leaves to be considered the counter-argument foreshadowed in the last
paragraph. There is, in fact, a long-standing presumption of company law (argua-
bly an unfortunate one) that a shareholder cannot at law delegate his or her power
to vote, in the absence of constitutional provision for proxies.42 This presumption,
however, does not apply in relation to voting by co-shareholders, because then
clause 11, above, applies.
None of the foregoing argumentation would be determinative of a dispute
amongst trustees, or between beneficiaries and the trustees, as to how the legal
powers attached to shares held by the trust should be, or have been, exercised. In
such contexts, the unanimity and non-delegation rules would be applicable. Such
a dispute can be found in Radich v Brown,43 a case concerned with local authority
trustees holding shares in an electricity company.
With some reluctance, mention should now be made of the decision of the Vic-
torian Court of Appeal in Australasian Annuities Pty Ltd (in liq) v Rowley Super
Fund Pty Ltd.44 The case is rather inaccessible for a number of reasons. Aspects

41 See too Visini v Cadman [2012] NZCA 122, (2012) 21 PRNZ 70 [17]; Hansard v Hansard [2014]

NZCA 433, [2015] 2 NZLR 158 [51].

42 See Harben v Phillips (1883) 23 Ch D 14 (CA). It is common for constitutions to provide for

proxy voting. See, more generally, R Nolan, ‘The Continuing Evolution of Shareholder Governance’
(2006) 65 CLJ 92.
43 Radich v Brown HC Blenheim, CP4/01, 13 August 2001 (Doogue J). See also Tisdale v Ballanday

Pty Ltd [2006] NSWSC 909; New Zealand Maori Council v Foulkes [2014] NZHC 1777 (Issues 4–6).
44 Australasian Annuities Pty Ltd (in liq) v Rowley Super Fund Pty Ltd [2015] VSCA 9.
40 Peter Watts

of the pleadings were inadequate, which led at least one member of the Court to
rule out certain key arguments. Second, the case was affected by the rather nar-
row approach to imputation of knowledge that the High Court of Australia took
in Farah Constructions Pty Ltd v Say-Dee Pty Ltd.45 Third, the judges confused the
imputed knowledge of agents with the different concept of constructive knowl-
edge.46 The High Court of Australia declined leave for a further appeal.47 None-
theless, it is an appellate decision raising potentially interesting issues.
The claimant was a trustee company of what were nominally superannuation
funds, but which funds had been sourced as a result of a series of commercially
dubious transactions promoted by the then controller of the claimant, ‘S’. S pro-
ceeded to arrange for the transfer of the funds to four individual trustees of whom
he was one and his wife and sons the others. This transfer was held to involve a
breach of fiduciary duty by S in relation to the claimant. These individual trustees
were then replaced by a new trustee company, X Ltd, of which S was again found
by the majority of the Court (Neave JA and Garde AJA) to be the controller. The
claimant went into receivership and liquidation and commenced these proceed-
ings to recover the funds in knowing receipt, suing the individual trustees and X
Ltd. The majority of the Court held that X Ltd was liable in knowing receipt. But
none of the judges found that the individual trustees, other than S, were liable in
knowing receipt.
For present purposes, it was the position of the individual trustees that was
the most interesting. There was insufficient evidence to show that those trustees,
other than S, had personal knowledge of S’s breach of duty. Though imputation of
knowledge to them through the agency of S had not been properly pleaded by the
claimant, all members of the Court considered that there was no place for impu-
tation in any event. The duty on trustees not to delegate was one factor that was
found by Warren CJ, with whom Neave JA agreed on this issue, to militate against
S being an agent for the other trustees.48
It is suggested here that it is doubtful whether the unanimity rule carried
much weight on these facts, even when the cause of action being considered was
­equitable rather than legal. It is true that in ordinary circumstances the duty to act
unanimously might furnish a ground for thinking that trustees would not lightly
delegate decisions to one of their number, assuming they know the rules of equity.
However, it could not do more than that. On the facts, the individual trustees were
not disowning their beneficial receipt of the funds, and to get to that position they
needed to rely on the contract made on their behalf by S. In these circumstances, it
is hard to understand how that contract was made without S acting as their agent.

45 Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22, (2007) 230 CLR 89; see Watts,

‘Imputed Knowledge in Restitutionary Claims’ (n 32) 434–36.

46 Australasian Annuities (n 44) [98].
47 [2015] HCATrans 235.
48 ibid [99] (Warren CJ).
 Intersection of Agency and Trusts 41

The Court’s conclusion that none of the trustees other than S could be liable in
knowing receipt (without even needing to consider any defences that they might
have had) also leaves something of a puzzle as to how the majority could then hold
that X Ltd could be made liable in knowing receipt having received a transfer of
the funds from those innocent trustees. The Court imputed S’s knowledge to X
Ltd, but X Ltd was acquiring the funds from persons who had been held to be bona
fide purchasers for value,49 so it is arguable that the imputation of S’s wrongdoing
came too late. It may be that if S was the sole beneficial owner of X Ltd, he might
be compelled by equity to cause X Ltd to return the funds to the claimants, on the
basis that equity will not allow a dishonest trustee to purchase, even from an hon-
est seller, former trust assets free of the trust.50
In contrast to the foregoing decisions is the decision of the New Zealand Court
of Appeal in Murrell v Hamilton.51 Here the defendants were the trustees of Mr
Hamilton’s family trust, Mr Hamilton being one of the trustees. The trust owned
a property on which, during Mr Hamilton’s de facto relationship with the claim-
ant, a house was completed and in which the parties then lived. When some eight
years later the parties separated, the claimant sought an interest in the property
based on New Zealand’s constructive trust principles. Having convinced the judge
at first instance that she deserved an interest in the property, she faced the hurdle
that the independent trustee of the trust was a solicitor who lived in a different city
and had only very limited knowledge of what had happened on the property and
the contributions the claimant had made. The Court of Appeal, reversing the first
instance judge on this issue, concluded that the inactive trustee had delegated all
affairs relating to the trust assets to the active trustee, and must be bound by his
actions and omissions.
On its face, this robust reasoning fits better with the argumentation of this
chapter than the other decisions that have been discussed.52 However, the focus of
the reasoning in this chapter is on the enforceability of common law rights, namely
the contracts in question and dispositions of legal interests under them. The claim
being made in Murrell was an equitable one, which meant that the contest was
ultimately one between equitable interests, that of the claimant and those of the
beneficiaries of the trust. Priority contests in equity are governed by their own sets
of rules. How these ought to have played out in Murrell will not be pursued here,
other than to note that equity’s basic priority rule, the first-in-time rule, may not
be applicable to parties asserting rights under a discretionary trust.
Similar complexities attend one of the few potentially relevant English cases,
Fielden v Christie-Miller.53 The claimant brought a proprietary estoppel claim

49 cf Re Stapleford Colliery Co, Barrow’s Case (1880) 14 Ch D 432; Kettlewell v Watson (1882) 21 Ch

D 685, 712 (reversed on other issues, (1884) 26 Ch D 501 (CA)).

50 See Re Stapleford (n 49) 445.
51 Murrell v Hamilton [2014] NZCA 377 (leave to appeal to SC declined: [2014] NZSC 162); see also

Lang v Southen [2001] NZHC 666; cf Vervoort v Spears [2016] NZCA 375.
52 See also FAI Money Ltd v Crawley [2016] NZCA 219.
53 Fielden v Christie-Miller [2015] EWHC 87 (Ch).
42 Peter Watts

against the owners of land who were trustees of it. He was aware that the legal
owners of the land were trustees, but he was not aware that the rights he was claim-
ing were inconsistent with the owners’ trust duties, or at least what were alleged by
a beneficiary of the trust to be the trustees’ duties. The present hearing was con-
cerned merely with the sufficiency of the pleadings. The defendant ­trustees argued
that the claimant was up against the unanimity principle, and given that not all
trustees had directly sanctioned the rights claimed by the claimant, his claim must
fail. The judge, Sir William Blackburne, recognised the principle but plainly con-
sidered that the trustees’ position was to be determined by the law of agency. As it
happens, the pleadings in their current form fell short of establishing authority at
common law, so the claimant was in difficulty on any basis. But the judge accepted
that the claimant might be able to re-plead and prove that the other co-owners had
given authority to the representing party to make the relevant representations on
which he was relying.
It is of some interest that the claimant also relied on a dictum of Scarman LJ in
Crabb v Arun DC which seems to suggest that the appearance of authority in an
agent needed to create a proprietary estoppel against an owner of land might be
less than that needed to establish a contract.54 In particular, the dictum can be read
as allowing an agent with some actual authority to extend that authority by self-
authorisation. Sir William Blackburne was plainly not attracted to this dictum. He
stated:
Elementary fairness requires that before a person can be bound by the acts of another
purporting to act on his behalf, that other must have his authority to bind him in the
matter. Whether he has will depend on the usual principles of agency. This applies, in my
judgment, as much in the field of estoppel as it does in other contexts.55
It may be that a claimant will receive a more sympathetic hearing when the acts
on which a plea of proprietary estoppel are based have demonstrably raised the
market value of the defendant’s land.56
Fielden has since been followed in Preedy v Dunne,57 on very similar facts. Again,
the defendants pleaded the unanimity rule as an answer to any estoppel. Master
Matthews appears to have been attracted to that argument,58 but then concluded
that any estoppel depended on whether the active trustee had authority ‘actual,
implied or ostensible’ to bind the other trustee.59 On the facts, such authority
could not be shown.

54 Crabb v Arun DC [1976] 1 Ch 179, 193.

55 Fielden (n 53) [26]; cf Doueihi (n 19) [223].
56 cf Blue Haven Enterprises Ltd v Tully [1996] UKPC 17; noted P Watts, ‘Unrequested Improvements

to Land’ (1996) 122 LQR 553; B McFarlane, ‘Unjust Enrichment and Proprietary Estoppel: Two Sides of
the Same Coin?’ [2007] Lloyd’s Maritime and Commercial Law Quarterly 14.
57 Preedy v Dunne [2015] EWHC 2713 (Ch).
58 ibid [42].
59 ibid [43].
 Intersection of Agency and Trusts 43

Going a long way back in time, potential issues as to the effect at common law
of a delegation by a trustee arose in Sneesby v Thorne.60 In this case two executors
held some land in Sussex. One of them, Y, who was living in Dorset, expressed a
view to the other, X, that the land should be sold, but gave no particular authority
to sell. Y then went off to Canada. X, taking Y’s advice to heart, purported to sell
the land to the claimant. Y on his return objected that he had not approved this
sale. The Lords Justices held that Y was not bound by X’s conduct (the rule that
one executor could bind the estate did not apply to land), and hence the claimant’s
proceeding for specific performance must fail. Although they did not expressly use
the language of agency, the evident conclusion of the judges was that X had neither
actual nor apparent authority.
But Knight Bruce LJ clearly considered that the claimant would have had a
remedy at law against X on these facts, presumably on a breach of warranty of
­authority.61 It was the position at law that determined whether there was a con-
tract, and for that purpose it was the law of agency that did the work. The claimant
having lost its claim, costs were also awarded in favour of Y, but significantly not in
favour of X. In this period, when the courts of equity and common law were still
separate in every sense, the judges would have been unlikely to coalesce the two
systems as occurred in Niak. It was indeed normal practice for a court of equity
to withhold specific performance even where there was a valid contract at law if
there was a breach of trust on the part of the vendor such that enforcing the sale
would be prejudicial to the beneficiaries. But this was without prejudice to the
purchaser’s rights at common law against the vendor.62
It is surely not too much to hope that a party who is justifiably ignorant of a
breach of a merely equitable duty should be expected in dealing with multiple
legal owners of assets to be affected only by the rules of the common law, which in
relation to such dealings are perilous enough anyway. But, it is not just due consid-
eration for the interests of innocent third parties that is at issue. There is coherence
too. In particular, the Niak approach requires one to speculate whether it is only
wrongful delegations that are treated as removing a trustee’s powers of disposi-
tion. Would not any stepping outside trust powers by a trustee, even when the sole
trustee, result in the conduct being a nullity? Certainly, an outright misappropria-
tion by a trustee, which is morally much worse than a careless delegation, would
have to be treated the same. Yet, the case law dealing with dispositions of legal title
that are knowingly inconsistent with a claimant’s equitable rights, instances of
which are far more numerous in the law reports than improper delegations, make
it plain that a third party who acquires the legal title is protected if that party was

60 Sneesby v Thorne (1855) 7 De GM & G 399, (1855) 44 ER 156.

61 ibid 157.
62 See the cases in F White and O Tudor, A Selection of Leading Cases in Equity, vol 2, 5th edn

­(London, Maxwell & Son 1877) 497; see also Conaglen and Nolan (n 14) 360–61.
44 Peter Watts

in good faith and gave value without notice of the breach.63 To obtain legal title
one has only to meet the common law’s requirements for the transfer of ownership.

V. Importation of Trusts into Agency Relationships:

Two Issues

It is time now to turn to the other side of the coin, the intrusion of trusts into
agency relationships. There are two topics addressed here. First is the issue of when
parties have succeeded in stitching trust duties into what would otherwise be a
purely contractual relationship. And the other is what difference such stitching
might make to the personal obligations between principal and agent. The treat-
ment of these two issues can be brief, because the first is largely a factual question,
and the second is more complex but the writer has developed a detailed argument
on this topic elsewhere.

A. The Limits of Stitching a Trust Duty onto the Agency

Relationship

Principals frequently have to put their agents in funds before the services the
agents are to perform for them have been carried out. They worry about the agent
becoming insolvent, and given modern banking mechanisms the trust is the most
convenient, if not the only practicable, way in which those funds can be ring-
fenced against the agent’s general creditors. Similarly, it is frequently convenient to
have agents collecting in payments from customers, and the same concern arises
as to the possible intervention of the agent’s insolvency.
It is remarkable how often principals fail to spell out whether moneys in the
agent’s hands are to be held on trust for the principal. It is unlikely that a trust
requirement would meet the standard test, to the extent that there is now such
a thing,64 for an implied term in the contract of agency. Nonetheless, in settling
what is in essence a question of fact courts have often found an intention to create
a collateral trust even though the parties have not expressly used the phrase ‘on

63 See JD Heydon, MJ Leeming and PG Turner, Meagher, Gummow and Lehane’s Equity: Doctrines

and Remedies, 5th edn (Chatswood, NSW, LexisNexis Butterworths, 2015) para 8-225 ff; see also MCC
Proceeds Inc v Lehman Brothers International (Europe) [1998] 4 All ER 675.
64 See Marks and Spencer Plc v BNP Paribas Securities Services Trust Company (Jersey) Limited [2015]

UKSC 72, [2016] AC 742; see also D McLauchlan, ‘Construction and Implication: In Defence of Belize
Telecom’ [2014] Lloyd’s Maritime and Commercial Law Quarterly 203; cf J Carter and W Courtney,
‘Belize Telecom: A Reply to Professor McLauchlan’ [2015] Lloyd’s Maritime and Commercial Law Quar-
terly 245. Still less will courts impose a constructive trust in such circumstances: see Angove’s Pty Ltd
v Bailey [2016] UKSC 47, [2016] 1 WLR 3179; noted P Watts, ‘The Insolvency of Agents’ (2017) 133
LQR 11.
 Intersection of Agency and Trusts 45

trust’. A clear expectation that the agent is to keep the principal’s money separate
from the agent’s personal funds may be sufficient. A collection of cases falling
either side of the line can be found in Bowstead & Reynolds on Agency.65
It is worth noting here a recent New Zealand decision, Bambury v Jensen,66 that
‘pushes the envelope’ in terms of both contractual implication and furnishing the
essential elements of a trust. This was a case where the impetus to allege a trust was
not the usual one of the agent’s insolvency, but the operation of limitation periods.
In many jurisdictions, limitation periods do not apply to actions for failure to
account brought against an express trustee.67
The litigation arose out of the breakdown of a long and successful relationship
between a New Zealand contemporary artist and his agent. Because their rela-
tionship had been so close and trusting, in the lay sense, the legal arrangements
between them were largely oral. The artist now claimed that the agent had over
a long period failed properly to account for the proceeds of sales of some 60 art-
works. While the judge was able to group some of the claims, he was required to
make a long series of factual findings. A number of interesting legal issues arose,
most of which, however, are not pertinent here. The artist was successful in only
a fraction of his claims. The trust point was seen as important because the great
majority of claims fell outside the standard six-year limitation period. Whether
this really mattered is briefly discussed at the end of this section.
There was no evidence that the agent had been expressly required to bank the
proceeds of paintings and other artworks into a separate account tagged for the
principal. Such a duty is often the most important marker of a trust relationship.
The duty frequently supplies both the evidence of the requisite intention to create
a trust and the certainty of subject matter necessary for a trust to exist. However,
Fogarty J held that the duty to keep the proceeds separate is not absolutely crucial
to there being a trust interest.68 He concluded that it was wrong to read Millett LJ’s
well-known dicta in Paragon Finance Plc v DB Thakerar & Co as saying otherwise.69
In Paragon, Millett LJ stated that: ‘It is fundamental to the existence of a trust
that the trustee is bound to keep the trust property separate from his own and
apply it exclusively for the benefit of his beneficiary’.70 But Fogarty J pointed out
that that sentence was preceded by one that was directed at a situation (the one in
Nelson v Rye)71 where the agent was not only able to pay the relevant moneys into
his own account but was able to use them for his own cash flow and had to account
only at the end of the year. He also pointed out that the sentence which followed
the one quoted spoke of its being fatal to a trust for the agent to be able to mix the
money received with his own and be able to use it for his cash flow.

65 See Watts and Reynolds (eds) (n 15) para 6-041.

66 Bambury v Jensen [2015] NZHC 2384.
67 See the discussion in Williams v Central Bank of Nigeria [2014] UKSC 10, [2014] AC 1189.
68 Bambury (n 66) [119].
69 Paragon Finance Plc v DB Thakerar & Co (A Firm) [1999] 1 All ER 400, 415 (CA).
70 ibid.
71 Nelson v Rye [1996] 1 WLR 1378.
46 Peter Watts

On the facts of Bambury, the evidence both as between the parties and within
the ‘industry’ was that payment out to the artist was expected to be very prompt
and frequently took place within two days of receipt of the sale proceeds by the
agent. The judge concluded that, although each transaction had to be considered
on its own facts, where the agent was not entitled to use the funds, even when in
a bank account in his own name, for his own purposes, the proceeds of sales of
artworks were held on trust.
There are a number of criticisms that might be made in relation to the judge’s
reasoning. He was not as clear as he might have been on the difference between
fiduciary obligations and trust obligations. Nor did he spell out that where the
funds permissibly went into the agent’s bank account, in order for a trust to have
arisen the artist must have had a beneficial interest in the chose in action between
the agent and his bank. In other words, in order to meet the tests for trust cer-
tainty, it would have been necessary that the artist and the agent have been joint
beneficial owners of the bank account, even though the agent was the only party
to the contract with the bank.
Those criticisms apart, it would be difficult to argue that it is legally impossible
for there to be a trust on a fact pattern such as that in Bambury. The law of trusts
has made itself very flexible and accommodating. Hence, equity does not preclude
a trustee from being one of the beneficiaries of the trust. The only ultimate rule
is that the sole trustee cannot also be the sole beneficiary.72 Nonetheless, if the
trustee is free to apply all the money in his or her own favour the trust would be a
discretionary one, and the interest of a creditor-beneficiary would in such circum-
stances probably be worthless in an insolvency. To guard against that possibility
in the present context, the trustee’s right to have recourse to the ‘mixed’ account
would need to be made subject to there being enough other moneys in the account
at all times to meet the rights of the client or clients.73
On the basis of the analysis just given, the dictum of Keane J in a recent decision
of the High Court of Australia, Korda v Australian Executor Trustees (SA) Ltd,74
that ‘absence of a contractual intention that money be held in a separate fund
must surely be fatal to the imputation of a contractual intention to create a trust
over that money’ should be regarded as an oversimplification. The dictum can be
contrasted with some remarks of Lord Collins in Lehman Brothers International
(Europe) Ltd v CRC Credit Fund Ltd:
There is no doubt that money in a mixed fund may be held on trust, and that a trust of
money can be created without an obligation to keep it in a separate account: In Re Kay-
ford Ltd [1975] 1 WLR 279, 282, per Megarry J.75

72 Goodright v Wells (1781) 2 Doug 771, 778, 99 ER 491, 495; DKLR Holding Co (No 2) Pty Ltd

v Commissioner of Stamp Duties [1980] 1 NSWLR 510, 519; and on appeal (1982) 149 CLR 431, 464, 473.
73 See further, R Stevens, ‘Floating Trusts’ ch 5; and M Bridge, ‘Certainty, Identification and Inten-

tion in Personal Property Law’ ch 4, in this volume.

74 Korda v Australian Executor Trustees (SA) Ltd [2015] HCA 6, (2015) 255 CLR 62 [111].
75 Lehman Brothers International (Europe) Ltd v CRC Credit Fund Ltd [2012] UKSC 6, [2012] 3 All

ER 1 [194].
 Intersection of Agency and Trusts 47

At the same time, the Korda decision and a decision of the English Court of Appeal
a month before on similar facts, Juliet Bellis & Co v Challinor,76 could be used to
mount an argument that Fogarty J was too generous to the claimant in ­Bambury.
Courts will, it is suggested, be alive to the fact that Fogarty J’s approach is calcu-
lated to lead to multiple trust claims on the one account, and will wish to avoid
that complexity if they can. Moreover, they are unlikely to want to encourage the
‘double-dipping’ that trust claims lead to in insolvencies; trust claimants want
to stay outside the insolvency while they can still identify their moneys, but if
those moneys cease to be identifiable, they still want to share in the residual assets
derived from the insolvent’s dealings with the unsecured creditors.
It is possible to conjecture that it was the different context of the limitation
period that led to Fogarty J’s being more open to inferring a trust interest. It is
one thing, in cases such as Korda and Bellis, to foresee insolvency and provide for
it. But it might be harder to detect that one’s agent has not accounted properly
for sales made on one’s behalf. There is in fact a long, if rather old, body of case
law that suggests that independently of a trust, any accounting between agent and
principal can be reopened back through an indefinite period if there is evidence of
fraud or even only unconscionable dealing (ie, equitable fraud).77

B. What Liability when the Agent Accidentally Releases Trust

Funds?

The other topical issue in this area has been the effect the stitching of a trust onto
the agency relationship might have for the personal obligations between principal
and agent. There can be no doubt that the main purpose of requiring an agent
to hold onto trust money received from (or for) the principal is to protect the
principal vis-à-vis third parties, particularly external administrators who might be
appointed in respect of the agent’s affairs should the agent become insolvent. But
most conspicuously, it had been argued in Target Holdings Ltd v Redferns,78 and
again in AIB Group (UK) Plc v Mark Redler & Co Solicitors,79 that imposing such
trust obligations also created more stringent personal obligations on the agent
than would arise under the simple contract of agency.
Target and AIB Group were both concerned with the release by the defendant
solicitors in breach of instructions of funds they held on trust for their client, in
each case a finance company. Both the House of Lords in Target and the United
Kingdom Supreme Court in AIB Group accepted that the liabilities that arise at
equity in such circumstances might not be precisely the same as those of the com-
mon law. However, the Courts also held, Target more ambiguously than AIB Group,

76 Juliet Bellis & Co v Challinor [2015] EWCA Civ 59.

77 See Watts and Reynolds (eds) (n 15) para 6-098. In general, however, it appears that a failure to
account is governed by limitation periods: Paragon Finance (n 69) 415.
78 Target Holdings Ltd v Redferns [1996] AC 421.
79 AIB Group (UK) Plc v Mark Redler & Co Solicitors [2014] UKSC 58, [2015] AC 1503.
48 Peter Watts

that equity’s remedies are ultimately hedged in, like those of the common law, by
a requirement that the breach of duty cause the principal’s loss. So, if agents can
show that, even had they studiously complied with their instructions, the prin-
cipal would have suffered a loss at least equal to that resulting from the breach,
then there will be no recovery. On the facts of the two cases, the solicitors were, in
substance, able to show just that. The real cause of the loss in each case was the fact
that the security required by the finance company of the borrower was never going
to cover the loan, not the failure by the solicitors to follow instructions.
The writer has argued elsewhere that the introduction of trust obligations into
the agency relationship is not intended to add significant new personal obligations
to that relationship.80 Equity’s obligations inter partes are likely to mimic the com-
mon law’s. This much is consistent with the reasoning in Target and AIB Group.
But what seems equally incontrovertible as a matter of general contract principle,
let alone true of the agency relationship, is that it is not the case, as was the premise
of the reasoning at least in AIB Group, that a promisee who finds that its promisor
has not done what was promised is confined to expectation damages. In particular,
this ignores restitutionary, or refund, remedies, which permit a promisee simply
to demand the return of moneys paid the promisor upon the latter’s failure to do
what was required in respect of that money. It is, in general, no defence to such
claims for promisors to argue that had they done as asked the promisee would
have lost money.
Nor is the restitutionary remedy at common law confined to recovery of the
remuneration paid to procure performance. It extends to money paid (or even
goods) to be used by the recipient in executing the promise. So, where the money
paid over includes sufficient funds to allow the promisor to procure materials
needed to perform the contract, those funds too will be recoverable. Nor, prima
facie, does it matter that the promisor has embarked on performance. If the prom-
isor makes a botched job of the set task, sufficient at least to cause ‘a total fail-
ure of consideration’, the promisee is entitled to cancel the contract and call for a
refund.81
These common law principles seem straightforwardly to apply to cases where
an agent disburses funds in breach of instructions. Indeed, they have been held
to apply to an agent who has acted without reward.82 One would expect equity to
have taken a similar approach, and it is possible to show that it did,83 before Target

80 P Watts, ‘Agents’ Disbursal of Funds in Breach of Instructions’ [2016] Lloyd’s Maritime and Com-

mercial Law Quarterly 118.

81 See Gartell & Son (a firm) v Yeovil Town Football & Athletic Club Ltd [2016] EWCA Civ 62; Head

v Tattersall (1870) LR 7 Ex 7; Heywood v Wellers [1976] QB 446, 458, citing Hill v Featherstonhaugh
(1831) 7 Bing 569 (CP), 131 ER 220.
82 See Martin v Pont [1993] 3 NZLR 25.
83 See A Shaw-Mellors, ‘Equitable Compensation for Breach of Trust: Still Missing the Target?’

[2015] Journal of Business Law 165; J Penner, ‘Distinguishing Fiduciary, Trust, and Accounting Rela-
tionships’ (2014) 8 Journal of Equity 202, 223–25; M Conaglen, ‘Equitable Compensation for Breach of
Trust: Off Target’ (2016) 40(1) Melbourne University Law Review 126.
 Intersection of Agency and Trusts 49

and AIB Group came along. Not that it matters much, but it is arguable that the
common law remedies should arguably be the first port of call. In disbursing the
funds in cases such as these, the solicitor is exercising agency functions, changing
the client’s legal status from that of promisor to that of creditor, rather than trustee
functions. After all, the borrower is not a beneficiary of the trust.84 Disbursing the
funds correctly certainly terminates the trust duties, but it is less clear that that
process involves their performance.
So, in Target and AIB Group what happened with the client funds was in each
case a serious breach of contract that would have justified termination of the con-
tract, and a call by the client for a return of the moneys at common law. In this
regard, the Court of Appeal in AIB Group was correct to conclude that solicitors
who get only a second mortgage for their client when their instructions required
a first mortgage commit a breach justifying cancellation of the mandate, small
though the amount owing on the first mortgage might be. After all, the client
may itself have raised the funds from the public on an undertaking that the funds
would be on-lent only on first mortgage.
As it is, the logic of the reasoning of the Supreme Court in AIB Group would
have given the client no remedy had the solicitors sent the funds to a totally wrong
person, so long as the solicitors could show that the intended recipient was also
worthless. Arguments of that sort would be irrelevant to a restitutionary claim
elsewhere in the law of contract, and they should not be permitted in respect of
a deviation from mandate by an agent. The agent has simply not done what was
asked. The promisee is entitled to its restitutionary remedy, tout court, and is not
required to give the defendant the opportunity to show at trial that the promisee
would have lost money had the contract been performed.
Yet, it is crucial to understand that the restitutionary remedy is quite brittle. The
victim of non-performance who becomes aware that the promisor has failed to do
what was asked cannot stand by to see how things turn out. Such claimants must
take a stance promptly, cancel the contract and ask for restitution of all money
paid to the promisor. They will otherwise be taken to have affirmed the contract,
albeit without prejudice to rights to damages.85 Even were the law to develop to
allow post-affirmation refunds, it would be very rare that total refunds would be
available once a contract had been affirmed.
That is the best explanation why the Court was right to conclude that the client
should not succeed in AIB Group. Having learned what had happened, the client
did not cancel and assert its restitutionary remedy.
Target is more complex because there the client could not be accused of stand-
ing by, since it did not become aware that the solicitors had released the moneys
prematurely until a long time later. The claimant should still have lost. The reason

84 See Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567.

85 See Weston v Downes (1778) 1 Doug 23, 99 ER 19; Kwei Tek Chao v British Traders and Shippers Ltd
[1954] 2 QB 459, 475; Yeoman Credit Ltd v App [1962] 2 QB 508, 520­–21, 523–24.
50 Peter Watts

is that while the solicitors’ action was a repudiatory breach of contract that in itself
did not terminate the contract. The repudiation needed to be accepted. More than
that, the breach did not necessarily terminate the solicitors’ mandate to continue
to perform the contract. By still getting in the required mortgage, albeit tardily, the
agent acted within authority, and thereby cured the breach. Cure will not always
be possible (getting in a second mortgage instead of a first, as happened in AIB
Group, would not be cure, for instance), but where it operates it forecloses subse-
quent cancellation of the contract and at the same time forecloses the restitution-
ary remedy. Again, one would expect law and equity to be in step on such matters.
One should not close without accepting that for all the criticisms that were
made in the writer’s fuller discussion of Target,86 it was overlooked that in two
short passages Lord Browne-Wilkinson did accept that there had been an unquali-
fied obligation on the relevant solicitors to restore to the client’s account moneys
wrongly paid away but he concluded that that obligation ceased once the underly-
ing instructions had been completed.87 Those passages are indeed consistent with
the restitutionary arguments made here, and by others. For this oversight an apol-
ogy is owed.

86 Watts, ‘Agents’ Disbursal of Funds in Breach of Instructions’ (n 80).

87 Target Holdings Ltd (n 78) 436 D–E. Thanks to Rob Stevens for pointing this out.
 3
Equity in the Marketplace:
Reviewing the Use of
Unconscionability to Restrain
Calls on Performance Bonds

TANG HANG WU*

I. Introduction

In describing the role of equitable jurisprudence in the market place with its
emphasis on open-ended concepts like conscience, Lord Millett famously observed
in an extrajudicial essay that:
Even twenty years ago there was still a widely held belief, by no means confined to
common lawyers, that equity had no place in the world of commerce. Businessmen
need speed and certainty; these do not permit a detailed and leisurely examination
of the parties’ conduct. Commerce needs the kind of bright line rules which the com-
mon law provides and which equity abhors. Resistance to the intrusion of equity into
the business world is justified by concern for the certainty and security of commercial
transactions.1
Writing in relation to fiduciary law, Lord Millett dismissed the anti-equity
­sentiment in the first sentence of his essay by stating that: ‘Equity’s place in
the law of commerce, long resisted by commercial lawyers, can no longer be
denied’.2
This tension, described by Lord Millett, between bright line rules which ­promote
certainty in commercial dealings as compared to equitable jurisprudence based
on a detailed examination of parties’ conduct is played out acutely in the debate

* I am grateful to James Penner, Dora Neo, Robert Stevens, Paul S Davies, Kelry Loi, Lau Kwan Ho

and the participants of the survey for their help. The usual caveats apply.
1 PJ Millett, ‘Equity’s Place in the Law of Commerce’ (1998) 114 LQR 214, 214.
2 ibid.
52 Tang Hang Wu

on the role of unconscionability in restraining performance bonds. English law

which subscribes to the philosophy of promoting certainty in relation to perfor-
mance bonds restrains a call on performance bonds on the very limited basis of
fraud.3 This is because English law subscribes to the principle that a performance
bond, like a letter of credit, should be considered to be autonomous from the
underlying contract between the parties. Or to put it in another way, a perfor-
mance bond is treated as cash in hand and the beneficiary of the bond should be
allowed to avail himself or herself of the bond. In contrast, Singapore’s jurispru-
dence on performance bonds is noteworthy because it represents a conscious and
significant departure from English law. The Singapore Court of Appeal confirmed
in GHL Pte Ltd v Unitrack Building Construction Pte Ltd & Anor4 after a period
of some uncertainty5 that unconscionability is a separate and distinct ground
from fraud to restrain a call on performance bonds. This has resulted in a robust
debate found in the banking literature on whether this development in Singapore
is ­desirable and should be adopted by other jurisdictions.6
This conscious divergence from English law may be seen as a major develop-
ment in the history of Singapore’s commercial law. With regard to contract and
commercial law, Singapore has always endeavoured to mirror English law. True
to its status as an international commercial hub, Singapore has since its earliest
days sought to retain the purest form of English commercial law.7 As Voules J
explained in Seng Djit Hin v Nagurdas Purshotumdas & Co,8 this pragmatic policy
was ‘to inspire confidence amongst merchants by assuring them that any ques-
tions arising in regard to their commercial transactions will be decided in the like
case at the corresponding period in England’. Although the formal reception of
English commercial law was discontinued in 1993, English contract and commer-
cial decisions are still today invariably cited by counsel in court, often accepted as
persuasive and routinely applied by the Singapore courts. In other words, while
English decisions are not binding in a stare decisis sense on the Singapore courts,

3 United City Merchants (Investments) Ltd v Royal Bank of Canada [1983] 1 AC 168 (HL).
4 GHL Pte Ltd v Unitrack Building Construction Pte Ltd & Anor [1999] 3 SLR(R) 44.
5 The developments are traced in L Hsu, ‘Autonomy of Performance Bonds in Singapore’ (1992)

Lloyd’s Maritime and Commercial Law Quarterly 297; A Loke, ‘Injunctions and Performance Bonds—
A Return to English Orthodoxy’ (1995) Singapore Journal of Legal Studies 682; L Hsu, ‘Performance
Bonds in Singapore: An Update’ (1996) Lloyd’s Maritime and Commercial Law Quarterly 35; A Wong,
‘Restraining a Call on a Performance Bond—Should “Fraud or Unconscionability” be the New
Orthodoxy?’ (2000) 12 Singapore Academy of Law Journal 132; Q Loh and HW Tang, ‘Injunctions
Restraining Calls on Performance Bonds—Is Fraud the Only Ground in Singapore?’ [2000] Lloyd’s
Maritime and Commercial Law Quarterly 353.
6 There is some evidence that the unconscionability exception jurisprudence has taken root in

Malaysia. See Sumatec Engineering and Construction Sdn Bhd v Malaysian Refining Company Sdn Bhd
[2012] 4 MLJ 1.
7 See Civil Law Act (Cap 43, 1985 Rev Ed) s 5, which provides questions and issues with respect

to mercantile law generally shall be the same as that which would be administered in England. This
section was repealed in 1993. See A Phang, ‘Reception of English Law in Singapore: Problems and
Proposed Solutions’ (1990) 2 Singapore Academy of Law Journal 20.
8 Seng Djit Hin v Nagurdas Purshotumdas & Co [1923] AC 444 (PC).
 Equity in the Marketplace 53

they are nevertheless regarded as highly persuasive authority.9 Hence, this diver-
gence from English law on the law on performance bonds heralds a new age where
­Singapore judges are increasingly confident of developing their own jurispru-
dence in c­ ommercial law.10
At the start, it is important to set out what this chapter does not purport to do.
The present author resists the temptation to seek to demonstrate which position
is the better approach to performance bonds, ie, English or Singapore law. It is
suggested that there is no way to reach a firm conclusion one way or the other. This
is because the arguments for each position are well known and firmly entrenched.
In favour of the English position of a bright line rule that the courts may not
intervene save for fraud is that this promotes certainty in relation to performance
bonds. As opposed to an emphasis on the value of certainty, the Singapore courts
adopt a fact-sensitive approach to protect the obligor of a performance bond from
abusive calls on performance bonds. The obvious drawback to the Singapore juris-
prudence on performance bonds is the lack of certainty as to when the courts
would intervene. But that is the price to pay for adopting a fact-sensitive test
to protect the weaker contracting party in the relationship. However, this is not
to say that the English position is perfect and wholly free from criticism. In order to
achieve the bright line rule of certainty, the English position is essentially a blunt
tool. English law is only capable of dealing with fraudulent calls on performance
bonds; it is unable to deal with the problem of abusive calls on performance bonds
which does not reach the threshold of fraud. Viewed in this context, it is not pos-
sible, in my view, to say that one position is ‘better’ than the other position. Rather,
the divergence in the law represents a conscious policy choice which each jurisdic-
tion has adopted to achieve a particular goal.
Instead of embarking on an inconclusive enquiry as to which is the better
approach, this chapter surveys every single reported and unreported Singapore
decision at every level since GHL Pte Ltd v Unitrack Building Construction Pte Ltd &
Anor11 where a call on a performance bond was challenged on the ground of
unconscionability. Hence, this review provides a case study as to how uncon-
scionability operates as a legal doctrine on the ground. Further, most academic
work has tended to focus on decisions by the High Court and Court of Appeal
while ignoring the unreported decisions in the District Court. By surveying
and ­analysing the District Court’s decisions, it is hoped that this chapter would
­provide a more accurate insight as to how unconscionability is applied. On a more

9 Although in recent times the Singapore courts are increasingly developing their own jurispru-

dence. See S Menon, ‘The Somewhat Uncommon Law of Commerce’ (2014) 26 Singapore Academy
of Law Journal 23 which traces the development of Singapore’s jurisprudence on implied terms in
contract.
10 eg the Singapore Court of Appeal refused to follow the English approach as found in The Achilleas

[2008] UKHL 48, [2009] 1 AC 61 (HL) on remoteness in contractual damages. See Out of the Box Pte
Ltd v Wanin Industries Pte Ltd [2013] 2 SLR 363; noted Y Goh, ‘Contractual Remoteness in England
and Singapore Compared: Orthodoxy Preferable?’ (2013) 30 Journal of Contract Law 233.
11 GHL Pte Ltd (n 4).
54 Tang Hang Wu

granular level, there are several aims to this survey of the cases. First, a survey of
these cases will show, to a certain extent, the number of challenges that have been
brought to court. This will then either confirm or refute the fear that the adop-
tion of the ground of unconscionability would result in an intolerable floodgate
of applications before the court. Second, the survey of cases will seek to determine
the percentage of successful restraints and the grounds on which unconscionabil-
ity has been made out. Thus, the analysis of the cases will essentially map out the
ambit of unconscionability in the context of performance bonds. Third, a study
of the cases will also reveal that some contracting parties have begun to choose
foreign law to govern the performance bond or exclude unconscionability as a
distinct ground for restraint from the terms of the performance bond. This is an
interesting development because it provides some evidence that when the law is
uncertain, sophisticated parties with a stronger bargaining power may draft their
contracts to exclude these uncertain default rules.
A well-known criticism of the use of unconscionability as a legal doctrine in the
market place is that it is too uncertain and prevents practising lawyers from advis-
ing their clients properly.12 Essentially, this argument is an empirical assertion. In
order to assess this argument in the context of performance bonds, a survey of
leading practitioners in the construction industry in Singapore was undertaken
to ascertain their views and practices in relation to performance bonds. More
specifically, questions as to their clients’ contracting behaviour were posed to
these lawyers. Other questions included whether they have experienced calls on
performance bonds which were tactical and abusive, whether their clients were
concerned with performance bonds being restrained on the ground of uncon-
scionability and whether they were frequently asked by their clients to restrain
performance bonds. The survey also delved into the number of hearing days such
applications would take and the legal costs involved. In this survey, the lawyers
were also asked whether they thought the law was certain enough for them to
advise their clients and whether they thought that unconscionability in this con-
text was a positive or negative development. The results of their responses will
demonstrate how practising lawyers in Singapore cope with the uncertainty inher-
ent in the law of unconscionability in relation to performance bonds. An enquiry
about the choice of foreign law to govern performance bonds and clauses which
exclude unconscionability was also pursued in this survey.
The data from the survey of the cases and practitioners’ responses may prove
useful to any jurisdiction which is confronted with the policy choice of whether to
adopt a separate ground of unconscionability with regard to restraints on perfor-
mance bonds. Ultimately, the overarching theme which emerges from this chapter
is that while unconscionability is undoubtedly a fact-sensitive enquiry and not
capable of being stated in the form of bright line rules, it can still operate in this

12 eg P Birks, ‘Equity in the Modern Law: An Exercise in Taxonomy’ (1996) 26 Western Australia

Law Review 1.
 Equity in the Marketplace 55

field where commercial certainty is said to be of paramount importance. The

­survey of the practitioners’ responses also indicated that more sophisticated par-
ties who have the bargaining power are now contractually excluding unconscion-
ability from the terms of the performance bond. If this trend continues, this may
spell the demise of the unconscionability exception to calls on performance bonds.
As a commentator recently noted, the unconscionability exception may ‘possibly
[be] rendered moot by the power of private law and the freedom to contract’.13

II. Unconscionability as a Ground for Relief:

Rationale, Doctrinal Underpinnings
and Standard of Proof

The policy rationale for adopting unconscionability as a separate ground to

restrain performance bonds as compared to the more stringent standard of fraud
which is the sole ground for restraint for letters of credit has been traversed exten-
sively in the Singapore cases14 and academic literature.15 Essentially, there are two
main explanations for this. First, the Singapore judges have pointed out that the
apparent symmetry between letters of credit and performance bonds is flawed.16
LP Thean JA makes the point in GHL Pte Ltd v Unitrack Building Construction Pte
Ltd & Anor17 that
it should not be forgotten that a performance bond is basically a security for the perfor-
mance of the main contract, and as such we see no reason, in principle, why it is should
be so sacrosanct and inviolate as not to be subject to the court’s intervention except on
the ground of fraud.
Chan Sek Keong JA reiterated this point in JBE Properties Pte Ltd v Gammon Pte
Ltd:
[A] performance bond is merely security for the secondary obligation of the obligor to
pay damages if it breaches its primary contractual obligations to the beneficiary. A per-
formance bond is not the lifeblood of commerce, whether generally or in the context of
the construction industry specifically.18

13 G Wooler, ‘The New “Asplenium Clause”—Unconscionability Unwound’ [2016] Singapore Jour-

nal of Legal Studies 169, 179.

14 See GHL Pte Ltd (n 4); JBE Properties Pte Ltd v Gammon Pte Ltd [2011] 2 SLR 47; BS Mount Sophia

Pte Ltd v Join-Aim Pte Ltd [2012] 3 SLR 352.

15 eg LP Thean, The 12th Singapore Law Review Lecture: ‘The Enforcement of A Performance Bond:

The Perspective of the Underlying Contract’ (1998) 19 Singapore Law Review 389; A Lee, ‘Injuncting
Calls on Performance Bonds: Reconstructing Unconscionability’ (2003) 15 Singapore Academy of Law
Journal 30.
16 An argument made by C Debattista, ‘Performance Bonds and Letters of Credit: A Cracked Mirror

Image’ (1997) 7 Journal of Business Law 289, 304.

17 GHL Pte Ltd (n 4).
18 JBE Properties Pte Ltd (n 14) [10].
56 Tang Hang Wu

Second, the recognition of the unconscionability exception was to counter abusive

calls on performance bonds. In GHL Pte Ltd v Unitrack Building Construction Pte
Ltd & Anor,19 LP Thean JA observed that a performance bond may operate as an
oppressive instrument if it is misused. The Court of Appeal in BS Mount Sophia
Pte Ltd v Join-Aim Pte Ltd20 accepted the observation by commentators who argue
‘[i]n certain cases, it is not unforeseeable that an abusive call may effectively crip-
ple the principal financially … An abusive call may render the principal insolvent
or incapable financially to proceed to arbitration or litigation’.21
However, it would be a mistake to think that the Singapore courts approach the
issue of restraining a performance bond lightly. The judges are acutely aware of the
arguments against the unconscionability exception. Andrew Phang JA described
this area as posing a ‘perennial tension’ in BS Mount Sophia Pte Ltd v Join-Aim
Pte Ltd22 and acknowledged that liquidity concerns would also affect the bene-
ficiary of the bond. In other words, ‘the deprivation of the beneficiary’s right to
call on the performance bond could equally well be as detrimental to its liquidity’
(emphasis in the original). Due to this ‘perennial tension’, the learned judge said
a balance needs to be struck and as such, Phang JA said that ‘the actual grant of
such i­njunctions should be kept within a very narrow compass’ (emphasis in the
original).23
While the Singapore judges have articulated the policy reasons, they have thus far
not explained the doctrinal basis for the unconscionability exception. This point is
important because it would impact on the issue of whether the unconscionability
exception may be contractually excluded by the parties. There are several compet-
ing possibilities to justify the doctrinal underpinning for the unconscionability
exception. First, the unconscionability exception may be justified as an extension
of equity’s rule against penalties and relief against forfeiture. Second, the doctrinal
basis is premised on the notion of inequality of bargaining power between the
parties. Finally, the unconscionability exception in relation to performance bonds
is truly a new doctrine created by the judges as a response to the policy reasons
given above.
It is interesting to note that penalty rule developed from the equitable juris-
prudence to provide relief against defeasible penal bonds.24 Such penal bonds are
promises to pay a certain sum of money subject to the satisfaction of a condition,
for example, the performance of a primary obligation. In other words, once the
obligation is performed, the penal bonds cease to be payable. While it is tempt-
ing to equate the unconscionability exception with equity’s rule against penalties
and relief against forfeiture, there is a major difference between these doctrines.

19 GHL Pte Ltd (n 4).

20 BS Mount Sophia Pte Ltd (n 14) [27].
21 Loh and Tang (n 5).
22 BS Mount Sophia Pte Ltd (n 14).
23 ibid [31].
24 The history of the rule against penalties was traced recently in Cavendish Square Holding BV

v Makdessi [2015] UKSC 67, [2015] 3 WLR 1373 (HL).

 Equity in the Marketplace 57

In relation to penalties and forfeiture of monies, the claimant invokes equity’s

jurisdiction to prevent a defendant from keeping the entire sum of money.
However, the unconscionability exception with respect to performance bonds is
merely a temporary restraint on the fund. If it can be demonstrated after the dis-
pute resolution process between the parties that the damages are indeed far less
than the sum called on the performance bond, the defendant must account to
the ­claimant.25 Thus, it could be argued that the rule against penalties and relief
against forfeiture deals with a more draconian situation whereby the defendant
is attempting to keep the monies regardless of his or her damages. It is therefore
understandable that the law would be more hesitant in letting parties contract out
of these rules.
The second possible doctrinal explanation for the unconscionability doctrine
need not detain us for too long. Like other parts of the Commonwealth, Singapore
does not have a free-standing doctrine of inequality of bargaining power. Thus,
the most persuasive account of the unconscionability exception in this context is
that it is a new doctrine in the face of pressing policy considerations. Indeed, this
explanation is consistent with the case law as the judges have not been concerned
to look at similar doctrines in developing the unconscionability exception.
Initially, there was some confusion as to the standard of proof required to estab-
lish unconscionability. Thean JA had said in GHL Pte Ltd v Unitrack Building Con-
struction Pte Ltd & Anor26 that ‘where there is prima facie evidence of fraud or
unconscionability, the court should step in to intervene’. However, the Court of
Appeal subsequently clarified in Dauphin v The Private Office of HRH Sheik Sultan
bin Khalifa bin Zahed Nahyan27 that the standard of proof required was a strong
prima facie case of unconscionability. The reason for requiring a high threshold
for unconscionability has been rationalised as ‘the need to strike the appropri-
ate balance between the conflicting positions of the obligor and beneficiary of
a performance bond’.28 It is also important to note that the Singapore courts do
not approach a restraint on the ground of unconscionability from an ‘all or noth-
ing’ perspective. In Eltraco International Pte Ltd v CGH Development Pte Ltd,29 the
Court of Appeal ordered a partial restraint of the bond after examining the facts
of the case.
Arguably, a further gloss to the standard of proof was added in BS Mount
Sophia Pte Ltd v Join-Aim Pte Ltd.30 Justice Phang after affirming the strong prima

25 See Cargill International SA and Another v Bangladesh Sugar and Food Industries Corporation

[1998] 1 WLR 461 (CA). Such relationships are not uncommon in other banking contexts. See S Booy-
sen, ‘“Pay Now—Argue Later”: Conclusive Evidence Clauses in Commercial Loan Contracts’ (2014)
1 Journal of Business Law 31.
26 GHL Pte Ltd (n 4).
27 Dauphin v The Private Office of HRH Sheik Sultan bin Khalifa bin Zahed Nahyan [2000] 1 SLR(R)

117 [57].
28 BS Mount Sophia Pte Ltd (n 14) [24].
29 Eltraco International Pte Ltd v CGH Development Pte Ltd [2000] 3 SLR(R) 198.
30 BS Mount Sophia Pte Ltd (n 14).
58 Tang Hang Wu

facie case of unconscionability test emphatically said ‘[w]e must emphasise that
the courts’ discretion to grant such injunctions must be sparingly exercised and
it should not be an easy thing for an applicant to establish a strong prima facie
case’.31 It is anticipated that these words would have an impact on the future
success rate of injunctions to restrain performance bonds.

III. Negative Academic Reactions to

Unconscionability and the Singapore Court
of Appeal’s Response

Generally, overseas academic reactions to the Singaporean jurisprudence on

unconscionability and performance bonds have been largely negative. The first
objection to unconscionability as a separate ground for restraining a performance
bond is that such an additional ground would erode the integrity of performance
bonds which are treated as equivalent to cash. As Professor Nelson Enonchong
writes: ‘that easy availability of injunctions would destroy confidence in [perfor-
mance] bonds as the equivalent of cash in hand and undermine their utility as the
lifeblood of commerce’.32 In a similar vein the learned editors of Jack: Documentary
Credits state that such an exception ‘would tend to reduce confidence in the system
of credits’.33 Second, detractors of unconscionability point out that this exception
will lead the court to become entangled in the underlying contractual dispute.
Enonchong argues that the ‘recognition of the unconscionability exception may
lead to the courts getting involved in disputes arising from the underlying contract
when such disputes should be resolved in separate proceedings and in accordance
with any arbitration or jurisdiction clause in the underlying contract’.34 Horowitz
pursues this theme as well in her monograph by contending that the unconsciona-
bility exception forces the court to probe too deeply into circumstances surround-
ing performance of the underlying contract.35 Third, commentators point out
that unconscionability as a ground for restraint is imprecise, vague and difficult
to define. It is argued that accepting unconscionability as a ground for restraining
performance bonds would inject intolerable uncertainty in an area where clarity

31 ibid [21]. The distinction between unconscionability and fraud will be dealt with in section V

below.
32 N Enonchong, The Problem of Abusive Calls on Demand Guarantees’ [2007] Lloyd’s Maritime

and Commercial Law Quarterly 83, 104 and N Enonchong, The Independence Principle of Letters of
Credit and Demand Guarantees (Oxford, OUP, 2011) para 7.34.
33 A Malek and D Quest, Jack: Documentary Credits (London, Tottel Publishing, 2009) para 9.30.
34 Enonchong, The Problem of Abusive Calls on Demand Guarantees’ (n 32) 105 and Enonchong,

The Independence Principle of Letters of Credit and Demand Guarantees (n 32) para 7.35.
35 D Horowitz, Letters of Credit and Demand Guarantees: Defences to Payment (Oxford, OUP,

2010) 169.
 Equity in the Marketplace 59

and certainty are highly prized.36 Finally, Horowitz argues that many of the Singa-
pore cases decided on unconscionability may be determined in a similar fashion
based on the fraud exception. She argues that these cases may be restrained on the
ground of fraud because the beneficiary had ‘no honest belief ’ that the beneficiary
was entitled to call on the performance bond. Horowitz’s point will be considered
in the section on the survey of cases.
Two well-known Singapore banking scholars, Peter Ellinger and Dora Neo, have
also expressed scepticism about the unconscionability exception. They argue that
an independent guarantee serves the function where the beneficiary ‘can be paid
first and talk later’.37 Ellinger and Neo also point out that the beneficiary may have
sacrificed a stronger position by not insisting on retention money and accepting a
bond. In these circumstances, they argue that the autonomy principle is as equally
important in performance bonds as in a letter of credit.
Interestingly, the Singapore Court of Appeal responded to these academic cri-
tiques on two occasions in JBE Properties Pte Ltd v Gammon Pte Ltd38 and BS
Mount Sophia Pte Ltd v Join-Aim Pte Ltd.39 Chan Sek Keong CJ disagreed with
Ellinger’s and Neo’s argument that the autonomy principle should apply with
equal force to a performance bond. The Chief Justice thought that if parties had
agreed to the provision of a performance bond instead of cash, the parties must
have accepted the risk that a call on the performance bond might be restrained.
According to Chan CJ, the fact that performance bonds may be restrained ‘is a
factor which the employer-beneficiary must be taken to have considered and
accepted in preferring a performance bond to a cash deposit’.40 In relation to the
point of the potential ease of obtaining an injunction, Andrew Phang JA in BS
Mount Sophia Pte Ltd accepted that this was a valid concern. The key considera-
tion according to Justice Phang is that unconscionability must be applied in a
nuanced manner and applied ‘in a principled manner, having regard to the facts of
the case at hand’ (emphasis in original).41 However, the learned judge repudiated
the assertion that it was easy to obtain an injunction based on unconscionability.
In this regard, Phang JA cited Kelry Loi’s work where Loi pointed out that such an
injunction may only be obtained where there is unconscionable behaviour and it
is provable on strong evidence.42 The learned judge also responded to the argu-
ment that the recognition of unconscionability would lead the court to getting
involved in disputes arising from the underlying contract. Again, the Court cited

36 Enonchong, ‘The Problem of Abusive Calls on Demand Guarantees’ (n 32) 105 and Enonchong,

The Independence Principle of Letters of Credit and Demand Guarantees (n 32) para 7.33; see also Malek
and Quest (n 33) para 9.30.
37 P Ellinger and D Neo, The Law and Practice of Documentary Credits (Oxford, Hart Publishing,

2010) 325–26.
38 JBE Properties Pte Ltd (n 14) [10].
39 BS Mount Sophia Pte Ltd (n 14).
40 JBE Properties Pte Ltd (n 14) [11].
41 ibid [33].
42 K Loi, ‘Two Decades of Restraining Unconscionable Calls on Performance Guarantees—From

Royal Design to JBE Properties’ (2011) 23 Singapore Academy of Law Journal 504, 508–09.
60 Tang Hang Wu

Loi, who argues that the autonomy principle has already been comprised by the
fraud ­principle. Loi says rhetorically that ‘the courts will … not allow the law or
its offices to become instruments of unconscionable conduct’.43 With regard to
the point that the concept of unconscionability is too vague, Phang JA thought
that this was a far too pessimistic view. The learned judge said that while crisp
definitions of legal doctrines are generally preferable, ‘we do not think that relief
for unconscionable conduct should be categorically rejected simply because a neat
and tidy definition of the same is not forthcoming’.44 Thus, while Phang JA alluded
to general principles associated with the unconscionability exception, it would
seem that the jurisprudence in this area is to be decided incrementally with refer-
ence to a multi-factorial approach. This multi-factorial approach will be explored
below.

IV. Contracting Out of Unconscionability:

Choosing Foreign Law and Excluding
Unconscionability

Predictably, it was a matter of time before a contracting party with the stronger
bargaining power sought to mitigate the uncertainty surrounding the concept of
unconscionability by attempting to contract out of unconscionability.45 However,
the option of contracting out of unconscionability raises its own potential uncer-
tainty. Would the court respect such clauses? Or more fundamentally, are parties
able to agree amongst themselves to contract out of unconscionable behaviour?
Prima facie, it seems counterintuitive that parties may agree that one party may
act in an unconscionable behaviour in a contractual setting. The inherent uncer-
tainty associated with such clauses may explain the reason why they only surfaced
in the reported decisions many years after GHL Pte Ltd v Unitrack Building Con-
struction Pte Ltd & Anor.46
An obvious method to try to disapply the unconscionability exception would
be to choose English law as the choice of law for the performance bond. This
would potentially get round the ambiguity of whether parties may contract out of
unconscionable behaviour. Instead, the problem could be presented to the court as
a simple choice of law problem where the parties chose a foreign law. But choos-
ing a foreign law in this regard raises a conflict of laws issue: is the law governing
injunctive relief in this context a procedural or substantive law? If it is the former,
then the lex fori would apply. In contrast, if the matter is regarded as a substantive

43 ibid 510–511.
44 BS Mount Sophia Pte Ltd (n 14) [35].
45 cf JBE Properties Pte Ltd (n 14) [15] where the terms of the performance bond expressly stipulate
that the exceptions to payment is fraud or unconscionability.
46 GHL Pte Ltd (n 4).
 Equity in the Marketplace 61

law, then the choice of the law of the performance bond would apply. Andrews
and Millett thought, albeit without citation of any authorities, that this was prob-
ably a matter of procedural law of the forum.47 Hence, on their analysis, the
unconscionability exception would still apply. On the other hand, Professor Yeo
argues that the injunction here is to protect substantive legal rights and hence
should be governed by the choice of law. In other words, where an injunction is
issued to protect legal rights, these rights are established by choice of law rules.
Yeo, relying on the English Court of Appeal’s decision in Wahda Bank v Arab
Bank plc,48 argues that ‘[w]here the issuer of a performance bond is refusing to
pay the beneficiary because of the beneficiary’s fraud, the proper law of the per-
formance bond has been applied to determine the issue of fraud’.49 He concludes
that this is a sensible conclusion because parties reasonably expect the proper law
to apply to this question subject always to the fundamental public policy of the
law of the forum.
Lee Seiu Kin JC (as he then was) foresaw this in Marinteknik Shipbuilders (S) Pte
Ltd v SNC Passion50 where he speculated that if parties chose English law to govern
the relevant contract and bond, there is the question as to whether a contract-
ing party may rely on unconscionability as an additional ground to restrain the
bond. However, this was not a live issue in that case and he did not have to make
a final decision. Many years later, the issue of a foreign choice of law governing
the performance bond came to be considered before the same judge in Shanghai
Electric Group Co Ltd v PT Merak Energi Indonesia and another.51 In this case, the
plaintiff was hired by the defendant to construct a power plant in Indonesia. The
contract provided for the defendant to pay the plaintiff an advance payment of
10 per cent of the contract price which amounted to US$ 10.8 million by way of
a performance bond. The contract and performance bond were both governed
by English law. However, the Singapore Court was given a non-exclusive jurisdic-
tion to hear proceedings arising out of the bond. Lee J thought that a restraint on
the beneficiary’s right to receive immediate payment on the bond would deprive
the defendant of a substantive right envisaged by the bond. Since a substantive
right was engaged, the choice of law would govern the relationship. It followed
that English law would govern the restraint on a call on the bond. This holding is
consistent with the position advocated by Professor Yeo as opposed to Andrews’
and Millett’s view.
Quite apart from choosing English law, another possibility would be to expressly
exclude unconscionability as a ground for restraint from the terms of the perfor-
mance bond. The first case in which contracting parties sought to exclude uncon-
scionability as a ground of restraint is Scan-Bilt Pte Ltd v Umar Abdul Hamid.52

47 GM Andrews and R Millett, Law of Guarantees (London, Thomson Reuters, 2015) 656–57.
48 Wahda Bank v Arab Bank plc [1999] EWCA Civ 1599.
49 TM Yeo, Choice of Law for Equitable Doctrines (Oxford, OUP, 2004) para 4.34.
50 Marinteknik Shipbuilders (S) Pte Ltd v SNC Passion [2001] SGHC 140.
51 Shanghai Electric Group Co Ltd v PT Merak Energi Indonesia and another [2010] 2 SLR 329.
52 Scan-Bilt Pte Ltd v Umar Abdul Hamid [2004] SGDC 274.
62 Tang Hang Wu

This is a little noticed case at the District Court level involving a performance
bond for the value of S$125,000. In this case, the performance bond contained the
following terms:
Except only in the clear case of fraud, the Contractor shall not be entitled to enjoin
or restrain the Employer from making any call or demand on the performance bond
or receiving monies under the performance bond, on any other ground including the
ground of unconscionability.
This clause was not disclosed to the Court when the plaintiff obtained an ex parte
injunction to restrain the performance bond. The defendant applied to discharge
the injunction on the ground of a failure to make full and frank disclosure. Eugene
Teo DJ thought that the plaintiff had failed to make full disclosure of this clause to
the Court and discharged the injunction.
The issue of contracting out of unconscionability came to the fore recently in
CKR Contract Services Pte Ltd v Asplenium Land Pte Ltd.53 In this case, the devel-
oper, Asplenium, employed CKR as a main contractor for the construction of a
condominium in Singapore. The contract sum was S$88 million and CKR had
to furnish Asplenium with an S$8.8 million performance bond. It was provided
in the terms of the performance bond that CKR agreed that except in the case of
fraud not to enjoin or restrain a call on the performance bond. Specifically, the
terms of the bond mentioned that this prohibition against restraining a call on
the performance bond included the ground of unconscionability. Subsequently,
disagreement arose and Asplenium called on the bond. CKR retaliated by apply-
ing for an injunction to restrain the call on the performance bond. The issue that
is relevant is whether the clause excluding a restrain based on unconscionability
was unenforceable. At first instance, Edmund Leow JC held that this clause was
unenforceable for three reasons. First, the clause was an attempt to oust the juris-
diction of the Court. Second, the power to grant injunctions emanated from the
Court’s equitable jurisdiction which could not be limited by contract. Third, the
unconscionability exception was premised on policy considerations which could
not be excluded by contract.
On appeal, Andrew Phang JA, delivering the judgment of the Court of Appeal,
held that the clause excluding unconscionability was enforceable. As a starting
point, Phang JA observed that while freedom of contract is the norm, the courts
may override the contractual rights of the parties on public policy concerns such
as an ouster of the jurisdiction of the courts. However, the countervailing consid-
eration is that courts should be careful not to apply this policy concern to situa-
tions where contracting parties place limitations on their rights and remedies. Such
limitations on rights and remedies such as a limitation of damages have not been
treated as an ouster of the court’s jurisdiction. The learned judge thought that the
present clause ‘was more in the nature of an exclusion or exception clause (as opposed
to a clause seeking to oust the jurisdiction of the court)’ (emphasis in original).54
53 CKR Contract Services Pte Ltd v Asplenium Land Pte Ltd [2015] 3 SLR 1041.
54 ibid [22].
 Equity in the Marketplace 63

In other words, the present clause is one which sought to limit the right to an equi-
table remedy and not a clause which sought to oust the jurisdiction of the court.
Phang JA said that this clause is potentially subject to the Unfair Contract Terms
Act and might be unenforceable if it was regarded as unreasonable.55 However, this
was not an argument that was run and Justice Phang did not state a conclusive view
on this issue.
With regard to the argument that a contractual clause excluding unconscion-
ability was unenforceable on public policy grounds, the learned judge observed as
follows:
The particular conception of policy that formed the basis for the unconscionability doc-
trine is quite different from the concept of public policy which underpins the category of
contracts which are void and unenforceable as being contrary to public policy as such
contracts seek to oust the jurisdiction of the court (emphasis in original).56
CKR Contract Services Pte Ltd v Asplenium Land Pte Ltd has drawn some dis-
quiet from commentators. For example, Dora Neo comments that ‘one might
feel slightly uncomfortable that the “bad guys”, that is, beneficiaries who call on
performance bonds in unconscionable circumstances, should be allowed to have
their way’.57 However, Neo rationalised that it is ultimately up to the obligor of
the performance bond to decide if it is willing to forego equity’s protection in this
context. Lau Kwan Ho has also subjected this decision to an extensive critique in
a Modern Law Review piece.58 Lau has three major criticisms of the position that
parties may exclude injunctive relief premised on unconscionable conduct. First,
he stresses that there is a difference between primary and secondary obligations
pursuant to the contract. A primary obligation is an obligation to perform the
contract whereas a secondary obligation arises to pay damages in the event of a
breach. He argues that the court when deciding to order an injunction is essen-
tially seeking to enforce primary obligations under the contract. In other words,
‘[t]he right to expect contractual performance is generally allied to a right to seek
equitable relief to compel such performance’.59 While it is relatively uncontro-
versial for parties to contractually limit their liabilities under a secondary obliga-
tion, it is questionable whether parties may contractually amend the content and
the performance of their primary obligations. Second, parties should not be able
to exclude the unconscionability exception due to its underlying policy. Accord-
ing to Lau, ‘[t]he true policy at work here is that of ensuring that parties do not
contract themselves out of the law’.60 Third, unconscionability like fraud should

55 It is likely that the Unfair Contract Terms Act does not apply in most cases because these contracts

are not consumer contracts nor written standard form contracts.

56 CKR Contract Services Pte Ltd (n 53) [41].
57 D Neo, ‘Banking Law’ (2014) 15 Singapore Academy of Law Annual Review of Singapore

Cases 73, 94.

58 KH Ho, ‘Injunctive Relief: But Let’s Agree Not to Have It?’ (2016) 79 MLR 468.
59 ibid 472.
60 ibid 473.
64 Tang Hang Wu

fall within ‘the sphere of general immunity from contractual manipulation’.61 He

cites Regus (UK) Ltd v Epcot Solutions Ltd62 as support for the proposition that
it is not possible to exclude liability for fraud or wilful damage. Lau concludes
‘that people expect and are entitled to nothing less than honest dealing in their
relationships’.63
Implicit in Lau’s analysis is the assumption that the primary contractual obli-
gation contained in a performance bond is that the beneficiary is only entitled
to make genuine calls on the bond if the beneficiary has suffered damage under
the underlying contract. As such, the beneficiary is under a primary obligation
not to make an unconscionable call on the bond which is abusive and tactical.
While I see some merit in this characterisation, it is ultimately question begging
and circular. Lau’s thesis starts with the premise that parties may not limit the
primary obligations inherent in the contract. In order to reach the conclusion that
unconscionability may not be excluded contractually he assumes that the obliga-
tion not to make unconscionable calls on the bond is within the primary obliga-
tion of the parties. In my view, the debate on whether it is possible to contractually
exclude the unconscionability exception in relation to a performance bond cannot
be resolved by dividing the contractual obligations undertaken by the parties into
a neat dichotomy of primary and secondary obligations. In contrast to Lau, the
Court of Appeal noted that performance bond in this particular context was pro-
vided in lieu of a cash deposit. Thus, if we proceed with this line of analysis, the
primary obligation of the parties is that the bond is to function as a cash deposit
and the beneficiary is entitled to call on the bond save for the fraud exception. Or
to put this in another way, it could be argued that the primary obligation on the
obligor is not to apply for an injunction restraining payment save for fraud. In
other words, the contractual exclusion of the unconscionability exception restores
the cracked image (using Debattista’s imagery)64 between the performance bond
and letter of credit. Another way of putting the argument in support of the Court
of Appeal’s decision is that the parties have by contract incorporated the auton-
omy principle inherent in letters of credit within their obligations under the per-
formance bond.
It is suggested that the most pertinent issue inherent in the Court of Appeal’s
decision in CKR Contract Services Pte Ltd v Asplenium Land Pte Ltd is whether
there is a public policy objection to allow a contracting party to exclude liability
for one own’s unconscionable conduct. This is a distinct policy consideration
from the public policy of ousting the court’s jurisdiction which was considered
extensively by the Court of Appeal. Unfortunately, the Court of Appeal did not
deal with this issue squarely in their judgment. Instead, the judgment of the
Court of Appeal concentrates solely on the question whether an exclusion of

61 ibid 475.
62 Regus (UK) Ltd v Epcot Solutions Ltd [2008] EWCA Civ 36, [2009] 1 All ER (Comm) 586 (CA).
63 Ho (n 58) 476.
64 Debattista (n 16) 304.
 Equity in the Marketplace 65

­ nconscionability is an ouster of the court’s jurisdiction. Perhaps this was because

u
of the manner in which arguments developed before the Court of Appeal. As Lau
correctly points out, there is English authority which suggest that it is not pos-
sible to contractually exclude liability for fraudulent conduct. Similarly, it is not
possible to contract out for liability for a person’s fraudulent misrepresentation.65
However, Andrew Burrows points out that ‘the question of whether, as a matter
of public policy, one can exclude other forms of conduct somewhat analogous
to fraud, such as duress and undue influence, appears not to have been decided
or discussed’.66 Ultimately, this is a policy choice which the courts have to make,
ie, between freedom of contract between the parties and the court’s ability to
intervene where one party is exercising his or her legal rights in an unconscion-
able manner. The Court of Appeal in Singapore seems to have made the choice
in preference of the former policy, ie, respecting the contractual bargain struck
by the parties. However, the counter argument against this is that the rationale of
unconscionability doctrine in relation to performance bonds is that it was devel-
oped to prevent abusive calls and mitigate the unequal bargaining power of the
parties.67 If so, then a case may be made for holding that unconscionability like
the fraud exception is not a ground which may be excluded by the parties. This is
because large contracting parties may now insist on such clauses being included
in their contracts. Be that as it may, this is not the position adopted by the Court
of Appeal. The issue of the contracting parties’ behaviour will be explored in the
empirical part of the chapter.

V. Analysis of the Survey of the Cases

A comprehensive review of the reported and unreported Singapore case law was
conducted using the database Lawnet68 to survey all the cases which have discussed
the unconscionability exception post GHL Pte Ltd v Unitrack Building Construction
Pte Ltd & Anor.69 The present author reviewed all the cases which came up with
the relevant search terms and identified the decisions directly relevant to applica-
tions restraining performance bonds. The author then read the cases while taking
note of the subject matter of the suit, the quantum of the performance bond and
whether the application to restrain the performance bond was ultimately success-
ful. Where the case was appealed to the Court of Appeal, the author only took note

65 HIH Casualty General Insurance Ltd v Chase Manhattan Bank [2003] UKHL 6, [2003] 2 Lloyd’s

Rep 61, [16], [24], [76] and [121]–[122] (HL).

66 A Burrows, A Restatement of the English Law of Contract (Oxford, OUP, 2016) 238–39.
67 Wooler (n 13).
68 The terms ‘unconscionable’ and ‘performance bond’ were entered into Lawnet. The cases were

surveyed between 2000 and 2015.

69 GHL Pte Ltd (n 4).
66 Tang Hang Wu

and reviewed the appellate court’s decision to prevent a double counting of cases.
While reviewing the grounds of decision, the author also took note of the judges’
reasons in allowing or dismissing such applications. The data is summarised in a
table marked Appendix A to this chapter.
The survey of the cases reveals that there were 31 reported and unreported cases
between 2000 and 2015. Over a span of 15 years, this averages to two cases per year
which suggests that there were not many applications to restrain calls on perfor-
mance bonds. Prima facie, these figures suggest that the number of attempts to
restrain performance bonds is at a tolerable level. However, these figures are not
conclusive because the practice is that judges in Singapore would only write the
grounds of decision when a party lodges a notice of appeal. It may be that there
were many applications to restrain performance bonds where the losing party
did not lodge a notice of appeal. Thus, this survey is inconclusive as to the actual
number of challenges filed by contracting parties in Singapore to restrain calls on
performance bonds. The limited conclusion which may be reached with the data is
that the number of appeals resulting from applications to restrain a performance
bond does not happen frequently in Singapore.
A summary of the number of cases broken down in the five-year period and the
success rate is found in the table below.

Table 3.1: Summary of the Number of Cases

Time period Number of cases Percentage Number of Remark

cases which
were successful
2000–05 14 45.2 6 11 of the challenges
were between 2000
and 2002
2005–10 6 19.4 3
2010–15 11 35.5 4 9 cases between
2013 and 2015

It is also interesting that out of 31 reported and unreported decisions, 11 of

these cases were dated between 2000 and 2002. This represented 35 per cent of
all the reported and unreported decisions. This could potentially be explained
on the fact that when the unconscionability exception was first recognised, the
contours of the doctrine were not fully mapped out. As a result, there were fre-
quent challenges. As the case law developed and more guidance was given by the
courts, the challenges become less frequent. However, this hypothesis does not
explain the spike of cases which happened subsequently, ie, 35.5 per cent which
occurred between 2010 and 2015. Out of 11 cases between 2010 and 2015, nine
of the cases were reported between 2013 and 2015. This is rather surprising con-
sidering this period was after the Court of Appeal’s decision in BS Mount Sophia
 Equity in the Marketplace 67

Pte Ltd v Join-Aim Pte Ltd70 where Andrew Phang JA said that the decision to
restrain a performance bond should be exercised sparingly and that it would
be difficult for a party to show a strong prima facie case of unconscionability.
Perhaps, the only way to explain the data is that the number of applications to
restrain performance bonds closely mirrors the construction industry and state
of the economy of Singapore. Recall that Singapore suffered a prolonged eco-
nomic slump which affected the property market between 2001 and 2006 due
to global events like the ‘September 11’ attacks on the New York World Trade
Center and the SARs crisis that affected Asia. Therefore, it is unsurprising that
there were only two cases between 2002 and 2005 because it is likely that the
construction industry in Singapore suffered a slowdown due to the economy.
Subsequently, the property market in Singapore experienced a sharp rise which
led to more construction projects. Thus, this could explain the spike of cases
between 2010 and 2015 as more construction projects were completed and the
performance bonds in relation to these projects were engaged.
In terms of successful applications to restrain calls on performance bonds, we
see 13 successful challenges out of 31 of the reported and unreported cases. These
figures include partial restraints on calls of performance bonds. This represents
a 41 per cent success rate out of the reported and unreported cases. Again, this
figure is not indicative of the overall success rate of all applications. As mentioned
above, there would not be any grounds of decision if parties did not file a notice
of appeal. It could be that parties were more inclined to file a notice of appeal in
situations where the application to restrain a performance bond is successful.
The quantum value of the performance bonds in the cases is summarised as
follows in the table below.

Table 3.2: Value of the Performance Bonds

Quantum (in Singapore dollars) Number of cases

≤250,000 11
≥250,000 ≤750,000 6
≥750,000 ≤1,000,000 2
≥1,000,000 10
Not stated 2

The most number of challenges from the reported and unreported cases comes
from the lower tier in terms of the quantum of performance bond, ie, below
S$250,000. There are several possible explanations for this. First, it could simply
be that there are more small-scale construction projects which are valued at S$2.5
million and below (the bond is usually 10 per cent of the project price). Second,

70 BS Mount Sophia Pte Ltd (n 14).

68 Tang Hang Wu

abusive and tactical calls are more common in smaller scale projects. It should
also be noted that there are 10 applications to restrain bonds which are worth
more than S$1 million. Again, this could tentatively be explained on the num-
ber of projects and unconscionable calls on performance bonds within this band.
These explanations are only tentative hypotheses.
Although Andrew Phang JA in BS Mount Sophia Pte Ltd v Join-Aim Pte Ltd71
disavowed a formulaic approach to unconscionability and counselled that the
whole broad set of facts must be analysed, the present author attempted to isolate
the factors in which the judges have regarded as significant in holding that a call
was unconscionable. In terms of mapping out unconscionable calls on perfor-
mance bonds, the following are factors which the courts have taken into account:
(i) The delay in the works was contributed by the beneficiary of the bond.72
(ii) There is independent evidence such as evidence from the architect that
there was no delay/defect in the works.73
(iii) The beneficiary did not assert that it had suffered damage.74
(iv) The alleged damages/rectification works were based on arbitrary figures or
grossly inflated.75
(v) The claim for damages was already time barred.76
(vi) There was a partial restraint of the bond because the contract sum had
been reduced.77
(vii) No performance was due because the defendant’s main contract had been
terminated.78
(viii) The call on the bond was not due to the plaintiff ’s poor performance but
based on an ulterior motive to attempt to force the plaintiff to take over a
contract.79
The judges have not placed much emphasis on the knowledge of the obligee in
calling on the bond. Instead, the judges rely on written documentation such as
letters and architects’ certificates in establishing the factors listed above. Unfortu-
nately, there does not seem to be a hierarchy of the factors and thus there is some
uncertainty inherent in the application of these factors. It is hoped that by listing

71 BS Mount Sophia Pte Ltd (n 14).

72 A1 Design & Build Pte Ltd v Neo Choon Seng [2015] SGDC 86; BS Mount Sophia Pte Ltd (n 14);
Global Facade (S) Pte Ltd v Eng Lim Construction Company Private Limited [2001] SGDC 325.
73 A1 Design & Build Pte Ltd (n 72); Polink Engineering Pte Ltd v Chen Hwei Lai & Ors [2010]

SGDC 36.
74 York International Pte Ltd v Voltas Limited [2013] 3 SLR 1142.
75 Scada Solutions Pte Ltd v Anderco Pte Ltd [2013] SGDC 237; JBE Properties Pte Ltd (n 14); Newtech

Engineering Construction Pte Ltd v BKB Engineering Constructions Pte Ltd and others [2003] 4 SLR(R)
73; Eltraco International Pte Ltd (n 29) 198.
76 Econ Piling Pte Ltd v Aviva General Insurance Pte Ltd and another [2006] 4 SLR(R) 501.
77 Hiap Tian Soon Construction Pte Ltd and another v Hola Development Pte Ltd and another [2003]

1 SLR(R) 667.
78 Prolian M&E Services Pte Ltd v Loh Lin Kett [2001] SGDC 322.
79 Samwoh Asphalt Premix Pte Ltd v Sum Cheong Piling Private Limited and Another [2002] 1 SLR 1.
 Equity in the Marketplace 69

down these various factors, this would assist practitioners and judges in determin-
ing when it is regarded as unconscionable to call on a performance bond. In ana-
lysing the jurisprudence from Singapore, Deborah Horowitz suggested that many
of the instances could be analysed as coming within the fraud exception on the
grounds that the beneficiary had no honest belief that the beneficiary was entitled
to call on the bond. Horowitz writes:
One chief difficulty with the Singaporean cases on unconscionable conduct in relation to
abstract payment instruments is that the courts seem to have forgotten about the fraud
defence—or, rather, the applicant in the cases frequently does not plead it. It is true that
there are risks for a party (or its counsel) who pleads fraud: one must genuinely believe
in, and have sufficient proof of, the fraud allegation. Nonetheless, given the potential
fraud and unconscionable conduct, it is still surprising that parties have chosen to plead
the latter defence, but not the former, in many of the cases.80
With respect, there are several problems with the passage above. On a descriptive
level, this statement is wrong because the multiple factors the courts have consid-
ered show quite conclusively that the unconscionability exception goes beyond
the no honest belief analysis. The underlying thread running through most of
the factors identified above is that the beneficiary of the bond is not entitled to
the damages pursuant to the underlying contract between the parties. In order
to determine this enquiry, the courts would have to assess the underlying dispute
between the parties. If the court is of the view that there is a genuine contractual
dispute between the parties, the court would not restrain the call on the perfor-
mance bond but ask the parties to proceed to arbitration or litigation. However,
if there is strong evidence that the damages are not due, the courts would regard
this as a case of an unconscionable call on the performance bond. Horowitz’s criti-
cism that the Singapore judges and practitioners have forgotten about the fraud
defence is both condescending and wrong. As she rightly notes, in many cases, this
ground is not asserted by counsel. Therefore, it is perplexing for Horowitz to criti-
cise the Singapore courts as having forgotten about the fraud exception. Further,
there is an obvious and practical reason why fraud is not pursued by counsel—the
standard of proof associated with fraud is almost impossible to make out at the
interlocutory stage. This is a frequent refrain from the survey of the practitioners
and it is to this part that we now turn in the next section.

VI. Survey of Construction Law Practitioners

Based in Singapore

Since most of the cases on performance bonds arose from construction disputes,
the present author embarked on a survey of leading building and construction

80 Horowitz (n 35) 163.

70 Tang Hang Wu

lawyers to attempt to get the practitioners’ insight into various problems asso-
ciated with the unconscionability exception. The questions used in the survey
are found in Appendix B. In particular, the survey asks, inter alia, the following
questions:
(i) Are clients concerned about a potential restraint on performance bonds at
the contract formation stage?
(ii) If they are concerned, do clients factor this into the contract price?
(iii) Do clients choose a foreign law to govern the performance bond?
(iv) Do clients seek to exclude unconscionability as a ground for restraint from
the words of the performance bond?
(v) How often do you see calls on performance bonds which are tactical and
abusive?
(vi) Is the law in Singapore clear enough for you to advise your client on
restraining a call on a performance bond?
(vii) What is a ballpark figure as to hearing days and costs for restraining a call
on a performance bond?
(viii) How often do parties appeal a court’s decision to allow or deny a restrain a
call on a performance bond?
(ix) Do parties attempt to settle disputes on a restraint on a call on a perfor-
mance bond? What are the impediments to settlement, if any?
(x) In your personal opinion, is unconscionability as a separate ground for
restraining performance bonds a positive or negative development?
In order to carry out the survey, the author used two leading online legal guides to
practitioners—Chambers and Partners81 and Legal 500.82 Chambers and Partners
listed the following as the leading firms in construction law.

Band 1 Band 2 Band 3

Pinsent Masons MPillay LLP Allen & Gledhill LLP Rajah & Tann Singapore LLP
WongPartnership LLP Clifford Chance Rodyk & Davidson LLP
Hogan Lovells Lee & Lee TSMP Law Corporation

The author emailed the survey questions to a construction partner in the firms
listed above. Some partners were happy to fill out the survey and others who
were busy preferred a short telephone interview. The present author managed
to get survey responses from lawyers from all these firms listed in Chambers and
­Partners. Care was also taken not to speak to multiple lawyers from the same firm
in order to prevent a particular firm’s practice from the skewing the data. The only
exception was one firm on this list where the author spoke to both the construc-
tion partner and also a partner with a commercial arbitration/shipping practice.

81 www.chambersandpartners.com/guide/asia/8/188/1.
82 www.legal500.com/c/singapore/.
 Equity in the Marketplace 71

This was because the latter partner was counsel in a major case on the restraint of a
performance bond in the High Court and Court of Appeal. In order to enlarge on
the sample size, the author also consulted the online version Legal 500 directory.
Unlike Chambers and Partners, Legal 500 does not have a discrete construction
law section but lists the lawyers within a combined category of Real Estate and
Construction. The author went through the list and found three lawyers on the
Legal 500 list with a construction practice focus who were willing to complete the
survey. There was also the fear that both the Chambers and Partners and Legal 500
list of lawyers would be lawyers who advise on big deals and the response would
not accurately reflect the views of the smaller players. To counter this potential
bias in the data, the present author managed to speak to three lawyers in small
law firm practice who identified their practice as mainly in the construction field.
Overall, the author managed to obtain 15 survey responses.
In relation to whether clients are concerned with a restraint on a call of a per-
formance bond at the contract formation stage, the responses were almost evenly
split. Seven of the lawyers surveyed said that their clients were not concerned with
such a risk at the contracting stage. Several lawyers said that their clients were more
concerned at this stage about the details and profitability of the project rather than
worrying about the performance bond. Also, at the contracting stage, parties were
typically very optimistic about the project and did not think that the performance
bond would have to be engaged in the future. Two lawyers gave a qualified answer
to this issue, ie, that some of their clients were now aware of the possibility that
unconscionability as a ground for restraint may be excluded by the contractual
provisions post the decision in CKR Contract Services Pte Ltd v Asplenium Land
Pte Ltd.83 The remaining six lawyers surveyed said their clients were concerned
with the risk of injunctive relief against a call on a performance bond at contract-
ing stage. These responses suggest a high level of sophistication in terms of clients’
awareness of the law in this area. Furthermore, most of the respondents who said
that their clients were concerned about restraints on performance bonds thought
that their clients would have factored this risk into the contract pricing, although
it is difficult to tell precisely how this risk was priced.
The survey responses also showed that there are practical reasons for parties
not choosing a foreign law to govern the performance bond if the construction
project is in Singapore. The main reason seems to be that for such contracts the
entity which issues the performance bond would either be a Singapore bank or
insurer. Singapore banks and insurers have certain regulatory concerns about issu-
ing an English law governed bond. In addition, Singapore banks and insurers were
less comfortable with issuing bonds governed by English law because they would
usually not have English qualified in-house legal counsel on their staff. A very
significant development from the survey results is that lawyers from three law firms
considered the ‘Big Four’ law firms in Singapore indicated that they are ­receiving

83 CKR Contract Services Pte Ltd (n 53).

72 Tang Hang Wu

many enquiries about excluding unconscionability as a ground for restraint

in their contracts after the case of CKR Contract Services Pte Ltd v Asplenium Land
Pte Ltd.84 In fact, one of these lawyers who is the construction head of a Big Four
law firm said that this is done ‘[i]n almost every construction contract that we
assist clients on’. Another construction lawyer in a Big Four law firm said that this
is a trend in 50 per cent of the cases because the clients’ quantity surveyors are now
aware that the law allows parties to contract out of unconscionability. This lawyer
said that he expected an upward trend in the practice of excluding unconscion-
ability in the future. The practice of excluding unconscionability from the terms
of the bond is not confined to local Singapore law firms. At least two partners in
international law firms have reported the same phenomenon of excluding uncon-
scionability in the terms of the performance bond. If this practice spreads across
all the law firms, this could potentially spell the demise of the ground of uncon-
scionability as a separate ground of restraint for performance bonds because par-
ties would have excluded this ground from the terms of the bond.
The responses were mixed in terms of the number of calls on performance
bonds that the lawyers have encountered in their practice which they considered
to be tactical and abusive. Seven of the respondents said that they often see calls
on bonds which are abusive and tactical. In contrast, the remaining eight lawyers
thought that abusive calls on performance were relatively rare. Several lawyers
who said that abusive calls were rare were sanguine and observed that this ques-
tion was very subjective and really depended on the profile of their client. Obvi-
ously, those who were acting for owners/employers thought they were entitled to
call on the bond. With regard to lawyers who said they often see abusive calls, a
respondent wrote:
We see calls that are obviously aimed at putting contractors under financial pres-
sure to compromise and settle claims, or to accept the employer’s demands. There are
P[erformance] Bond calls which seem to be aimed at causing insolvency so that the con-
tractor cannot pursue its claims in Court/Arbitration.
Another common tactic is to inflate the alleged damages suffered or to unjustifi-
ably assert that the contractor had delayed the works. A senior construction lawyer
in a Big Four law firm said:
Calls which are tactical and abusive are calls for amounts which do not reflect the amount
of losses which the Employer has suffered. Usually these losses are inflated as a result of
large amounts of liquidated damages which are, in turn, based on delays for which the
Contractors have not been given adequate extensions of time.
Some lawyers also explained that calls on performance bonds are used in the con-
tractual power play between the parties to obtain leverage against the other side.
One scenario mentioned by three respondents is that the bond may be called by
the employer when the contractor asks for payment pursuant to the adjudication

84 ibid.
 Equity in the Marketplace 73

process enacted under the Security of Payment Act.85 By way of background, the
adjudication process was set up to speed up payment in the building and con-
struction industry. Viewed in this context, the call is usually aimed at retaliating at
the contractor for seeking out the adjudication process. As one respondent from a
small practice observed, sub-contractors are very concerned that if they take out
an application under the adjudication process, their main contractor will call on
their bond.
All the lawyers unanimously said that their clients have asked them to restrain
calls on performance bonds. This is an unsurprising result and suggests that appli-
cations to restrain performance bonds are far more common than the 31 reported
and unreported cases surveyed in the earlier part. What is interesting is that the
lawyers are again divided on the clarity of the law on unconscionability. Eight law-
yers thought that the law was clear enough for them to advise their clients on appli-
cations to restrain performance bonds. However, the remaining seven respondents
disagreed. As a construction partner in an international law firm points out:
What remains for counsel like us is to survey precedent decisions in which restraint
had been ordered for conduct amounting to ‘unconscionability’ and to try to align
our clients’ case accordingly. Even so, results may vary from case to case, and although
these are largely facts-dependent, we also suggest that to a lesser degree, it can also be
tribunal-dependent.
Another construction lawyer gave the following ambivalent answer and referred to
unconscionability as an oxymoronic ‘known unknown’. He said:
Yes and no in that the law is clearly unclear. The courts have deliberately left the test for
unconscionability quite fluid with no pre-determined categories of unconscionability. So
it is a known unknown, except perhaps where the facts are close to those in previously
decided cases of unconscionability.
The responses which said that the law was unclear all pointed out that uncon-
scionability is very fact-sensitive and would depend on the judge hearing the case.
In terms of hearing dates and ballpark figures as to cost, 13 of the 15 lawyers
provided information on this. All 13 lawyers said that a hearing date could be held
within one to two days. The costs estimate involved ranged between $8,000 and
$100,000 depending on the size of the bond and the complexity of the matter.
However, the average costs provided by the lawyers were between $30,000 and
$50,000. With regard to settlement of disputes on calls on performance bond, the
respondents pointed out the parties usually do not regard the performance bond
issue as a discrete dispute. Instead, there are usually multiple disputes between the
parties at the material time. If a settlement was to be reached, it would be a global
settlement with regard to the entire myriad of issues between the parties. Some
lawyers pointed out that the performance bond is often used as a form of leverage
in these negotiations. If the owner/employer has successfully called on the bond,

85 Security of Payment Act (Cap 30B, 2006 Rev Ed).

74 Tang Hang Wu

then the owner/employer is regarded as having the upper hand. However, if the
obligor has successfully restrained a call on the performance bond, then the bar-
gaining position is equalised somewhat.
The responses to the final question as to whether unconscionability is a posi-
tive or negative development saw a majority of the lawyers (10 out of 15) saying
that this was a positive development in the law. Several reasons were proffered in
support of the position that this was a positive development. First, several lawyers
pointed out that the threshold of establishing fraud as a ground of restraint was
almost impossible to achieve in practice. Second, the lawyers supportive of the
unconscionability exception said that this ground deals effectively with abusive
calls on performance bonds. Third, some lawyers pointed out that the uncon-
scionability doctrine evens out (to a certain extent) the unequal bargaining posi-
tion between parties in the building construction contract. Otherwise, contractors
are powerless in the face of an abusive call on a performance bond. In contrast
to the positive responses, two lawyers said that this was a negative development
pointing out that unconscionability is an uncertain concept. The remaining three
lawyers were ambivalent about the unconscionability exception—they said they
understood what the courts were trying to do but raised the uncertainty of the
ambit of the unconscionability exception.
Several tentative conclusions may be drawn from this limited survey of practi-
tioners’ responses. First, from the responses from three of the Big Four law firms,
clients (or their legal advisers) who have the upper hand in terms of the bargain-
ing power were uncomfortable with the inherent uncertainty associated with the
unconscionability exception to calls on performance bonds. These clients are now
actively excluding unconscionability from the terms of the bond. In fact, one of
these Big Four law firms is advising all their clients to exclude unconscionability.
If this trend becomes common place, it is surmised that this will herald the death
of unconscionability as a separate ground of restraint. Second, while some lawyers
complain about the uncertainty which unconscionability entails, others are per-
fectly comfortable with the open-ended nature of the law. This may be explained
by lawyers who may have differing philosophies, ie, those who prefer certainty
to lawyers who are happy to leave the courts with the residual guided discretion
to determine which situations are regarded as unconscionable. Third, some law-
yers report that abusive calls on performance bonds are unfortunately common in
Singapore’s construction industry. Fourth, the hearing days and costs of resolving
performance bond issues are not excessive in Singapore, typically taking one or
two days and costing between S$30,000 and S$50,000. Finally, two-thirds of the
lawyers surveyed thought that was a positive development in the law. There could
be several explanations for this. It could be that all these lawyers saw the policy
reasons for adopting the unconscionability doctrine in relation to performance
bonds and could tolerate a degree of uncertainty inherent in its application in
advising their clients. Next, another potential explanation is local pride in the Sin-
gapore court developing its own jurisprudence. Of course there is the more cyni-
cal explanation that the inherent uncertainty of the concept of unconscionability
 Equity in the Marketplace 75

meant that this would generate more legal work for the practitioners, and hence
they viewed this development of the law as a positive one.

VII. Conclusion

Singapore’s experiment with unconscionability presents an interesting case study

of equity’s jurisprudence operating in the market place. While there have been
high level calls that it is desirable for common law courts to reach similar conclu-
sions in matters pertaining to the commercial law,86 Singapore’s divergence rep-
resents a conscious policy choice in the face of local imperatives, ie, abusive calls
on performance bonds. The aim of this chapter has been to sketch out the devel-
opments in the law since the recognition of the unconscionability exception by
surveying all the case law and leading construction law practitioners’ perspectives
on the operation of the unconscionability exception. As an overarching theme, the
conclusion reached by the present author is that although the concept of uncon-
scionability does entail a degree of uncertainty, it has worked in Singapore in this
context. In terms of the number of reported and unreported cases, the survey of
the cases shows that it is at a low level, ie, an average of two cases per year. Hearing
days on unconscionability do not seem to be protracted (one or two days) and
the costs of hearings were not too astronomical. Furthermore, while some practi-
tioners lamented on the inherent uncertainty associated with unconscionability,
others thought the law was clear enough for them to advise their clients. It is also
telling that 10 out of the 15 practitioners surveyed thought that the unconscion-
ability exception was a positive development. But the survey results also show that
we may be at the beginning stage of the ultimate demise of the unconscionabil-
ity exception. Since the Court of Appeal’s holding that unconscionability may be
excluded from the terms of the bond, the largest law firms in Singapore are seeing
their clients contracting out of unconscionability. If this trend persists, we may
find unconscionability in relation to performance bonds as merely a legal histori-
cal footnote in Singapore’s jurisprudence.

86 See S Menon, ‘Transnational Commercial Law: Realities, Challenges and a Call for Meaningful

Convergence’ [2013] Singapore Journal of Legal Studies 231; FHR European Ventures LLP & Ors v Cedar
Capital Partners LLC [2014] UKSC 45, [2015] AC 250 (HL) [45] (Lord Neuberger).
 Appendix A

76
S/No Date reported Name of case Subject matter Quantum Successful Reasons/interesting features
of suit involved application?
1. 4 March 2015 JK Integrated (Pte Building and $4.7 million  —— No under certification of payment.
Ltd) v 50 Robinson construction —— Owner did not delay the works.
Pte Ltd and another
[2015] SGHC 57
2. 22 April 2015 A1 Design & Build Building and $159,600  —— No delay in the work as the work
Pte Ltd v Neo construction was certified by the architect.

Tang Hang Wu
Choon Seng [2015] —— Alleged delay was contributed by
SGDC 86 the beneficiary of the bond.
—— There’s evidence that the owner
confirmed that there is no defect.
3. 16 Jan 2014 CAA Technologies Building and $534,080  —— This was an advance payment
Pte Ltd v BHCC construction bond.
Construction Pte —— Genuine dispute as between
Ltd and ABN Amro the parties on performance and
Bank NV [2014] amount due.
SGDC 25
4. 27 Feb 2014 Builders Designers Building and $199,900  —— Allegation that progressive
Engineers (Bde) construction payment was not paid rejected:
Pte Ltd v Sin Chew payment not endorsed by the
Woodpaq Pte Ltd professional engineer.
[2014] SGDC 78 —— Evidence by quantity surveyor
that the owner had overpaid the
contractor.
5. 16 April 2014 CCM Industrial Pte Building and $4,728,250  —— Evidence of delay in the works.
Ltd v 70 Shenton construction
Pte Ltd and another
[2014] SGHC 75
6. 31 March 2014 Tech-System Design Building and $988,888  —— Architect has not certified an
& Contract (S) construction extension of time: owner prima
Pte Ltd v WYWY facie entitled to claim liquidated
Investments Pte Ltd damages.
[2014] SGHC 57
7. 24 April 2013 Ryobi-Kiso (S) Building and $1.88 m  —— There was clear evidence of

Equity in the Marketplace

Pte Ltd v Lum construction breaches of contract.
Chang Building —— Plaintiff was in delay of the
Contractors Pte Ltd contract.
and another [2013] —— Genuine construction disputes
SGHC 86 between the parties.
8. 1 July 2013 York International Supply, deliver, Not stated: 10%  (on the —— Bond was interpreted to be
Pte Ltd v Voltas test and of the purchase grounds conditional.
Limited [2013] 3 commission price that this is a —— Ambiguity should be construed
SLR 1142 chillers conditional against the beneficiary.
bond) —— Deliberate omission of the word
‘unconditional’.
—— Beneficiary did not assert damage
due to breach of contract.
(continuted)

77
 78
S/No Date reported Name of case Subject matter Quantum Successful Reasons/interesting features
of suit involved application?
9. 5 August 2013 Scada Solutions Pte Building and $188,000 (restrained —— Call on performance bond based
Ltd v Anderco Pte construction for on an arbitrary figure of alleged
Ltd [2013] SGDC $156,616.08) damages.
237 —— Set off not quantified with details
and particulars as required by the
set off provisions in the contract.
—— No delay certificate or certificate
of practical completion relied
in quantifying the liquidated
damages.

Tang Hang Wu
—— The Defendant had written to the
Plaintiff prior to the call on the
performance bond saying that
the Plaintiff owes the Defendant
$47,583.92.
10. 18 April 2012 Master Marine AS International Five instalments:  —— Doctrine of strict compliance
v Labroy Offshore shipbuilding not stated in the applied.
Ltd and others contract: offshore report
[2012] 3 SLR 125 elevating rig
11. 9 May 2012 BS Mount Sophia Building and $484,440  —— There was evidence that the
Pte Ltd v Join-Aim construction completion date had been pushed
Pte Ltd [2012] 3 back.
SLR 352 —— There was evidence that the
beneficiary of the bond did not
genuinely believe that the Plaintiff
was responsible for the delay.
12. 6 January 2010 Shanghai Electric Building and $10.8 m  —— Bond governed by English law.
Group Co Ltd construction —— Genuine disputes of contract.
v PT Merak Energi —— The bond was given to secure
Indonesia and advanced payment.
another [2010] 2
SLR 329
13. 27 January Polink Engineering Building and $123,800  —— The Defendant had interfered with
2010 Pte Ltd v Chen construction the previous architect.
Hwei Lai & Ors —— Changed an architect and found a
[2010] SGDC 36 ‘compliant’ architect who certified

Equity in the Marketplace

on the calling of the performance
bond.
14. 3 December JBE Properties Pte Building and $1,151,500  —— The terms of the performance
2010 Ltd v Gammon Pte construction bond mentioned unconscionability
Ltd [2011] 4 SLR as reason for non-payment.
47 —— Quotation for rectification works
obtained by the owners was grossly
inflated.
—— Owner never gave the contractor
a chance to rectify the alleged
defects.
—— Cost of alleged rectification works
is less than amount owed.
(continuted)

79
 80
S/No Date reported Name of case Subject matter Quantum Successful Reasons/interesting features
of suit involved application?
15. 26 August Astrata (Singapore) Building and $490,000  —— Strong prima facie case of
2010 Pte Ltd v Tridex construction unconscionability not made out.
Technologies Pte —— Genuine disputes of contracts
Ltd and another which should be referred to
and other matters arbitration.
[2011] 1 SLR 449
16. 12 January Leighton Building and $956,395  —— Genuine disputes of contract.
2009 Contractors construction
(Singapore) Pte Ltd
v J-Power Systems

Tang Hang Wu
Corp and Another
[2009] SGHC 7
17. 12 September Econ Piling Pte Ltd Building and $173,400  —— Claim was already time barred.
2006 v Aviva General construction
Insurance Pte Ltd
and another [2006]
4 SLR(R) 501
18. 4 November Scan-Bilt Pte Ltd Building and $125,000  —— Clause in Performance
2004 v Umar Abdul construction Bond specifically excluded
Hamid [2004] unconscionability as a ground to
SGDC 274 restrain payment.
19. 26 June 2003 Newtech Building and $200,000  —— Defendant had 37 legal actions
Engineering construction $43,150 against it.
Construction —— Discrepancy in the final statement
Pte Ltd v BKB of account: the damages claimed
Engineering had ballooned in five months.
Constructions Pte
Ltd and others
[2003] 4 SLR(R) 73
20. 15 January McConnell Dowell Building and $125 m  —— Bank guarantee was provided to be
2002 Constructors (Aust) construction called if the proposed funder failed

Equity in the Marketplace

Pty Ltd v Sembcorp to procure financing.
Engineers and —— It was clear that the proposed
Constructors Pte Ltd funder had failed to procure
(formerly known financing.
as SembCorp
Construction Pte
Ltd) [2002] 1
SLR(R) 60
21. 17 July 2002 Seng Hock Heng Building and $1,295,000  —— ‘The evidence before me is
Contractor Pte Ltd construction inconclusive and difficult to
v Hup Seng Bee evaluate although, if pressed, my
Construction Pte sympathy inclines towards the
Ltd and another plaintiff ’.
[2002] 2 SLR(R)
486
(continuted)

81
 82
S/No Date reported Name of case Subject matter Quantum Successful Reasons/interesting features
of suit involved application?
22. 31 October Hiap Tian Soon Building and $1,009,000  (only —— Contract sum had been reduced
2002 Construction Pte construction entitled to from $10 m to $7.9 m.
Ltd and another call for
v Hola Development $ 790,000
Pte Ltd and another
[2003] 1 SLR(R)
667
23. 25 November Anwar Siraj and Building and $120,000  —— Owner was an extremely difficult
2002 another v Teo construction person.
Hee Lai Building —— Owner interfered with architect.

Tang Hang Wu
Construction —— Owner denied Plaintiff the
Pte Ltd [2003] 1 opportunity to remedy the work.
SLR(R) 394 —— Not sufficient to be regarded as
unconscionable.
24. 20 June 2001 Marinteknik Shipbuilding €666,000  —— Genuine disputes as to the defects.
Shipbuilders (S) Pte
Ltd v SNC Passion
[2001] SGHC 140
25. 8 October Prolian M&E Building and $74,000  —— The Defendant’s main contract
2001 Services Pte Ltd construction had been terminated.
v Loh Lin Kett —— No performance due from the
[2001] SGDC 322 Plaintiff.
—— There was no basis for the
Defendant to call on the
performance bond.
26. 10 October Global Facade Building and $93,000  —— Project was certified by the
2001 (S) Pte Ltd v Eng construction architect as completed.
Lim Construction —— Call was two years after completion.
Company Private —— Defendant has not filed any legal
Limited [2001] proceedings to pursue its alleged
SGDC 325 claims.
27. 20 October WW Welding & Building and $218,500  —— Plaintiff claimed that Defendant
2001 Construction Pte construction owed it money.
Ltd v Multiplex —— Defendant claimed that Plaintiff
Construction Pty owed it money.

Equity in the Marketplace

Ltd [2001] SGDC —— Burden of proof of strong prima
332 facie case of unconscionability not
discharged.
28. 8 November Liang Huat Building and $538,000  —— Not possible to determine at
2001 Aluminium construction interlocutory stage whether
Industries Pte Defendant’s claims against Plaintiff
Ltd v Hi-Tek are justifiable.
Construction Pte
Ltd [2001] SGHC
334
(continuted)

83
 84
S/No Date reported Name of case Subject matter Quantum Successful Reasons/interesting features
of suit involved application?
29. 5 Dec 2001 Samwoh Asphalt Building and $500,000  —— Ulterior motive for calling on the
Premix Pte Ltd construction bond.
v Sum Cheong —— The Defendant wanted the
Piling Private Plaintiff to take over the main
Limited and contract when they were only the
Another [2002] 1 nominated sub-contractor.
SLR 1 —— The call on the performance
bond was a bargaining chip in the
negotiations.


Tang Hang Wu
30. 17 January Dauphin Offshore Building of a $877,500 —— No unconscionability because
2000 Engineering & yacht there were genuine disputes.
Trading Pte Ltd —— Some hesitation because Plaintiff
v The Private Office has done substantial work but has
of HRH Sheikh not been paid.
Sultan bin Khalifa
bin Zayed Al
Nahyan [2000] 1
SLR(R) 117
31. 18 September Eltraco Building and $2,438,800 (partial —— Damages not to the extent of the
2000 International construction restraint— full bond value.
Pte Ltd v CGH only entitled —— Contrasted with the English case
Development to call on of Cargill.
Pte Ltd [2000] 3 $600,000)
SLR(R) 198
 Equity in the Marketplace 85

Appendix B

Personal Information

1. Please state your number of years with Post Qualification Experience.

2. Please elaborate on your practice (eg, do you work in a local or international
law firm, size of firm, area of practice).
3. Please elaborate on the profile of your clients (eg, owners, main contractors,
sub-contractors, paid up capital etc).

Formation of Contract Stage

4. Are clients concerned about a potential restraint on performance bonds at

the contract formation stage?
5. If clients are concerned about a potential restraint on performance at the
contract formation stage:
a) Who is the person (eg, legal counsel, quantity surveyor, engineer etc)
typically concerned about this?
b) Do clients factor this into the contract price?
c) Do clients choose a foreign law to govern the performance bond?
d) Do they seek to exclude unconscionability as a ground for restraint from
the words of the performance bond?
6. If the answer to question 4 is no, please elaborate why your clients are not
concerned.

Calls and Restraint on Performance Bonds

7. How often do you see calls on performance bonds which are tactical and
abusive? Please elaborate on your answer as to what you consider to be tacti-
cal and abusive calls.
8. Do your clients often ask you to consider a restraint on a call on performance
bond?
9. Is the law in Singapore clear enough for you to advise your client on restrain-
ing a call on a performance bond?
10. Please give a ballpark figure as to hearing days and costs for restraining a call
on a performance bond?
11. How often do parties appeal a court’s decision to allow or deny a restrain a call
on a performance bond? Do they appeal all the way to the Court of Appeal?
Can you give a ballpark figure on the costs and hearing days involved?
86 Tang Hang Wu

12. Do parties attempt to settle disputes on a restraint on a call on a performance

bond? What are the impediments to settlement, if any?
13. In your personal opinion, is unconscionability as a separate ground for
restraining performance bonds a positive or negative development? Please
elaborate on your answer.
 4
Certainty, Identification and
Intention in Personal Property Law

MICHAEL BRIDGE

I. Introduction

A key indicator of a property right is whether that right is exigible against a thing.
If there is no identified thing against which a right may be exacted, whether that
thing is a tangible ship or an intangible balance in a bank account, it therefore
follows that the claim of a property right fails in limine. As Lord Blackburn once
remarked: ‘The [rule] that the parties must be agreed as to the specific goods on
which the contract is to attach before there can be a bargain and sale, is one that is
founded on the very nature of things’.1
This exigibility requirement may therefore be regarded as demanding a suf-
ficient degree of certainty in the subject matter of any grant or encumbrance or
other proprietary disposition before the law will recognise a proprietary interest in
it arising out of that disposition. We may be considering the creation of a benefi-
cial interest by way of trust, or the assignment of a thing in action, or the passing
of property in goods under a contract of sale, or the taking of security in the assets
of a company or individual. Whatever the transaction, and whether we are acting
at law or in equity, the certainty requirement embedded in ‘the nature of things’
imposes itself.
Two fundamental questions present themselves in property enquiries. First,
what is it about a right that makes it a property right? Second, when can it be said
that a property right comes into existence? The concern of this chapter is with the
second of these questions, though it cannot be said that there is a completely clean
separation between the two. In answering this second question, it is not merely a

1 C Blackburn, A Treatise on the Effect of the Contract of Sale (London, William Benning & Co, 1845)

122, a passage approved by the Privy Council in Re Goldcorp Exchange Ltd [1995] 1 AC 74, 90. In his
capacity as Blackburn J and later Lord Blackburn, the author’s views on the matter appear distinctly
more favourable to the claimant of a part interest in an identified bulk: see Martineau v Kitching (1872)
LR 7 QB 436 and Inglis v Stock (1885) 10 App Cas 263. This may not have been fully appreciated in
Re Goldcorp, 93, discussed below.
88 Michael Bridge

matter of observable fact whether the requirement of certainty permits a property

right to be created. There is also the matter of intention, more importantly the
grantor’s or disponor’s intention, to consider, together with any statutory impera-
tive or even an estoppel. In distinguishing certainty and intention, it is impor-
tant to determine whether a supposed requirement is essential in establishing the
requisite degree of certainty, or is of a lesser intensity in supplying evidence of
an intention to create a type of property right. The distinction here made is a
vital one. One reason why this is important is that it is not always straightforward
whether a claim for property rights fails because of the lack of an identified source
of property rights. To anticipate the case of Re Goldcorp Exchange Ltd,2 discussed
below, did the unallocated claimants fail because there was no bulk from which
their claimed share could be extracted, or because such goods of the type claimed
and held by the exchange were never intended by the exchange to be the subject
matter of property rights held by those claimants?
In taking further the ‘when’ question, I shall examine the various consensual
dispositions mentioned above3 with a view, in part, to seeing whether and for what
reason the certainty requirement, even the intention requirement too, is compro-
mised. Before doing so, however, I shall consider the extent to which property that
does not yet exist is by anticipation treated for certain purposes as having a present
existence.

II. Future Property

It is a truism to say that future property has no present existence, so that unless
and until it comes into existence no proprietary right over it can be created,4 irre-
spective of any disponor’s intention to that effect. ‘[A] mere expectancy or pos-
sibility of becoming entitled in the future to a proprietary right is not an existing
chose in action.’5 Consequently, the object of a discretionary trust or of a power

2 Re Goldcorp Exchange Ltd [1995] 1 AC 74.

3 Hence, I shall not be dealing with constructive trusts.
4 Belding v Read (1865) 3 H&C 955, 961, 159 ER 812 (Pollock CB): ‘there cannot be a prophetic

conveyance’; Re Count D’Epineul (No 2) (1882) 20 Ch D 758; Re Clarke (1887) 36 Ch D 348 (CA); Glegg
v Bromley [1912] 3 KB 474 (CA); Raiffeisen Zentralbank Ősterreich AG v Five Star General Trading LLC
[2001] EWCA Civ 68, [2001] QB 825 [60], [80]; Mac-Jordan Construction Ltd v Brookmount Erostin
Ltd [1992] BCLC 350.
5 Norman v Federal Commissioner of Taxation (1965) 109 CLR 9 (Windeyer J). As to what consti-

tutes an expectancy as opposed to a vested right where a power of appointment exists, see Re Brooks’
Settlement Trusts [1939] Ch 993, holding that no such right existed if the power could be exercised so
as to remove the beneficiary’s entitlement. Similarly, see Campbell Connelly & Co Ltd v Noble [1963]
1 WLR 252, 261, holding that an assignment of renewal copyright, conditional upon the assignor sur-
viving 28 years from the date of the assignment, a matter that he could not control, amounted to an
assignment of future property and thus a contract to assign.
 Certainty, Identification and Intention 89

of appointment has nothing to assign.6 And yet the matter is not quite so simple,
in that the law in some circumstances recognises a transaction concerning future
property as having a type of proprietary effect even before the property comes into
existence. Suppose, for example, that a disponor creates two competing assign-
ments over future debts. Under the rule in Dearle v Hall,7 priority between them
will be accorded to the first assignment of which notice is given, even if this assign-
ment is the second in time, except that a second assignment cannot be promoted
in this way if the assignee was aware at the time of the assignment of the exist-
ence of the earlier assignment.8 Even though these two assignments may not have
attached to any extant property at the time they were created, the priority between
them will in this example be partly dependent upon events that have occurred
before the property came into existence. There is no question of a type of dead
heat between them, occurring as and when the two assignments bite simultane-
ously on the property at the moment it comes into existence.
The rule regarding competing assignments applies also in the case where one
of them is an assignment by way of charge, more particularly a fixed charge. An
assignment by way of charge has a suspensive character in that it is completed
only when the chargee takes steps to enforce the charge.9 Despite this, the charge
is treated as concluded for the purpose of establishing priority between the two
under the priority rule in Dearle v Hall.10
Another case of what might be called fictitious proprietary effect concerns the
assignment by way of charge of future property that is required to be registered
as a present charge under the Companies Act if it is to prevail against liquida-
tors, administrators and other secured creditors of the chargor.11 Registration
must be effected by filing the requisite documents within 21 days of the creation
of the charge. A difficult distinction has to be taken between contingent charges
and present charges over future property, with the 21-day period tolling from the
grant of the charge only in the latter case. Hence, a purported charge over moneys
received by an assured under an indemnity insurance policy is not treated as a
present charge at the time of its creation: the claim under the policy may never
have to be made.12 On the other hand, a charge over hire purchase debts falling
due under hire purchase agreements yet to be made will be treated as a present

6 Schmidt v Rosewood Trust Co [2003] UKPC 26, [2003] 2 AC 709 [40]; Gartside v Inland Revenue

Commissioners [1968] AC 553 (HL) 607: ‘[A] right to require trustees to consider whether they will pay
you something does not enable you to claim anything’.
7 Dearle v Hall (1828) 3 Russ 1.
8 Ward v Duncombe [1893] AC 369.
9 M Bridge, L Gullifer, G McMeel and S Worthington, The Law of Personal Property (London, Sweet

& Maxwell, 2013) paras 27-011–27-012.

10 Colonial General Mutual Insurance Co Ltd v ANZ Banking Group (New Zealand) Ltd [1995]

1 WLR 1140.
11 Companies Act 2006, ss 859A et seq (UK); Companies Act, ss 131 et seq (Singapore).
12 Paul & Frank Ltd v Discount Bank (Overseas) Ltd [1967] Ch 348.
90 Michael Bridge

charge for the purposes of the legislation,13 even though it is possible, though
perhaps unlikely, that those agreements will not be concluded. The hire purchase
debts are predictable and striven for in the chargor’s ordinary course of business;
a policy of indemnity insurance gives financial protection against an event that is
not sought. Once the registration requirement does apply in a given case, however,
this does not amount to an overt recognition that the charge has a proprietary
effect in respect of future property at the time it is granted. This is because any
failure to register has the negative effect of preventing the chargee at a later date
from asserting its rights under the charge and as granted by the charge. A different
view would have to be taken if our law were to go down the path of Article 9 and
similar Commonwealth legislation, where registration (or filing) serves a positive
purpose in that priority derives from the fact of registration rather than from the
instrument of charge itself.
A further case of fictitious proprietary effect concerns the so-called lightweight
floating charge which made an appearance in Re Croftbell Ltd.14 A company was
contesting the right of a debenture holder to appoint an administrative receiver
which the legislation in force at the time permitted if the debenture holder’s secu-
rity, over the whole or substantially the whole of the company’s assets, contained
at least one floating charge. The company was part of a corporate group. It was a
non-trading company and engaged only in intra-group dealings. Its sole asset was
the entire shareholding in another company in the same group; that company in
turn owned only one asset (a valuable site). The company granted the debenture
holder a floating charge covering the whole of its undertaking in the usual way,
as well as a pledge of the shares.15 Although it was plain that the floating charge
captured nothing after the pledge was taken into consideration, the debenture
holder’s claim that it had the power to appoint an administrative receiver,16 so as
to block the appointment by the court of an administrator, prevailed. In address-
ing the argument that the pledge was but a device to lock out a court-appointed
administrator, the court declined to consider the pledgee’s motive. It was also
unimpressed by the fact that at the time of its execution the floating charge was an
empty vessel—noting that this is commonly the case where a charge finances the
commencement of a business—and, in response to the argument that the com-
pany never intended to acquire assets that might be captured by the charge, simply
observed that the company’s intentions might change. The case leaves us therefore
with a floating charge that could not be said ‘to have no operation at all’.

13 Independent Automatic Sales Ltd v Knowles & Foster [1962] 1 WLR 974.
14 Re Croftbell Ltd [1990] BCC 781.
15 The company also granted a second-ranking fixed charge over the shares to another creditor.
16 Further to the Insolvency Act 1986, s 29(2), which applies where a floating charge, or a float-

ing charge in combination with another security, captures the whole or substantially the whole of a
­company’s property.
 Certainty, Identification and Intention 91

Another case of a charge being given by anticipation a proprietary effect in

respect of property that has not yet come into existence is Foamcrete (UK) Ltd
v Thrust Engineering Ltd,17 where a clause in a joint venture agreement provided
that rights and obligations under the agreement between FTE and Thrust could
not be assigned without the other party’s written approval. Two years previously,
FTE had granted to its bank a debenture containing a floating charge over its
undertaking present and future. An assignee of the bank’s rights made a claim
against Thrust for non-payment of certain moneys owed to FTE, which Thrust
resisted on the basis of the non-assignment clause. One of the grounds on which
the assignee’s claim was upheld was that the bank’s rights derived not from the
prohibited assignment but from the antecedent floating charge. The floating
charge gave the bank an immediate beneficial interest in all the property of the
chargor, present and future, including the future debt. Yet it is plainly a fiction to
say that the bank has a present interest in moneys not yet due under a contract
not yet concluded. Since the non-assignment clause spoke in future terms about
what the parties might not do, the same conclusion might have been reached by
construing in restrictive terms the non-assignment clause.18
It has been said in other circumstances that a charge has a proprietary character
even before the property in question comes into existence. The purported charge
will be recharacterised as a promise to grant a charge, binding if consideration
has been given for the promise. In Re Lind,19 the debtor, next of kin to his mother,
mortgaged his future inheritance from her on two occasions in favour of separate
creditors in return for advances. Between the grant of the mortgages and the death
of his mother he was adjudicated bankrupt and then discharged. Neither creditor
put in a proof in his bankruptcy. Lind’s argument now was that the discharge freed
him from the mortgage debts, but it was held instead that the mortgages were not
merely a matter of contract during Lind’s bankruptcy. Rather, they survived the
discharge and captured the share of his mother’s estate when he inherited it. They
did so even though they were bereft of content up to that point in time. Although
Phillimore LJ observed that ‘[a]ssignments of property not then in existence pass,
as such, nothing’, he went on to say that the mortgagees’ entitlement was more
than a matter of specific performance in that, prior to the inheritance falling in,
the mortgagees had ‘something more than a mere right in contract, something in
the nature of an estate or interest’.20 The trial judge had stated that the charges had

17 Foamcrete (UK) Ltd v Thrust Engineering Ltd [2000] EWCA Civ 351, [2002] BCC 221.
18 ibid [8]: ‘Provided that neither of the parties to this agreement shall be entitled to assign this
agreement or any of its rights and obligations under this agreement’ (emphasis added).
19 Re Lind [1915] 2 Ch 345.
20 Ibid 363. Bankes LJ ascribes to the mortgagees an extant security that became enforceable

when the property came into existence (ibid 373–74) and Swinfen Eady LJ refers to the mortgage
security remaining in force and becoming effective when the expectancy vested (ibid 357). See also
Performing Right Society v B4U Network (Europe) Ltd [2013] EWCA Civ 1236, [2014] Bus LR 207 [26];
PK Airfinance SARL v Alpstream AG [2015] EWCA Civ 1318, [2016] 2 P&CR 2 [138]–[141]; cf Collyer
v Isaacs (1881) 19 Ch D 342.
92 Michael Bridge

‘a prospective interest in the distributive share in question’.21 The appeal of this

quasi-proprietary feature of mortgages and charges over future assets, no doubt,
owes much to the smooth way in which equity allows future assets to be captured
by a charge as soon as they come into existence. In Maitland’s words:
And so lawyers easily slipped into the way of saying that in equity one could make an
assignment of goods hereafter to be acquired though one could not do so at law. This
was a compendious way of putting the matter and was not likely to deceive any equity
lawyer.22
There is no need for a separate transfer as each one becomes extant for that would
have spelt the death of future assets financing. Instead, using the doctrine of spe-
cific performance in an instrumental, rather than discretionary, way, equity deems
the asset to be captured automatically by the charge. Value having previously been
given by the creditor, no more needs to be done to fill out the charge.23 In equity,
a promise to give a charge is as good as a charge provided consideration is given
for it,24 so that in a plausible sense the charge is anticipated from the moment
of the binding promise. Binding promises, automatically enforced, collapse the
future into the present.25
It is not always clear whether property is extant or future in character.26 A debt
payable in the future is a present right,27 even if it is subject to possible deductions
that have yet to be calculated.28 Share dividends yet to be declared are not present
property—the directors have a discretion in the matter, not curtailed by company
policy in declaring dividends in the past—and interest on a loan payable in the
future is also future property in those cases where the debtor may have the right to
accelerate payment and thus foreclose the accrual of interest.29 It is arguable, nev-
ertheless, that the right to a dividend could not be said to have vested but that the
right to interest was in existence though liable to be divested.30 Finally, any difficul-
ties we might still have in respect of charges over future property can be d ­ isposed

21 Re Lind [1915] 1 Ch 744, 758.

22 FW Maitland (eds AH Chaytor and WJ Whittaker) Equity (Cambridge, CUP, 1910) 153.
23 Tailby v Official Receiver (1888) 13 App Cas 523; Re Clarke (n 4) 352: ‘In the present case the con-

tract is not wholly executory. The mortgagee has performed his part of it by advancing his money on
the faith of it, and the principle that damages are a sufficient remedy does not apply’. See also Holroyd
v Marshall (1862) 10 HLC 191; Palette’s Shoes Pty Ltd v Krohn (1937) 58 CLR 1, 26–27 (Dixon J);
­Norman (n 5) (Windeyer J).
24 See Re Ellenborough [1903] 1 Ch 697.
25 In a similar way, it has been said that there can be a statutory assignment under the Law of

Property Act 1925 s 136 when written notice of the assignment is given, even though the notice refers
to debts not yet due and can therefore only be notice of a contract to assign: see Jones v Humphreys
[1910] 1 KB 10, 13: ‘I think there is no doubt that an absolute assignment of future debts may be a good
assignment for the purposes of the section’; Cottage Club Estates Ltd v Woodside Estates (Amersham)
Ltd [1928] 2 KB 463, 467.
26 See also n 5.
27 And is treated as such for the purpose of legal set-off.
28 G&T Earle (1926) Ltd v Hemsworth Rural District Council (1928) 44 TLR 758.
29 Norman (n 5).
30 There was a bare majority in the court in Norman (n 5) on the interest point.
 Certainty, Identification and Intention 93

of, almost by sleight of hand, by taking a different view of what constitutes the
subject matter of a disposition. It is one thing to assign future royalty payments;
it is another to assign a share of a present right to receive royalty payments in the
future. The former is future property; the latter is existing property. The right to
receive royalties is the tree and the royalty payments themselves, dependent upon
the contingent extent to which a licence to exploit an invention might be taken up,
the fruits of that tree.31

III. Portions and Quantities: Legal Interests

A correct identification of what constitutes the subject matter of a disposition

has proven also to be important when it comes to sale of goods transactions and
declarations of trust, though in different ways.32 In the case of sale of goods, the
fundamental rule for the passing of property is that the joint intention of the par-
ties is the paramount consideration.33 This intention is presumptively found for
unascertained goods when goods are unconditionally appropriated to the con-
tract by one party (usually the seller) with the assent of the other.34 Sale and trust
diverge here in that a seller’s manifest intention or even promise to pass the prop-
erty, unilaterally evidenced or expressed, does not have proprietary effect, whereas
a unilateral declaration of trust does. The governing rule of intention in sale of
goods law cannot however prevail if the goods that are the subject matter of the
sale have never been ascertained.35 Until the reforms of the mid-1990s,36 this rule
captured all unascertained goods, whether they were generic goods of no stated
source or provenance, or stipulated but unseparated quantities of goods contained
in a larger, identified bulk. The property, therefore, in six bottles to be drawn from
a specified case could not pass before the particular six bottles had been ascer-
tained in the sense of being identified, typically by a physical act that amounted to
earmarking (labelling or setting aside) the six bottles.37 No intention on the part

31 Shepherd v Federal Commissioner of Taxation (1965) 113 CLR 385.

32 Nevertheless, a case failing as a declaration of trust may equally be cited as concerning goods that
were never ascertained for the purpose of the passing property: Re London Wine Co Ltd [1986] PCC
121.
33 Sale of Goods Act 1979, s 17 (Sale of Goods Act).
34 ibid s 18, Rule 5.
35 ibid s 16.
36 Inserting Sale of Goods Act ss 20A-B and introducing and amending definitions in s 61(1).
37 In a case involving the sale of metals stored in warehouses, lot numbers in warehouse receipts

were held to be insufficient to amount to a system of identification that constituted ascertainment of

the goods: RBG Resources Plc v Banque Cantonale Vaudoise [2004] 3 SLR(R) 421. It was not enough,
moreover, that the warehouse manager had indicated to the buyer the places in the warehouse where
the metals were stored given that the manager was aware that the seller did not have sufficient metals
to carry out all of its transactions. There is some evidence that the warehouse manager was acting in
collusion with the seller and without authority from the warehouse.
94 Michael Bridge

of seller and buyer to contrary effect could allow for the passing of property in
unascertained goods, which is why legislation was required to alter the position,
though such legislation went on to say that it was subject to any contrary agree-
ment between buyer and seller.38
Although the sale of a share of goods has been characterised as the sale of intan-
gible property,39 it was never entirely clear prior to the 1990s reforms that a sale of
a share of goods fell outside the Sale of Goods Act. Indeed, the Act made provision
for sales between one part owner and another.40 Whether a contract for the sale of
a share was otherwise in or outside the Act prior to the reforms, the ascertainment
bar to the passing of property seems not to have prevented the property in that
share from passing once the goods had been identified to the contract. The posi-
tion is clearer now because the Act has been amended to include in the definition
of goods ‘an undivided share in goods’.41 Moreover, specific goods are now defined
so as to include ‘an undivided share, specified as a fraction or percentage, of goods
identified and agreed upon’.42 This means that the ascertainment bar to the pass-
ing of property cannot apply to the sale of a share of specific goods, because that
bar applies only where the contract is for the sale of unascertained goods. Oddly,
however, the Act in its present form may have imposed a permanent bar to the
passing of property where the contract is for a share in future goods, for example,
a ship yet to be built,43 if something that has no physical existence at the contract
date cannot be described as goods ‘identified and agreed on at the time [the] con-
tract of sale is made’: a contract for the sale of the first 20 widgets to come off a
manufacturing seller’s production line next Monday may for this reason not be a
contract for specific goods. The contract for the sale of a share in a future ship is
now clearly a sale of goods contract and so may be subject to the bar on the passing
of property in unascertained goods. This surely is not what Parliament intended.
As for a contract for the sale of a specified quantity of goods, there have
occurred in the past numerous failed attempts to overcome the rule that the prop-
erty in unascertained goods was incapable of passing, even where the source of
such goods could be identified with a degree of precision. One such failed attempt
concerned rights arising by way of tenancy in common. As a general proposition,
it seems correct to say that outside legislative intervention to which we shall soon
turn, tenancy in common has proved less effective in the creation of property

38 But the legislation, in providing for contrary intention, is concerned with a disapplying inten-

tion, and not with an intention to give a proprietary right in a bulk where the terms of the legislation
themselves do not capture the case (eg, where the buyer has not paid).
39 Re Sugar Properties (Derisley Wood) Ltd [1988] BCLC 146.
40 Sale of Goods Act, s 2(2).
41 ibid s 61(1).
42 ibid.
43 This is because a contract of this type can no longer be claimed to fall outside the Sale of Goods

Act and because the provisions enacted for the passing of a part interest in a specified bulk of unascer-
tained goods apply only if the contract is for a specified quantity of goods.
 Certainty, Identification and Intention 95

rights44 than it has when it comes to the survival of pre-existing property rights.45
As a result of statutory reforms dating from the mid-1990s, the position now is
that, provided such goods are to come from an ‘identified bulk’, the contract is in
effect recharacterised as a contract for the sale of a share (or part interest) in that
bulk. The buyer acquires, commensurately with any payment made for the goods,
an interest in common (as opposed to a joint interest) with other parties.46 The
starting point is that the normal rules concerning tenancy in common at com-
mon law should apply,47 but this is subject to the following two qualifications.
The first concerns a measure of doubt about whether and to what extent those
rules are modified for a seller who retains an interest in the bulk. The question
here is whether, in cases where the bulk shrinks, that seller’s interest should abate
first before the same process begins to affect the buyers.48 For reasons largely to
do with risk, falling outside the scope of that paper, the normal rule of rateable
abatement between co-owners should apply.49 The second qualification concerns
an extraordinary provision, for which no justification apart from a yearning for
legal simplicity has ever been advanced, that would allow a co-owner to recover his
contractual share in full from a bailee, without sanction, even though this exceeds
his shrunken proprietary share.50
Just as exigibility demands that property must be identified as the source of
a property right, so the Sale of Goods Act as amended requires that the bulk be
identified. The Act defines a bulk as ‘a mass or collection of goods of the same
kind … contained in a defined space or area’ and requires also that the bulk con-
sist of fungible goods, so that ‘any goods in the bulk are interchangeable with any
other good therein of the same number or quantity’. That bulk, moreover, must be

44 eg Laurie and Morewood v Dudin and Sons [1926] 1 KB 223.

45 Re Stapylton Fletcher Ltd [1994] 1 WLR 1181 and mixture cases such as Spence v Union Marine
Insurance Co Ltd (1868) LR 3 CP 427. A particularly interesting case is Mercer v Craven Grain Storage
Ltd [1994] CLC 28, an interlocutory appeal in the House of Lords. On what looked like the physical
equivalent of a ‘repo’ transaction, the deposit of grain in bulk, where one possible outcome was that an
equivalent quantity would be redelivered to the depositor, was held to give rise to a tenancy in common
right of the depositor in that bulk.
46 Sale of Goods Act, s 20A.
47 One difference between a share in a bulk of say, grain, and a share in a ship or a racehorse is that

the former may be partitioned, with each co-owner extracting his share, whereas the latter cannot be
broken up in this way.
48 Sale of Goods Act, s 20A(4): ‘Where the aggregate of the undivided shares of buyers in a bulk …

would at any time exceed the whole of the bulk at that time, the undivided share in the bulk of each
buyer shall be reduced proportionately so that the aggregate of the undivided shares is equal to the
whole bulk’.
49 Another reading of s 20A(4), which jars with established rules of transfer of risk, would have

the seller’s interest abate first, on the ground that abatement of buyers’ interest only begins once their
combined proprietary shares amount to less than the bulk. But the seller may also be a buyer from a
seller further up the chain, which complicates matters. Furthermore, if s 20A(4) is supposed to have the
seller’s interest abate first, it is not clear in its purport: legislation should have to pass a high standard of
clarity if it is to be given expropriatory effect. See further M Bridge, The Sale of Goods, 3rd edn (Oxford,
OUP, 2014) para 3.56.
50 Sale of Goods Act, s 20B.
96 Michael Bridge

‘identified either in the contract or by subsequent agreement between the parties’.

The only reported case on an identified bulk under this legislation is the Singapore
case of RBG Resources Plc v Banque Cantonale Vaudoise,51 where a representative
of the buyer visited the offices of the Singapore warehouse company that the seller
had named as the warehouse keeper. Bearing warehouse receipts (for delivery ‘In
warehouse Singapore’) for the metals that were the subject of the sale contract,
he was then directed to the particular warehouse in Singapore said to contain the
metals. The manager of the third-party warehouse indicated to the representa-
tive the places in the warehouse where these metals were being stored. There was
an overt issue in the case that concerned the honesty of the manager, and a less
clear issue about whether the manager had the authority to make statements that
bound his employer or even the seller, apart from which the court’s conclusion
that the bulk had not been identified by agreement seems doubtful. The court
was on surer ground when it concluded that an identified bulk could not simply
be equated with a seller’s general trading stock, though that stock surely could
constitute a bulk if sufficiently identified as the source of the buyer’s goods by ref-
erence to a defined place or area where the totality of the stock is kept. If there is a
difficulty with this conclusion, it is because trading stock on land is dynamic and
shifting, whereas a quantity of goods locked into a dry bulk carrier at sea is fixed.
The conclusion we arrive at is that a buyer cannot claim property rights in
goods unless there has occurred a sufficient identification of the goods, or of the
source of the goods, to the contract. As for the source, it must be a ‘defined space or
area’, such as a specific ship52 or warehouse. A contract for soya beans shipped in a
given month from a port or ports in the Gulf of Mexico will not satisfy the require-
ment of a defined space or area. There will be many such shipments and nothing
yet to identify the particular shipment from which the buyer will receive its goods.
Even if the seller were to make or adopt only one shipment in the stated month,
the maxim id certum est quod certum reddi potest would not avail the buyer, if only
because of the absence of any agreement identifying that particular shipment as
the sole source of the goods. A final point concerns whether any constraint in the
contract on the source from which the seller might supply the goods should be
material in determining whether there is an identified bulk. In Re London Wine Co
Ltd,53 Oliver J, in a case predating the above statutory changes, was not prepared
to interpret a contract for the sale of wine ‘lying in bond’ as ‘providing an identify-
ing label for the mass from which the goods were to be selected’, since the seller
‘remained free to fulfil the contracts to its various purchasers from any source’.
This is surely too narrow a reading of the contract and hence far enough from the
spirit of the statutory changes that it ought to play no part in their interpretation.

51 RBG Resources Plc v Banque Cantonale Vaudoise [2004] 3 SLR(R) 421 (applying identical Singa-

pore statutory provisions).

52 There may be some difficulty in determining whether large bulk carrier with more than one hold

is a sufficiently defined space or area: Bridge (n 49) para 3.53.

53 Re London Wine (n 32).
 Certainty, Identification and Intention 97

IV. Portions and Quantities: Trust Interests

The issue of identification is expressed in different language when it comes to a

declaration of trust. Here, the question is whether the subject matter of the trust is
sufficiently certain for the trust to be properly constituted. Re Goldcorp Exchange
Ltd54 is one of a series of cases where a buyer who had paid for goods found that
there were no goods available for delivery.55 In that case, one category of claimants
had purchased unascertained bullion from a seller which the seller then undertook
to store on their behalf on an unallocated basis. The claimants were assured that
‘your’ bullion was being stored on ‘your’ behalf free of charge and that they could
withdraw it on giving seven days’ notice. They each received a certificate of owner-
ship. Had the seller declared a trust of such bullion answering the description that
it possessed at the time it made these statements or that later came into its pos-
session? In the court’s view, the statements of the seller did not amount to a dec-
laration of trust of their existing stock for that would have inhibited any dealings
with that stock. Apart from its question-begging character, the difficulty presented
by this conclusion is that it bears on the inward state of the seller’s mind and not
on the way that the seller’s words might have been interpreted by the claimants.
There is no good reason why a declaration of trust should be determined by sub-
jective means when a statement of contractual intent is objectively interpreted.56
Nevertheless, in holding that the various sales were not ex-bulk, the court added
that each claimant could not have contemplated that his rights would be defined
according to whatever bullion of the contract description the seller had in stock
at the relevant time, in combination with the numbers of other claimants with a
similar claim to that same stock. One response here is to ask why this could not
have been contemplated by the claimants: at the time of the litigation they were
adamantly of the view that they did. The rhetoric of the court tends towards the
case having an inevitable outcome when a cold appreciation of the facts yields
considerably less certainty. The court went on to hold that no trust could attach to
incoming stock since there would have had to be a separated bulk as the sole source
from which the buyers’ claims should be satisfied. The mixing of trading stock and

54 Re Goldcorp (n 2).
55 The issue had presented itself in Re Wait [1927] 1 Ch 606, where the buyer of 500 tons of grain on
board a named ship paid before the 500 tons were separated from bulk. The core of the buyer’s claim
was that the buyer had by operation of law an equitable lien over a quantity of 530 tons on that ship
remaining with the seller and previously represented by a bill of lading for 1,000 tons to the order of
the seller.
56 ‘A settlor must, of course, possess the necessary intention to create a trust, but his subjective inten-

tions are irrelevant. If he enters into arrangements which have the effect of creating a trust, it is not
necessary that he should appreciate that they do so; it is sufficient that he intends to enter into them’:
Twinsectra Ltd v Yardley [2002] UKHL 12, [2002] 2 AC 164, 185 (Lord Millett); see also Byrnes v Kendle
[2011] HCA 26, 243 CLR 253, [54]–[59].
98 Michael Bridge

stored bullion was fatal to the trust claim and there is even some s­ uggestion in the
case that there should have been individual storages of each claimant’s entitle-
ment for the trust argument to succeed.57 I shall return to this issue of segregation
which, it is submitted, is concerned more with an intention to create a trust than
with a requirement of certainty of subject matter.
In Re London Wine Co, the trust argument of wine investors also failed notwith-
standing statements made by the seller acknowledging investors’ ownership of
wines in the seller’s possession and the issue of certificates of ownership, together
with the levying of storage charges. It was fatal to the investors’ claims that these
were based on the numbers of bottles purchased rather than upon a percentage
of the type of stock consisting of those bottles. There had to be a ‘homogeneous
whole’58 and what constituted a homogeneous whole depended upon the nature of
the property. In explaining why there was no trust of individual investors’ wines,
Oliver J said:
I appreciate the point taken that the subject matter is a part of a homogeneous mass
so that specific identity is of as little as importance as it is, for instance, in the case of
money. Nevertheless, as it seems to me, to create a trust it must be possible to ascertain
with certainty not only what the interest of the beneficiary is to be but to what property
it is to attach.59
The judge went on to cite the example of a farmer declaring himself a trustee of
two unidentified sheep, concluding that this would not amount to an effective
declaration of trust even if there were a flock of sheep out of which the trust inter-
est could be satisfied. But he also went on to say that the farmer might declare
himself a trustee of ‘a specified proportion of his whole flock’, giving rise in this
way to an equitable tenancy in common between himself and the named benefi-
ciary. Such an intention would not, however, be inferred from a declaration that a
number of sheep were to be held on trust.60
The distinction made by Oliver J and the question of identification presented
themselves again in controversial circumstances in Hunter v Moss.61 This case
began with a finding of fact that a settlor had informally constituted himself trus-
tee of 5 per cent in the issued share capital of a company (which consisted of 1,000
certificated shares of which the settlor held 950). When a motion was entertained
by the trial judge to raise a point not mentioned at trial, namely, the issue of cer-
tainty of the subject matter of the trust, the issue somehow was transformed into
something rather different, namely, whether the settlor had succeeded in ­creating

57 Re Goldcorp (n 2) 90. This would have grave implications for investors in securities held in a

pooled account.
58 Re London Wine (n 32) 136 (original emphasis).
59 ibid 137.
60 ibid.
61 Hunter v Moss [1993] 1 WLR 934; [1994] 1 WLR 452. See White v Shortall [2006] NSWSC 1379

for a similar conclusion, noting that the point had been left open in Herdegen v Federal Commissioner
of Taxation (1988) 84 ALR 271, and also at [153] et seq for a lengthy treatment of responses to Hunter.
 Certainty, Identification and Intention 99

a trust over 50 of his 950 shares. The distinction between these two cases was
­further blurred in the Court of Appeal:
The first issue that arises in this appeal is that the conclusion that the defendant had
declared himself trustee for the plaintiff of 50 shares in [the company], being 5 per cent
of the share capital of that company, is challenged.62
The reforms to the Sale of Goods Act discussed above were founded on a funda-
mental distinction drawn between the sale of an unseparated share or percentage
of an identified bulk and the sale of a stated quantity of goods contained in a
larger, identified bulk, a distinction not clearly taken in Hunter v Moss. Treating
it, as the courts did, as a case of a trust of 50 shares, the question raised is how the
case can be distinguished from Re London Wine Co Ltd.
The judge at first instance made much of the difference between chattels and
shares, the latter having a fungible character denied to chattels, and distinguished
Re London Wine Co Ltd so far as it concerned the creation of a tenancy in common
of a bulk of bottles of wine.63 The distinction is proper enough when it comes to a
flock of sheep—some are male and some female, some young and some old, and so
on—but it surely overstates the individuality of bottles of wine, say, a 2001 ­Cornas
produced by a pre-eminent named grower. For the purposes of the amendments
to the Sale of Goods Act, it is highly unlikely that the idiosyncratic character of
individual bottles would prevent there from existing an identified bulk consisting
of ‘a mass or collection of goods of the same kind which … is such that any goods
in the bulk are interchangeable with any other goods therein of the same number
or quantity’. There is nothing in the individual aspect of a bottle of such wine
to show that it is corked when another bottle is not, or has cellared better than
another bottle, and so on. The person making the selection has nothing to go on
in determining whether to pick up one bottle as opposed to another. Individual
bottles of the same wine are fungible when individual sheep, unless cloned, are
not.64 A court in another case had no difficulty in finding a legal tenancy in com-
mon when ascertained investors’ wines were pooled in a common stock,65 so there
is no good reason why an equitable tenancy in common should be any different,
nor any reason why tenancy in common principles should be applied differently
according to whether an interest is being created or instead preserved out of an
earlier, plenary property entitlement.

62 [1994] 1 WLR 452, 454 (Dillon LJ). This carries through into Re Harvard Securities Ltd [1997]

2 BCLC 369, 383, a case dealing with a claimed entitlement to a stipulated number of shares, where
reference is made to a ‘part of a holding of chattels and [a] part of a debt or fund’, no distinction being
drawn between number and proportion.
63 The same justification is used in Re Harvard (ibid 383) to distinguish that part of Oliver J’s judg-

ment in Re London Wine (n 32).

64 This is a reason to doubt Oliver J’s conclusion in Re London Wine (n 32) that there can be a trust

of a proportion of a flock of sheep.

65 Re Stapylton (n 45).
100 Michael Bridge

The cursory judgment of the Court of Appeal in Hunter v Moss66 stated briefly,
and without explaining why, that a distinction existed between an appropriation of
chattels and the passing of property therein, and a declaration of trust, but rather
more needs to be said to define the fields of the distinction and to justify that dis-
tinction. To start with, appropriation is a word of doubtful import in sale of goods
transactions. It may mean simply ascertainment or identification,67 or it might mean
the type of physical conduct that puts it out of the seller’s power to change his mind
and thus presumptively passes the property in goods,68 usually an event that follows
on from ascertainment. The Court seems, however, to be treating appropriation to
mean identification, the latter being a more proper word for dealing with bulks. It is
the very fact that something has not yet been extracted from a bulk—that is, appro-
priated from it—that gives rise to the question whether a transaction can never-
theless have proprietary effect. When it comes to the identification of property to a
transaction, this is a matter of observable fact that ought not to call for any difference
in principle between equitable and common law powers of observation. Either there
is a fungible bulk or there is not. A similar unexplained distinction is made in the
briefest of terms in the case between a trust and a charge.69 Given that a charge is an
encumbrance and not a transfer, so that it extends to the whole of a bulk or fund and
not to an unseparated part, this is correct but it should have been said why this was
the case. There is, however, a persuasive way in which the outcome can be justified,
though it comes close to obliterating the distinction between a share and a quantity.
A trust of 50 out of 950 shares in effect gives rise to a trust for two beneficiaries, the
intended disponee and the settlor himself, beneficially sharing the bulk in different
proportions. In the words of an Australian judge, guided by the notion of a fund:
It is because the trust is construed of the entire shareholding of the company that it is
not necessary for the [disponee] to be able to point to some particular share and be able
to say, ‘That share is mine’.70
Hunter v Moss has been criticised too on the ground that it creates difficulties for
the application of trust principles, such as liability for breach of trust, when it
can hardly be known which precisely are the assets held on trust for the declared
beneficiary.71 It creates difficulties too when the trustee comes to dispose of other

66 Rather, the judgment of Dillon LJ in which Mann and Hirst LJJ concurred. See D Hayton, ‘Uncer-

tainty of Subject-Matter of Trusts’ (1994) 110 LQR 335 and the searching criticism of the reasoning in
the case in White (n 61) [166]–[192].
67 See Wait v Baker (1848) 2 Ex 1.
68 Carlos Federspiel & Co SA v Charles Twigg & Co Ltd [1957] 1 Lloyd’s Rep 240.
69 See the criticism of this passage in White (n 61) [190].
70 White (n 61) [212] (Campbell J). But the Court also notes at [216] that fund-based reasoning

cannot apply in the case of something, like a horse, that cannot be partitioned.
71 A problem that can be overstated. See Re International Contract Co, Ind’s Case (1872) 7 Ch App

485, a case concerning a share transfer where the wrong identifying numbers had been inserted in the
transfer but the transfer was not vitiated by the error. According to Mellish LJ at 487: ‘I think the num-
bers of the shares are simply directory for the purposes of enabling the title of the particular persons to
be traced; but that one share, an incorporeal right to a certain portion of the profits of the company, is
the same as the other, and that share No 1 is not distinguishable from share No 2 in the same way as a
grey horse is distinguishable from a black horse’.
 Certainty, Identification and Intention 101

parts of the same bulk. Is the trustee selling out of the remainder or selling the
same part again?72 Just as it is important to distinguish between the application
of trusts to commercial and to family cases, so too should it be remembered that
there are different types of trust cutting across this contextual distinction. A bare
trust would not carry responsibility for the management and investment of trust
assets that would exist in the case of a more intensive trust. Furthermore, it is
perfectly possible for the bare legal interest and the entire equitable interest to
be vested in different persons, without there being a trust relationship between
them.73 The problem of whether an unseparated quantity out of a bulk satisfies
the certainty requirement of a trust goes away when a share of the bulk is substi-
tuted for a number. Even though the distinction between these two was blurred
in Hunter v Moss, and even though a disposition of a share of chattels may make
commercial sense in only a limited number of cases,74 it is a vital distinction to
draw, even though the issues concerning a trustee’s responsibilities and repeat dis-
positions out of the bulk still remain to be solved. Had the decision been expressed
in terms of an agreed portion of the 950-share holding of the settlor, as the initial
finding of fact accepted, the case should not have come in for the criticism that it
received for recognising a trust of 50 unidentified shares in that larger holding.75
A final point presented by Hunter v Moss concerns again the distinction between
number and portion. So far as the beneficiary was claiming 50 shares, what did
this mean? Even given the character of the shares as certificated, share certificates
are not negotiable documents76 and are merely evidence of ownership of the
shares. They are presented to the company along with transfer forms in order that
changes in the legal ownership might be recorded on the register of members. It is
a difficult matter to discern what ownership of shares means, but a share as its very
name signifies is a share in something else, and the argument has been pressed that
shares in multiple numbers are but a multiple share of the company itself.77 Even
if those share certificates are numbered, the characterisation of their nature is not
affected. By this reasoning, the owner of 500 shares in a company with 10,000

72 See S Worthington, ‘Sorting Out Ownership Interests in a Bulk: Gifts, Sales and Trusts’ [1999]

Journal of Business Law 1. In White (n 61) [220], the court saw a trustee as being free to deal with the
surplus in excess of the quantity of unnumbered shares in the larger bulk.
73 Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669, 706–07

(Lord Browne-Wilkinson, citing the examples of the acquisition of title to land by estoppel and the
action for the redemption of mortgaged property by a mortgagee (scil mortgagor) who has repaid the
mortgage debt.
74 A contract to sell a share in a ship or a racehorse is one thing, but an unlikely commercial propo-

sition is a contract to sell a share in a bulk shipment of soya beans. Given the changes inaugurated by
the Sale of Goods Act s 20A, the buyer of goods who has paid for, say, 10,000 tonnes of soya beans in
an identified bulk, will under a sub-sale contract for the same quantity transfer an interest in common
to a paying sub-buyer.
75 In fact, all the shares were sold by the time of the action, hence the would-be beneficiary was

claiming only a share of the money proceeds.

76 Colonial Bank v Cady (1890) 15 App Cas 267; MCC Proceeds Inc v Lehman Brothers International

(Europe) [1998] 4 All ER 675.

77 A point made firmly in R Goode, ‘Are Intangible Assets Fungible?’ [2003] Lloyd’s Maritime and

Commercial Law Quarterly 379.

102 Michael Bridge

issued shares owns 5 per cent of the company and a disponee of 500 shares does
not receive 500 shares as such—for that confuses the property interest with the
evidential paper—but a divisible, intangible interest in the company measured as
5 per cent.
Identification has been held to play a very diminished role in what we might call
statutory trusts. A court minded to do so can ride roughshod over the identifica-
tion requirement, finding a trust when there is no more than a promise or a duty
to appropriate property to a trust, if the legislation is thought to require it. This is
what occurred in Lehman Brothers International (Europe) Ltd v CRC Credit Fund
Ltd.78 A prime broker, acting in breach of its statutory duty by retaining c­ lient
moneys and securities in its general trading account instead of transferring them
to a pooled client account,79 was treated for the purpose of an insolvency distri-
bution as having done what it ought to have done, so that clients whose assets
had not been so treated were held entitled to participate in the pooled account.80
The legislative provisions in question were generously interpreted in favour of the
wronged clients by reference to EU Directives striving for a high degree of client
protection in the financial markets. The strains of the Lehman Brothers insolvency
and the perceived need to prop up the financial system amounted to a significant
stress test for proprietary principles.81 The ability of a court in common law sys-
tems to treat legislation as an excrescence rather than an integral part of a legal
system permits a case of this sort to be dealt with in the non-principled way that it
was, secure from any fears that the reasoning in the case will infect non-statutory
trusts.
The identification of trust property, as stated above, and the intention to create
a trust, are separate matters. Nevertheless, this is often more a matter of analyti-
cal than practical separation since the two issues in fact will often run into each
other.82 It is well known that, in order to declare a trust, it is not necessary to use
explicit trust language. Commercial imperatives may persuade a court to infer a
trust from language that does not obviously bespeak trust.83 This has been dem-
onstrated in a particular way in other Lehman’s litigation84 not concerning the

78 Lehman Brothers International (Europe) Ltd v CRC Credit Fund Ltd [2012] UKSC 6, [2012] 3 All
ER 1.
79 The rules required the firm either to put client moneys directly into a segregated client account
or, having first put them into a house account, to transfer them to a segregated client account on a daily
basis. The prime broker took neither of these actions.
80 cf Vintage Bullion DMCC v Chay Fook Yuen [2016] SGCA 49 [55]–[56] (Singapore statutory trust

arising only when client moneys had been segregated).

81 See M Bridge and J Braithwaite, ‘Private Law and Financial Crises’ (2013) 13 Journal of Corporate

Law Studies 361.

82 See the discussion above of Re Goldcorp (nn 2, 54).
83 eg Don King Productions Inc v Warren [2000] Ch 291.
84 A broad label since other financial institutions were involved in the welter of case law following

the financial crisis of 2008.

 Certainty, Identification and Intention 103

statutory trust of client assets. Acting as prime brokers and as lenders, a Lehman’s
(or other) entity from time to time managed client assets, converting them to cash
and replacing them with other assets at intervals. The arrangement between the
entity and its clients made no explicit mention of a trust but referred instead to
‘custody’ and ‘custodian’ and to assets that ‘belong to the Counterparty [client]’.
Under the terms of a security collateral arrangement, the entity in question was
granted a right of hypothecation (or use) so that it might for its own purposes
remove assets from an account and replace them at a subsequent date. These pur-
poses were personal to the entity: it might use them to manage a short position,
or to provide margin for a clearing house, or to transfer them on under a stock
lending agreement. In so doing, it was not required to seek the prior permission
of its client or to account to the client for the gains resulting from its activities.
Despite this wide-ranging freedom,85 as well as the possibility that an account
might be emptied in this way from time to time, courts were prepared to conclude
that the arrangement in question amounted to a trust and satisfied the require-
ments of a trust.86 This conclusion comes close to a proposition that, in extreme
financial circumstances, a court will be prepared to conjure a trust out of thin air
and prompts the following question: does the arrogation to a trustee of an extreme
freedom to deal beneficially with trust assets tend towards negativing any inten-
tion to create a trust, or is it so inconsistent with a trust that a trust cannot be
constituted whatever the intention of the parties may be? Are assets really identi-
fied to a trust as trust property if the so-called trustee is given such a wide-ranging
personal freedom? Can a trust be said to exist when it is fully depleted at intervals?
If the Lehman’s litigation testifies to anything, it is that ‘diseases desperate grown
by desperate appliance are relieved or not at all’. At the very least, it has to be asked
whether these cases should be used as a guide in the application of trust principles,
not merely in domestic arrangements but also in less esoteric commercial matters.
The next question under this heading concerns the segregation of trust prop-
erty. This is more than just a matter of identification: it concerns whether the
trust property should not merely be part of an identified bulk but should actu-
ally be isolated, that is, be separated from any bulk. Here again, the boundary
between identification and intention falls to be considered. In Henry v Hammond,­
Channell J said:
It is clear that if the terms upon which the person receives the money are that he is bound
to keep it separate, either in a bank or elsewhere, and to hand that money so kept as a
separate fund to the person entitled to it, then he is a trustee of that money and must
hand it over to the person who is his cestui que trust. If, on the other hand, he is not

85 See Lomas v RAB Market Cycles (Master) Fund Ltd [2009] EWHC 2914 (Ch).
86 Re Lehman Brothers International (Europe) [2011] EWCA Civ 1544 [68], [2012] BCLC 151.
cf Slade J in Re Bond Worth Ltd [1980] Ch 228, 261: ‘W]here an alleged trustee has the right to mix
tangible assets or moneys with his own other assets or moneys and to deal with them as he pleases,
this is incompatible with the existence of a presently subsisting fiduciary relationship in regard to such
particular assets or moneys’.
104 Michael Bridge

bound to keep the money separate, but is entitled to mix it with his own money and deal
with it as he pleases, and when called upon to hand over an equivalent sum of money, …
he is not a trustee of the money, but merely a debtor.87
Apart from the modern orthodoxy that a relationship of trust and debt can coex-
ist between two persons,88 this dictum shows how far the Lehman’s cases have
strained the boundaries of trust. Subject to the qualification of the payee being
free to deal with the money as he pleases, the passage comes close to requiring an
agreed segregation of assets if a trust is to be properly constituted. This, however,
is not the case.89 If a trust is supposedly created, by agreement or otherwise, the
absence of a segregation requirement goes to the question of intention to create a
trust,90 always provided that a bulk containing the trust assets can be identified.91
If no countervailing factors are present, the absence of a prohibition against mix-
ing tends towards a finding that no trust is created92 but it will not negative explicit
trust language.93 Nor should it necessarily negative the clear implication of a trust
if the relationship between the parties points strongly towards a trust.94 That it is a
matter of intention rather than identification may be tested according to ‘whether,
immediately after the purported declaration of trust, the court could, if asked,
make an order for the execution of the purported trust’.95 There is no prohibition
on a trustee being also one of the beneficiaries of a trust,96 so long as the trustee
is not the sole beneficiary, for in that case there would be a merger of legal and
beneficial interests.97

87 Henry v Hammond [1913] 2 KB 515, 521 (Channell J).

88 Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567. This applies to secured creditors
and trustees too: Re Lehman Brothers (n 86).
89 See White (n 61).
90 Re Nanwa Gold Mines [1955] 1 WLR 1080; Hinckley Singapore Trading Pte Ltd v Sogo Department

Stores (S) Pte Ltd [2001] 4 SLR 154. But see Vintage Bullion (n 80) [61]–[62] (segregation, though not
sufficient for the inference of an express trust, was in this case necessary for the trust to be properly
constituted since intention alone was not sufficient).
91 A trust of segregated assets would not be vitiated by a later admixture of the trustee’s own assets:

Vintage Bullion (n 80) [52] (trustee adding its own assets to client accounts to avert the risk of client
undermargining).
92 Re Clowes (No 2) [1994] 2 All ER 316, 325. The trial judge in Hunter (n 61) 941, restrictively

interpreting certain language in Re Andrabell Ltd [1984] 3 All ER 407, 415, was firmly of the view that
the absence of a segregation requirement did not mean that a trust failed for uncertainty. Similarly, in
respect of payment into a bank account, see also Re Kayford Ltd [1975] 1 WLR 279, 282.
93 Re Lewis’s of Leicester Ltd [1995] 1 BCLC 428; Associated Alloys Pty Ltd v CAN 001 452 106 Pty Ltd

[2000] HCA 25 [34].

94 See Re Fleet Disposal Services Ltd [1995] BCC 605 (agent entitled to deduct commission and

expenses from a trust account into which sale receipts had been paid); cf Paragon Finance Plc v DB
Thakerar & Co [1999] 1 All ER 400, 416 (where the agent used moneys received as cash flow and was
required to account at annual intervals, compared with the five days in Fleet Disposal).
95 Hunter (n 61) 945.
96 See, eg White (n 61).
97 P Watts, ‘Some Aspects of the Intersection of the Law of Agency with the Law of Trusts’ (ch 2 in

this volume), citing Goodright v Wells (1781) 2 Doug 771, 778, 99 ER 491; DKLR Holding Co (No 2) Pty
Ltd v Commissioner of Stamp Duties (1982) 149 CLR 431, 464, 473.
 Certainty, Identification and Intention 105

V. Portions and Quantities: Charges

It was stated above that the failure of a claim of property rights could be laid
either at the door of an insufficiently defined subject matter of the claim, or attrib-
uted instead to the absence of any intention to create property rights. It is under-
standable in the case of sale of goods and declarations of trust that the emphasis
should have been placed on the former approach. In the case of equitable charges,
however, which tolerate a degree of vagueness about the day-to-day depth of a
chargee’s interest in charged property, the main difficulties that have arisen have
been due to a lack of clarity in the requisite intention. That said, when the Court of
Appeal in Re Wait98 dismissed the claim of a pre-paying buyer to the lion’s share of
goods (wheat) still in the seller’s possession at the critical date, it treated indiffer-
ently two proprietary claims made by the buyer: one was that there had occurred
an equitable assignment of the 500 tons of wheat claimed by the buyer, where the
language of equitable assignment of goods, as opposed to things in action, makes
sense only if it is translated into the language of express trust; and the other was
that the goods remaining with the seller were subject to an equitable charge or lien
(the only difference between the two for present purposes being that the former is
consensual and the latter, where it exists, arises by operation of law).
The question whether a transaction amounts to a declaration of trust or instead
to an equitable charge has proved to be notoriously vexing, especially in those cases
involving unpaid sellers who have by contractual means purportedly succeeded in
having the buyer declare itself the trustee of the proceeds of resale or of a part of
the proceeds. The practical issue here is whether a court should recharacterise a
purported trust as but a charge under another name, so that a failure in the case
of a corporate buyer to see to the registration of the charge results in the charge
being struck down as void against liquidators, administrators and secured credi-
tors of the buyer.99 Even if a court were otherwise persuaded to view a transaction
as giving rise to a charge and not to a trust, and even though the company charges
legislation defines a charge skeletally as including a mortgage,100 there is no reason
why a court might not consider a trust to be a charge for the purposes of the Act, in
view of the purposes served by the requirement that charges be registered.101 This,
however, is not a course of action suggested in the case law. English courts have
routinely concluded that proceeds trusts of this kind are charges rather than trusts,
essentially because of the absence of any true intention that the seller shall have
the whole of the proceeds, or because the period of credit under the sale contract

98 Re Wait (n 55).
99 Companies Act 2006, ss 859A et seq.
100 ibid s 859A(7).
101 The majority judgment in the Australian High Court in Associated Alloys (n 93) assumes that

once a transaction has been classified as a trust it therefore cannot be a charge under company charges
legislation.
106 Michael Bridge

containing the clause does not match the period of credit allowed by the buyer to
the sub-buyer in the follow-on sale, or because the buyer is at liberty to pay the
seller from a source other than the sub-sale proceeds, in which last case the buyer’s
supposed duty to account for the proceeds as trustee falls away.102
Nevertheless, in Associated Alloys Pty Ltd v CAN 001 452 106 Pty Ltd,103 a major-
ity of the Australian High Court concluded that a contractual clause, according to
which a buyer declared itself trustee of such share of the money proceeds of a sub-
sale as represented the indebtedness of buyer to seller at the date of their receipt,
gave rise to a trust and not a charge. As a matter of construction, the difference
between a charge and a trust can be difficult to draw, but there was no ambigu-
ity in the language in this case, which spoke explicitly of a trust.104 Consequently,
resort did not have to be made to any implied intention that a trust arise, which
might have presented difficulties for the seller given the absence of any require-
ment that the proceeds be segregated. The presence of express language meant that
the question depended squarely on whether the certainty of subject matter condi-
tion, required of a trust, had been met, more particularly, whether the defined part
of the proceeds of the sub-sale had been in part sufficiently identified to pay the
debt owed by the buyer. And this was an issue that simply was not addressed by
the majority judgment, since no reference at all was made to the payment cycle or
to the defeasance of the trust on payment being made from a non-trust source.105
Moreover, the need to identify a source, even a mixed source, identified to the
trust for payment should have been fatal: the trust settled on the ‘undifferentiated
finances’ of the buyer.106 A provision in a construction contract that a site owner
will hold a percentage of the agreed price for the works on trust for the contractor
in a retention fund will not give rise to a trust of unpaid moneys if no fund is ever
created into which the sum in question is paid. In the absence of identifiable trust
assets, the supposed trust is but a contractual obligation to set up a trust.107

102 The second point is essentially a different way of stating the third.
103 Associated Alloys (n 93).
104 ibid [9]: ‘In the event that the [Buyer] uses the goods/product in some manufacturing or con-
struction process, then the [Buyer] shall hold such part of the proceeds of such manufacturing or
construction process as relates to the goods/product in trust for the [Seller]. Such part shall be deemed
to equal in dollar terms the amount owing by the [Buyer] to the [Seller] at the time of the receipt of
such proceeds’.
105 This issue is addressed in the dissenting judgment of Kirby J, who refers to the defeasibility of

the trust, the absence of a requirement that the buyer pay as soon as payment under the sub-sale was
received and the absence of any obligation on the buyer to pay out of a particular fund. Kirby J con-
cludes at [91] by saying that the clause in question was a charge for registration purposes because in
‘substance and reality’ it operated as a charge to secure a debt. He also makes a segregation point by
referring to the absence of ‘a particular identifiable fund’.
106 A point made by Kirby J (ibid [94]).
107 Mac-Jordan (n 4). Even the concession of the competing bank, which had a floating charge

(which later crystallised) over the site owner’s assets, that the site owner’s contractual obligation was
specifically enforceable could not give rise to a proprietary right in property yet to be identified.
 Certainty, Identification and Intention 107

Apart from such cases, the question whether a transaction gives rise to a charge,
as opposed to no proprietary interest at all, has presented itself in a number of
cases where directions or restrictions have been set up that affect a fund or other
money source. A good starting point is Palmer v Carey,108 which inverts the segre-
gation question as previously discussed in relation to declarations of trust. It con-
cerned an arrangement between debtor and creditor under which the debtor was
put in funds to acquire trading stock. When the stock was sold, the debtor was to
pay the moneys received into an account of the creditor at the creditor’s bank. The
creditor would then deduct the amount he had advanced together with one-third
of the debtor’s gross profits. When the debtor failed, he still had stock in his hands
as well as money proceeds not yet paid into the creditor’s bank account. The Privy
Council firmly and economically held that the stock purchased with the credi-
tor’s funds belonged to the debtor and that the money proceeds belonged to the
debtor too. Even though there was an obligation on the debtor’s part to pay those
proceeds into the creditor’s account—and even though in an appropriate case an
injunction might issue to prevent the debtor applying the proceeds in any other
way—there was no charge on the proceeds in the debtor’s possession, but merely
a contract to pay them into the creditor’s account.
In so holding, the court cited with approval a well-known dictum of Lord Truro
in Rodick v Gandell that an agreement to pay a debt out of a specific fund coming
to the debtor creates a valid equitable charge on the fund.109 Why then were the
moneys in the debtor’s hands not a specific fund, given that he was required to
pay them into a designated account? And could it not be said that the debtor was
to pay the debt out of those funds, albeit in the form of proceeds arising from the
payment of those moneys into an account giving rise to a credit balance in favour
of the creditor? If the debtor had been required to hand over the money proceeds
to the creditor as and when received, it would not have been easy to see what
more would have been required, in the absence of express language, to give rise
to a charge. Where control of the proceeds is as closely defined as it was in Palmer
v Carey, it is surely unnecessary to require additional language. The court provides
no guidance as to whether the creditor’s pitfall was a matter of identification of the
assets or of intention; it is unclear which of the two posed the greater difficulty for
the creditor. This is one of those cases where they are hard to separate since either
or both of the following might be said: there was a lack of clear intention that
payment should be made out of the fund, and the subject matter of the purported
charge had not been sufficiently identified.
A case more clearly demonstrating the absence of an intention to create a charge
is Flightline Ltd v Edwards,110 where an action for damages leading to a world-
wide freezing injunction had been commenced against an airline. Pending the

108 Palmer v Carey [1926] AC 703.

109 Rodick v Gandell (1852) 1 De GM & G 763, 777–78.
110 Flightline Ltd v Edwards [2003] EWCA Civ 63, [2003] 1 WLR 1200.
108 Michael Bridge

r­ esolution of the case, the injunction was discharged when the airline agreed to
pay a stipulated sum into a designated bank account in the joint names of the
parties’ solicitors. The airline undertook not to withdraw, dispose of, deal with, or
encumber the balance in the account by letting it fall below an agreed amount.111
It was held to be fatal to the existence of a charge for any damages awarded against
the airline that there was no positive obligation to discharge the airline’s indebted-
ness out of the account.112 The problem here for the claimant was more a matter
of identification than of intention: no fund had been sufficiently identified as the
source of payment. Had the issue been one of trusts, the argument would have
been one for a trust of an uncertain amount from a bulk suggestively but not
clearly identified.

VI. Estoppel and Property

Suppose that the actions of a disponor fall short of transferring a property interest
to a disponee. This may be for various reasons. The property in question might
not have been separated from a larger mass so as to give it the necessary identity
of a subject of transfer, or a contractually agreed condition for the transfer might
not yet have occurred. Notwithstanding this, the disponor gives the disponee to
understand that a transfer has successfully occurred. In what circumstances might
the disponor be estopped from denying that the transfer has been successfully
completed, and how effective in proprietary terms will any such estoppel be?
Let us begin with a striking example of estoppel at work. It arose in the so-called
RASCALS case,113 which concerned a ‘repo’ scheme for the continuous selling of
securities back and forth between a Lehman’s hub company in Europe and its vari-
ous European affiliates. The current litigation concerned the Swiss affiliate with
which there was both a manual and an automatic system conducted at frequent
intervals between the two companies. In the case of the automatic system, which
concerned fixed-income securities, the hub company first purchased securities for
the affiliate from the marketplace, extending credit to the affiliate in the form of
paying the purchase price for those securities on behalf of the affiliate. An equi-
table title to those securities vested in the affiliate. At that point, the repo scheme,
operating at daily intervals, would come into play with the affiliate selling the

111 The report does not make it clear how the company could have dealt with the account in the

joint names of the parties’ solicitors in any of these prohibited ways.

112 On the question whether an order going beyond the terms of that made in Flightline amounted

to a security over an account in joint names, see Ready Rentals Ltd v Ahmed [2016] EWCH 1996 (Ch)
[34]–[39].
113 Re Lehman Brothers (n 86). See also R Stevens, ‘Floating Trusts’ (ch 5 in this volume). The acro-

nym stands for the Regulation and Administration of Safe Custody and Global Settlement and may
be thought to take colour from the type of working environment in which the scheme was conceived.
 Certainty, Identification and Intention 109

securities to the hub company under the first leg of the transaction. The price paid
by the hub company took the form of a set-off of the amount owed by the affiliate
for the initial purchase of the securities from the marketplace. When the securities
were sold back to the affiliate, a debit entry was made against the affiliate, which
was settled by the first leg of the next repo and so on indefinitely. The problem in
this case was that the sale price for the repo transactions was calculated on a mark-
to-market basis, with the consequence that the price paid by the hub company for
their initial purchase did not match the sale price under the first leg of the repo
transactions. Consequently, the offsetting of that initial purchase price against the
amount due under the first leg of the repo transaction did not discharge the debt
owed to the affiliate under the first leg, so the property in the securities at no point
passed to the hub company.114 Yet, throughout the process, both parties believed
that it had done. When the hub company and the affiliate then entered into insol-
vency proceedings, there was a contest between the creditors of both companies,
with no secured creditors present to complicate the outcome.
Had the court stopped at the point where title to the securities never passed to
the hub company, the decision would have gone in favour of the Swiss affiliate. This
was not due to any uncertainty concerning the subject matter of the various trans-
actions but because the agreed condition for vesting title in the hub company had
never occurred. Nevertheless, throughout the process both companies believed
that it had and this was sufficient to give rise to an estoppel by active acquiescence
so that the affiliate could not deny that title had vested in the hub company. That
estoppel bound the liquidator of the affiliate, standing in the shoes of the affiliate
itself. The conclusion was surely a generous one. Although it was Swiss, the affili-
ate had only three directors, all non-executive, and 12 full-time employees, who
worked mainly in the London offices of the hub company. Without going so far as
to pierce the corporate veil, it is fair to ask whether such an unbalanced relation-
ship involving a captive affiliate can support the estoppel found in the case.
A similar estoppel argument failed in Re Goldcorp Exchange Ltd.115 Given the
seller’s assertion that it was storing bullion belonging to the claimants, the claim-
ants now maintained that the seller could not now be heard to deny that it had
claimants’ bullion in its vaults. This argument would of course serve no purpose
unless there was indeed bullion in the seller’s vaults. But even the existence of
such a stock would not have been sufficient since, as the Privy Council observed,
a ‘bulk [cannot] be conjured into existence … simply through the chance that the
vendor happens to have some goods answering the description of the res vendita
in its trading stock at the time of the sale’. Earlier, the court had dismissed the
argument that the seller had declared a trust over the bullion in its possession,
one reason for this being that the seller could not have intended to create a trust
over its general trading stock so as to inhibit any dealings with it. Its business plan

114 For a fuller account of the transaction, see Bridge and Braithwaite (n 81).
115 Re Goldcorp (n 2).
110 Michael Bridge

being to retain only so much bullion as predictably might be needed by investors

calling for ­delivery, the seller throughout behaved more like a bank than a bailee.
In the quoted passage, the court merely implies that the seller had not in the first
place agreed to appropriate bullion from its existing stock, so that any promise
or representation made thereafter to the claimants could not be referenced to an
identified bulk.116 This is confirmed in the court below.117 If the sales to unal-
located claimants had been expressed to come from existing stock, their estoppel
argument would have possessed much greater, even compelling, force. And if, on
top of that, the seller had unconditionally appropriated separated bullion to each
contract, with the presumed assent of the claimants, then the claimants would
have had more than an estoppel claim: they would have had rights at law as tenants
in common of the commingled mass of bullion.
Supposing, however, that the claimants had succeeded in establishing a propri-
etary estoppel binding on the seller, they would still have failed against the chargee
bank whose floating charge later crystallised. This is because the estoppel does not
succeed in passing any property interest.118 The chargee bank is not in the posi-
tion of a liquidator or trustee in bankruptcy acting as a ‘universal successor’ of the
insolvent seller. As much as a floating charge sanctions a broad form of activity
under the banner of acting in the ordinary course of business,119 which on one
reasonable view of the matter might be taken to include incurring liability in the
form of an estoppel with proprietary effect,120 the court was firm in its conviction
that this did not extend to circumscribing the assets available to the chargee bank
as a result of incurring a personal liability.

VII. Summary

A number of the issues dealt with in this chapter are common to both equity and
the common law. There is, for example, no reason to suppose there is any d
­ ifference

116 Knights v Wiffen (1870) LR 5 QB 660 was distinguished on dubious grounds as the case of ‘a sale

ex bulk, or at least it must have been seen as such, for otherwise Lord Blackburn’s judgment would have
contradicted his treatise’ (see fn 1 and accompanying text). In Knights v Wiffen, the estoppel in question
was between a seller and a sub-buyer, where the buyer never made payment to the seller. No sacks of
barley were ever appropriated to the contract of sale and the seller’s statement to the sub-buyer made
no reference to any identified bulk.
117 Sub nom Liggett v Kensington [1993] 1 NZLR 257, 267: ‘Nothing is said about the source of the

bullion sold to the customer, so Exchange would be free to draw on its own existing stock or buy’.
118 See Re London Wine (n 32); cf Eastern Distributors Ltd v Goldring [1957] 2 QB 600.
119 Extreme examples are Re Borax Ltd [1901] 1 Ch 326 and Willmott v London Celluloid Co (1886)

34 Ch D 147.
120 One reason why an execution creditor defeats a floating chargee is that the latter authorises the

chargor to enter into ordinary course transactions that are subject to the normal consequences arising
from a failure to perform those transactions: Evans v Rival Granite Co [1910] 2 KB 979, 995 (Fletcher
Moulton LJ).
 Certainty, Identification and Intention 111

in the treatment of property according to whether it is subject to a common law

tenancy in common or an equitable tenancy in common. Issues of identification
also present themselves in broadly the same way. The trust of 50 undifferentiated
shares in Hunter v Moss finds its common law counterpart in section 16 of the
Sale of Goods Act, which, if the subject matter had been a sale of 50 sheep or 50
bottles of wine in an identified bulk, would not have recognised the passing of the
legal property prior to ascertainment of the 50 items. It took legislation to change
the Sale of Goods approach, but that legislation did not pass the property in the
50 sheep or the 50 bottles of wine. Instead, it recharacterised the contract as one
for the sale of a share in the bulk. When the Court of Appeal dealt with a similar
problem in Hunter v Moss, it failed fully to appreciate the difference between a
trust of a quantity in a bulk and a trust of a share of the bulk. Even had it done so,
the Court, in the absence of any ambiguity in the expressed intention of the settlor,
would not have had the power to recalibrate the settlor’s intention to salvage a
trust that might otherwise have failed for lack of certainty.
Further points raised in this chapter point to the lack of clarity separating prop-
erty and no-property, instrumental reasons sometimes requiring an anticipatory
recognition of something as property, for one or more purposes, when it has not
truly matriculated as an item of property. Finally, the law in this area turns upon
a fine balance between identification of an item as capable of being the subject
matter of a proprietary disposition and the intention of a disponor that a property
right therein be created or transferred. The line between the two is not always as
clearly drawn in the case law as it should be.
112
 5
Floating Trusts

ROBERT STEVENS

I. The Problem

It’s an ill wind that blows no good whatsoever. The collapse of Lehman Brothers
has generated some interesting cases concerning the law of trusts.
It was Lehman Brothers’ practice for one company in the group, in each time
zone, to act as a hub company for the acquisition and sale of all securities in that
zone. Lehman Brothers International Europe (LBIE) was the hub for Europe.
The RASCALS decision concerned whether securities acquired from third parties
(annoyingly called ‘the street’) for the account of affiliate companies in the same
group were held on trust. To understand the decision, it is necessary to read both
Briggs J at first instance and that of the Court of Appeal (the judgment of the
Court delivered by Lloyd LJ) which largely concurs with it.1
LBIE itself did not acquire the underlying securities, but rather acquired rights
against a depository (sometimes through one or more further intermediaries)
which had the relevant rights vested in it. The use of a hub company for buying
and selling in this way had advantages in terms of efficiency of scale. The economic
risks and rewards of ownership were to fall on those for whom the securities were
acquired, but the right to the rights to the securities held by the depository was
vested centrally in LBIE.
In the 1990s three problems were perceived to arise.
First, LBIE paid for the securities and had a right to reimbursement from the
affiliate for whom they were acquired. This unsecured debt gave rise to a concern
that regulators would require LBIE to have sufficient capital to secure it against the
risk of non-payment of these debts.
Second, that LBIE would be required to segregate its securities for the accounts
of third parties (affiliates and others). LBIE’s practice was to hold all securities in
unsegregated house accounts.

1 Re Lehman Brothers International (Europe) (in administration) [2010] EWHC 2914 (Ch)

(Briggs J), [2011] EWCA Civ 1544.

114 Robert Stevens

Third, that LBIE had unencumbered title to the rights it sold such that third
parties who acquired securities from it would not be prejudiced by any interests
of affiliates or others.
These perceived problems led Lehman Brothers to adopt from 1996 a process
of Regulation and Administration of Safe Custody and Global Settlement (RAS-
CALS). Under this Byzantine arrangement, once LBIE acquired the securities for
the affiliate, they would enter into a repo contract, providing for the sale of the
securities to LBIE by the affiliates, followed by a sale back to the affiliates of equiva-
lent securities (plus a fee). LBIE would have the use of securities in the meantime
between sale from affiliate and purchase back. These purchases and repurchases
were not effected through the payment of cash, but rather through a series of book
entries with LBIE’s initial obligation to buy being offset against the affiliate’s obli-
gation to pay the purchase price. Some of these repo transactions took place auto-
matically each day, with LBIE the unencumbered owner of the securities during
each day (so-called ‘automatic’ RASCALS). These transactions were all done by
computer. Other repo transactions took place manually, rather than automatically
daily, with a sale by the affiliate to LBIE with a right in the affiliate to reacquire
equivalent security upon payment at some point in the future.
Once LBIE acquired securities it would deal with them freely as part of its busi-
ness assets. If there was a dividend paid this would be credited to the affiliate, but
if LBIE made profits from short-term dealings in the securities, this would accrue
to LBIE. At any given time LBIE may have had none of the securities originally
acquired for the affiliate but merely other rights that traceably represented those
securities.
When the music stopped in 2008 with the collapse of Lehman Brothers a new
question arose: who in the group was entitled to the securities? The affiliates
claimed that the securities were held on trust for them. LBIE claimed that they
were not.

II. How Do Intermediated Securities Work?

If A, the owner of Blackacre, declares himself a trustee of the right to his land in B’s
favour, the law (by which is meant here law and equity together) does ‘not say that
[B is] the owner of the land, it says that the trustee was the owner of the land, but
adds that he is bound to hold the land for the benefit of [B]’.2 This may be illus-
trated by the fact that B has no standing to sue for violation of the right to the land

2 FW Maitland (eds AH Chaytor and WJ Whittaker) Equity: A Course of Lectures, revised by J

­Brunyate (Cambridge, CUP, 1936) 17–18.

 Floating Trusts 115

itself: only A may sue a trespasser or the creator of a private nuisance.3 B has no
right in relation to the land exigible against the rest of the world, but only one as
against the person with title to Blackacre from time to time. B does not, therefore,
acquire in the narrow sense employed by the Romans, a right in rem.
B’s right that A hold the title to the land for his benefit (which is simply the
converse of A’s duty to hold the title to the land for B’s benefit) is not simply a
right against A personally, a right in personam in the traditional sense. Rather,
the subject matter of B’s right is A’s right to the land.4 If, therefore, A gives the
(right to) Blackacre to his son, C, B’s right will bind C because B’s right is in rela-
tion to the right C has acquired. Similarly, if A goes into bankruptcy, B’s right
against A’s right will bind A’s trustee in bankruptcy and hence will be protected in
this event.5 Because of these characteristics, we are content to describe B’s right as
proprietary, although it is not of the same kind as a right in rem strictly so called.
Whenever one party is obliged to hold a right for the benefit of another a trust
arises, because that is, as a matter of definition, what a trust is. So, if A makes a
binding contract to transfer specific shares, or receivables, or title to land, or an
intellectual property right, or an equitable interest that he owns to B, A becomes a
trustee of this right even though the requisites of transfer have not been fulfilled.
It is vital to note that this equitable property right is not a mere personal right
against the trustee. Such a view would be inconsistent with the additional protec-
tion against certain third parties enjoyed by a holder of an equitable property
right. An equitable property right is not a right against a thing, nor simply a right
against a person, it is rather a right to another right. So, if A holds a right (whether
it be a personal right or a right to a thing) on trust for B, then B has a right to A’s
right. This means that, if B can follow that right into the hands of a third party, C,

3 The decision of the Court of Appeal in Shell UK v Total UK [2010] EWCA Civ 180, [2011] QB 86

is, in part, inconsistent with this proposition as beneficiaries under a trust of the title to an oil refin-
ery were allowed to claim for consequential loss they suffered as a result of the defendant’s negligent
damage of the refinery, provided that the trustee was joined as a party to the proceedings. The prior
authorities do not support this proposition and the dismissal of arguments to the contrary as ‘legalistic’
(at [132]) is not a high point in English jurisprudence. The better view is that the case is rightly decided
because the claimants were in joint possession of the land (and therefore had title) through the agency
of those who operated the refinery on their behalf. If the claimants had unanimously instructed the
operator to destroy the refinery, the operator would have had to do so.
4 See also R Chambers, An Introduction to Property Law in Australia, 3rd edn (Sydney, Thomson

Reuters, 2008) para 13.90; L Smith, ‘Unravelling Proprietary Restitution’ (2004) 40 Canadian Busi-
ness Law Journal 317; L Smith, ‘Philosophical Foundations of Proprietary Remedies’ in R Chambers,
C Mitchell and J Penner (eds), Philosophical Foundations of the Law of Unjust Enrichment (Oxford,
OUP, 2009) 281; L Smith, ‘Trust and Patrimony’ (2008) 38 Revue générale de droit 379; L Smith, ‘Trust
and Patrimony’ (2009) 28 Estates, Trusts and Pensions Journal 332; W Swadling in A Burrows (ed),
English Private Law, 2nd edn (Oxford, OUP, 2007) paras 4.140–4.153; B McFarlane and R Stevens, ‘The
Nature of Equitable Property’ (2010) 4 Journal of Equity 1; cf R Nolan, ‘Equitable Property’ (2006) 122
LQR 232.
5 For bankrupt individuals this is expressly stated in the Insolvency Act 1986, s 283(3)(b). It is also

true of insolvent companies despite the absence of expression in legislation: see eg, Barclays Bank Ltd
v Quistclose Investments Ltd [1970] AC 567.
116 Robert Stevens

it may also be possible for B to show that C is under a duty to B. In particular, it

means that B receives some protection in A’s insolvency: if the right held by A on
trust were to pass to A’s trustee in bankruptcy, B could prevent the trustee in bank-
ruptcy using that right for the benefit of A’s general creditors.
Analysing equitable property rights as rights to other rights has many advantages.
It can explain the fact that B can have such a right in relation to a personal right
held by A; it can explain why B can make a claim against a third party, such as C,
who acquires a right that depends on A’s right, but not against X, who acquires no
such right. In addition, it can assist in explaining why equitable property rights
arise: if B can show that A is under a duty to B in relation to a specific right held
by A, B necessarily acquires an equitable property right—a right to A’s right. That
core right, capable of having an effect on third parties and thus giving B protection
in A’s insolvency, thus combines with any additional personal duties that A may be
under to B. In addition, the analysis, unlike one which sees the separation of legal
and equitable title as constitutive of an equitable property right, can account for
cases in which A holds an equitable right on trust for B. For example, if Z holds a
right on trust for A, it is clear that A can then hold that right on trust for B. Such a
sub-trust arises because A holds a particular right (A’s right under the head trust)
and is under a duty to B in relation to that right.
This analysis can be applied without difficulty to the phenomenon of interme-
diated securities. The holder of the underlying right (eg, a depository) may come
under a duty to Intermediary 1 to hold that underlying right for the benefit of
Intermediary 1. No transfer of the underlying right is required; indeed, the very
essence of the arrangement is that the holder keeps the right and comes under
a duty to Intermediary 1 in relation to that right. Nonetheless, Intermediary 1
acquires more than a mere personal right against the holder of the right. As the
holder’s duty relates to the underlying right, Intermediary 1 has the ability to make
a claim against a third party who acquires a right from the holder and is therefore
protected in the insolvency of the holder. Depending on the terms of his contract
with the holder, Intermediary 1 may have additional personal rights against the
holder: those rights arise from duties binding the holder but which do not relate
to specific rights of the holder.
Having thus acquired a right to the holder’s right, Intermediary 1 may also deal
with his right. This may be done through a transfer of that right: in that case,
Intermediary 1 loses his right and that right is acquired by the transferee. In such a
case, there is no new link in the chain. Alternatively, Intermediary 1 may retain his
right, and give Intermediary 2 a right to that right. As well as acquiring that core
right to a right, Intermediary 2 may acquire personal rights against Intermediary 1,
as a result of duties assumed by Intermediary 1 that do not relate to any specific
rights held by Intermediary 1. Intermediary 2, having thus acquired a right to
Intermediary 1’s right then has the same power to either transfer his right or to
retain it and give another party a right to it.
What is thereby created is a chain of trusts which in principle can be of any
length (sub-trusts, sub-sub-trusts, sub-sub-sub-trusts etc). What is essential
 Floating Trusts 117

­ owever is the right that the investor has to the right of the intermediary, or put
h
synonymously, the duty that the intermediary has in relation to the right of the
investor.

III. What Was RASCALS Intended to Do?

When an affiliate ‘sold’ its interest in the securities to LBIE what happened? If
A holds a right to a car on trust for B, if B ‘sells’ his beneficial interest to A, nothing
is transferred to A. Rather A is no longer under a duty to B, so that the right to the
car is no longer held on trust. If it were the case that B’s equitable interest were
transferred back to A, then writing would be required every time there was a ‘sale’
by B to A,6 but fortunately this is incorrect.7 There is a release and not a transfer.
A’s right to the car is a single right, he does not have separate rights at law and in
equity any more than I do in the computer on which I am currently typing. Whilst
it is possible to speak of the ‘beneficial title being passed to’8 the trustee from the
beneficiary in such a case, this is only true in economic not legal terms. It is not
possible to hold an asset on trust for oneself as there cannot at law be any duty to
oneself.
The assumption underlying the introduction of RASCALS was that the affili-
ate was selling, or more accurately releasing, its interest under the trust to LBIE as
trustee. When LBIE ‘sold’ its interest back to the affiliate, it transferred nothing but
instead created a new right under a trust in the affiliate’s favour.
However, Briggs J concluded that, absent the RASCALS procedure, LBIE did not
initially hold securities acquired on trust for the affiliates. This finding was rightly
not challenged on appeal. LBIE was free to deal with the securities in the ordinary
course of business. Commercially there was no need for anything more than a per-
sonal obligation on LBIE to account for the value of the securities and their fruits.9
The result of this (clearly correct) conclusion was that the entire basis of the
RASCALS procedure was misconceived, proceeding as it had done on the assump-
tion that the affiliate had some kind of proprietary interest it needed to ‘sell’ to
LBIE. The concern that LBIE did not have an unencumbered title to the securities
was similarly incorrect. LBIE was not merely an unsecured creditor for capital
adequacy purposes as it did not hold the rights which related to the securities by
way of trust for the affiliates.
However, with the introduction of RASCALS it clearly was intended that when
the affiliate ‘bought back’ their interest in the securities (which on the first ­occasion

6 Law of Property Act 1925, s 53(1)(c).

7 Vandervell v Inland Revenue Commissioners [1966] UKHL 3, [1967] 2 AC 291, 311 (Lord Upjohn);
cf Re Paradise Motor Co [1968] 1 WLR 1125 (a disclaimer not a release).
8 Re Lehman Brothers (n 1) [2011] EWCA Civ 1544 [127] (Lloyd LJ).
9 Re Lehman Brothers (n 1) [2010] EWHC 2914 (Ch) [275]–[276] (Briggs J).
118 Robert Stevens

of such a purchase was in fact an initial acquisition) that they would thereby
acquire such a beneficial interest.10 Briggs J and the Court of Appeal concluded
that this intention sufficed in order to create a trust in favour of the a­ ffiliates. This
conclusion is problematic.

IV. Was there Certainty of Subject Matter?

It has been a source of some concern that the holding of securities through inter-
mediaries may sometimes or indeed usually fail for want of certainty of subject
matter.11 One of the benefits of the RASCALS decision is that it clarifies both that
this is not so and, in the judgment of Briggs J, why it is not so.
If B has a right under a trust, he has right to a right of the trustee. To have such a
right, B needs to show that the trustee is under a duty to B and that A’s duty relates
to a specific right (or set of rights) held by A. For example, if A owns 20 sheep and
declares that he holds (his title to) two of those sheep on trust for B, it is clear that
A intends to come under a duty in relation to his title to two specific sheep. How-
ever, A can only come under such a duty if those specific sheep have been identi-
fied; some form of segregation is therefore necessary. There is in principle exactly
the same need for segregation if A instead attempts to sell (his title to) two of his
sheep to B: a sale is a transfer of rights, and no such transfer can occur until the
identification of the specific rights to be transferred has occurred. This explains
why recourse to the law of trusts provides no consolation to B where he has a con-
tract with a now insolvent A for the sale of unascertained goods. The very reason
that prevents B acquiring A’s title to any specific goods also prevents B acquiring a
right to A’s right to such goods.
The Court of Appeal in Hunter v Moss12 confirmed the validity of A’s declara-
tion of a trust, in favour of B, of 50 of 950 shares held by A. A trust was created
without the need for A to segregate 50 specific shares which he was to hold on
trust for B. Clearly, the reasoning behind the decision means that if, for example, A
holds an interest in 100 shares in X Co, then an investor (B) can acquire an equita-
ble property right if A states that it holds 50 of those shares for B: there is no need
for any particular shares to be segregated from the 100 in which A has an interest.
The decision in Hunter v Moss attracted a great deal of academic disapproval13
and how the result is capable of being squared with general principles is obscure in

10 ibid [2011] EWCA Civ 1544 [68] (Lloyd LJ).

11 Financial Markets Law Committee, ‘Property Interests in Investment Securities: Analysis of the
Need for and Nature of Legislation relating to Property Interests in Indirectly Held Investment Securi-
ties, with a Statement of Principles for an Investment Securities Statute’ (FMLC Papers, Issue 3, 2004):
www.fmlc.org/papers/fmlc1_3_july04.pdf, para 6.10.
12 Hunter v Moss [1994] 1 WLR 452.
13 eg D Hayton, ‘Uncertainty of Subject-Matter of Trusts’ (1994) 110 LQR 335.
 Floating Trusts 119

the case itself.14 The explanation for the result, if not the reasoning, was provided
by Professor Goode. A requirement of segregation may be justified in relation to
sheep, but is irrelevant when considering shares or other securities.15 Separating
out an individual share, unlike the notion of separating an individual sheep from
the flock, makes no sense. A share is simply that: a proportionate right against
the company and other shareholders. If a company issues 200 shares of which A
owns 100, A does not have 100 separate rights. Rather he has a half share in the
company. As a result, dealings with shares, unlike dealings with sheep, are always
dealings with co-ownership. This means that, in practice, there is no need for A
to segregate any specific shares before declaring a trust in B’s favour or making a
transfer to B. Indeed he could not do so. If A declares a trust of his freehold under
which B has a 50 per cent beneficial interest, no one would suggest that the trust
fails because A has not segregated a specific half of his land. Similarly, if A declares
that he holds 50 of 100 shares for B, there is no difficulty in finding that B has not
only a personal right against A, but also a right to half of A’s shares. The subject
matter of B’s right is A’s entire holding of shares of that kind, not any right to any
individual 50 shares as A has no separable right to such shares.
Precisely the same reasoning applies to debts. If A is owed £1,000 by C, A has
one right against C. Any trust over this debt which A declares in B’s favour must
have as its subject matter the entire debt. A does not have one thousand claims for
£1 against C (or 100,000 claims for one penny) which can be separately identified,
but rather one claim for £1,000. If, therefore, the beneficiary’s claim is not to the
full £1,000 but to some lesser figure the trust should not fail for want of certainty
of subject matter as the subject matter of the trust is and could only be, the entire
debt, of which the beneficiary acquires a right to an appropriate share.
RASCALS goes further than Hunter v Moss however because LBIE remained free
to deal with all of the assets it acquired as it saw fit. They may have had none of the
relevant securities at all at any given time but merely a right to call for equivalent
from third parties. Briggs J concluded however that ‘[a] trust does not fail for want
of certainty merely because its subject matter is at present uncertain, if the terms
of the trust are sufficient to identify its subject matter in the future’.16 For this
proposition he cited Tailby v Official Receiver,17 a case of an equitable assignment
of future property where the subject matter of the assignee’s rights was initially
unascertained (because in the future) but became certain as they were acquired.
If we are to conclude that the trust does not fail for want of certainty of subject
matter, what was the subject matter of each individual affiliate’s right? Because
LBIE traded freely in the securities it bought for the affiliates, the subject matter

14 Re Lehman Brothers (n 1) [2010] EWHC 2914 (Ch) [232] (Briggs J).

15 R Goode, ‘Are Intangible Assets Fungible?’ [2003] Lloyd’s Maritime and Commercial Law­
Quarterly 379.
16 Re Lehman Brothers (n 1) [2010] EWHC 2914 (Ch) [225] (Briggs J).
17 Tailby v Official Receiver (1888) 13 App Cas 523.
120 Robert Stevens

of the trust was clearly more complex than in Hunter v Moss. What was held on
trust included ‘LBIE’s right to recover equivalent securities from street lending
counterparties, and its rights as against affiliates to make good short positions’.18
However, it may be wondered whether this is a possible stopping point. An affiliate
who demanded from LBIE that it account for the securities acquired on its behalf
would have no cause for complaint if LBIE held no such securities at any given
time or anything representing them, but instead went out into the market and
acquired them for cash upon demand.
Rather, the central difficulty in RASCALS is in identifying any specific rights,
save perhaps LBIE’s entire corpus of assets, that it was required to hold for indi-
vidual affiliates. Unlike in Tailby v Official Receiver no future event ever cured this
uncertainty.

V. What Needs to be Intended?

Clearly the intention of the parties arising under the RASCALS procedure was that
the affiliates, once they had purchased back, should acquire a beneficial interest
under a trust. Once the problem of uncertainty of subject matter was overcome,
both Briggs J and the Court of Appeal took this to be dispositive.19 Clearly the
common law is not generally in the business of frustrating the intentions of com-
mercial parties, but it may be that the consideration of the necessary intention was
too compressed.
If the parties to an agreement intend to create a licence to use land, but the
agreement grants exclusive possession for a term at a rent, it is a lease regardless
of whether that is what they intended to create.20 A still closer analogy to the pre-
sent case is the distinction between a fixed and floating charge. The parties to the
agreement in National Westminster Bank plc v Spectrum Plus Limited21 intended
to create a fixed charge, but because the agreement allowed the borrower freedom
to deal with the assets in the ordinary course of business, it was a floating charge.
Similarly the mere fact that the parties intended to create a trust, and the subject
matter is sufficiently certain, should not suffice.
As we have seen, Briggs J considered that for the pre-RASCALS period the fact
that LBIE remained free to deal with the assets in the ordinary course of business
was strongly indicative of there being no trust.22 It should have been seen as fatal,

18 Re Lehman Brothers [2010] EWHC 2914 (Ch) (n 1) [239] (Briggs J); cf Re Lehman Brothers (n 1)

[2011] EWCA Civ 1544 [54] (Lloyd LJ).

19 ibid [245] (Briggs J); [68] (Lloyd LJ).
20 Street v Mountford [1985] AC 809.
21 National Westminster Bank plc v Spectrum Plus Limited [2005] UKHL 41, [2005] 2 AC 680.
22 Re Lehman Brothers (n 1) [2010] EWHC 2914 (Ch) [275] (Briggs J).
 Floating Trusts 121

just as the freedom of the borrower to deal with assets in the ordinary course of
business in the House of Lords in Spectrum Plus was fatal to the existence of a fixed
charge.23
As we have seen, the nature of a trust is that one party is under a duty to hold
particular rights for another. What is the minimum content of this duty?24 At a
minimum the trustee must be under a duty not to use the right for his own benefit
(save to the extent that he is also a beneficiary under the trust). A trust is not a
fixed charge because the trustee is obliged to hold the right absolutely for the ben-
eficiary, and not merely by way of security. However, trusts and fixed charges have
in common the need for a minimum duty in relation to the rights which are the
subject matter of the equitable property right. It is difficult to identify any duty in
relation to specific rights that LBIE was under to the affiliates.
In the realm of secured transactions we permit floating charges. The security
holder has the power to crystallise the charge, and from that point subject the
debtor to the obligation to hold the assets which are the subject matter of the
charge for him by way of security (ie, to create a fixed charge). The power that
the charge holder has prior to crystallisation has proprietary effects, if the assets
are given away to a third party outside the ordinary course of business the charge
holder may follow the rights so transferred into the hands of the recipient. Could
the RASCALS case similarly be seen as recognising a power in the affiliates to cre-
ate a full-blown trust at some point in the future over the assets which are the
subject matter of their claim, whilst leaving LBIE free to deal with the assets in the
ordinary course of business prior to doing so: a floating trust? Powers to create
trusts (such as the equity to rescind of a party induced by an innocent misrepre-
sentation to sell his land) are recognised by our law and similarly have proprietary
effects. The difficulty would seem to remain, however, that the affiliates would
have no cause for complaint after exercising an option to require LBIE to account
for the shares acquired on the affiliate’s behalf, if LBIE used any source to acquire
equivalent securities to those it was obliged to account to the affiliates for. If this is
so, the recognition of the affiliate’s proprietary rights still seems problematic. Put
colloquially, the affiliates needed to be able to assert ‘that is mine’, and they could
not. If we say that the subject matter of the affiliate’s rights was all the securities
from time to time held by LBIE, this interest was defeasible upon payment of a
sum equivalent to the value of specific shares bought for the affiliate. That looks
like a floating charge, and they are void for want of registration upon a debtor’s
insolvency.

23 See also Henry v Hammond [1913] 2 KB 515, 521 (Channell J); Paragon Finance Plc v DB Thakerar

& Co [1999] 1 All ER 400, 416 (Millett LJ).

24 cf Armitage v Nurse [1998] Ch 241, 253 (Millett LJ); Citibank v MBIA [2007] EWCA Civ 11,

[2008] 1 BCLC 376.

122 Robert Stevens

VI. Conclusion

The conclusion of Briggs J was that LBIE had (in effect) paid to buy from the affili-
ates their interests in the securities, leaving the affiliates with no proprietary rights.
Any trust had therefore come to an end. In other words, the conclusion was identi-
cal to that which would have been reached if the entire RASCALS procedure had
never been mistakenly entered into in the first place. This conclusion is consistent
with the view that there was never any trust at all. The Court of Appeal agreed, save
to the extent that they disagreed as to whether LBIE had in fact paid for all of the
securities subject to the manual RASCALS process.25
The first case to unequivocally recognise the existence of the floating charge in
England is usually taken to be the decision of the Court of Appeal in Re Panama,
New Zealand and Australian Royal Mail Company.26 Since then academics have
had a great deal of entertainment seeking to explain the legal nature of the floating
charge. If nothing else, the RASCALS decision should similarly add to the gaiety
of nations.

25 Re Lehman Brothers (n 1) [2011] EWCA Civ 1544 [150], [162] (Lloyd LJ).
26 Re Panama, New Zealand and Australian Royal Mail Company (1870) 5 Ch App 318.
 6
‘Sort of ’ Backwards Tracing

JAMES PENNER*

I. Introduction

In the UK Court of Appeal (CA) decision in Relfo v Varsani1 the CA implicitly

acknowledged that a claimant could ‘backwards trace’ in order to found a pro-
prietary claim. In Brazil v Durant International2 the Privy Council (PC) explicitly
allowed a claimant to do so. But the PC’s approval of the ability to backwards trace
was tentative, and issues of principle were not really discussed, so the effect of the
decisions is not clear. Much remains open.
One ‘backwards traces’ when one traces into property acquired by the recipient
before he receives the money that is traced. If, for example, a rogue trustee buys an
antique table worth £3,000 on credit, by taking a loan from a bank, or by using his
overdraft facility, or with his credit card, and then later discharges the debt with
trust money, the antique table is the ‘backwardly’ traceable proceeds of the trust
money.
In a moment we shall look at Smith’s elaboration of this idea, but first it is nec-
essary to say a word about terminology. In the passage below Smith says that what
is traced is the value of what is exchanged into the thing it is exchanged for. Lord
Millett says the same thing in Foskett v McKeown.3 That is, one traces the value of
one’s car into the cash one receives upon selling it. For reasons I have explored at
length elsewhere,4 I think this terminology is misleading. I should rather say that
one realises the value of one’s car by exchanging it for money. There is no ‘transfer’
or ‘flow’ of the value of the car into the money one receives in exchange. What one

* I am grateful to Michael Bridge, Joe Campbell, Robert Chambers, Matthew Conaglen, Lionel

Smith and participants at the conference, April 2016, for conversations, comments and criticisms. Any
remaining faults, which I suppose to be many, lie with the author.
1 Relfo v Varsani [2014] EWCA Civ 360.
2 Brazil v Durant International [2015] UKPC 35.
3 Foskett v McKeown [2001] 1 AC 102, 127C.
4 JE Penner, ‘Value, Property, and Unjust Enrichment: Trusts of Traceable Proceeds’ in R Chambers,

C Mitchell and J Penner (eds), Philosophical Foundations of the Law of Unjust Enrichment (Oxford,
OUP, 2009) 306.
124 James Penner

traces is the ownership of one right into the right one receives in exchange. Because
I hold title to the car I can use one of the powers that go with having that title to
exchange it. The money I receive in exchange is the ‘exchange product’ of my exer-
cising my power to sell it. Thus, my ownership of the money is mine—I acquire
title to the money—because I was the one who owned the car and exercised the
power of exchange going with that ownership, or title, to exchange it.
Smith elaborates the nature of backwards tracing as follows:
Suppose that D buys a car from C with some money. If we were tracing the value inherent
in ownership of the money, we could trace it into ownership of the car. Now change the
facts slightly, so that D buys the car on credit; he takes ownership of the car, but he is C’s
debtor in respect of the purchase price. A day later, D pays the debt with the money being
traced. Can we trace from the money into the car as before? It is difficult to see why not.
There is no substantial change in the transaction; the period of credit might be reduced
to a minute or a second to better make this point. If that is right, then when money is
used to pay a debt, it is traceable into what was acquired for the incurring of the debt …
[I]nstead of tracing through substitutions in D’s hands, we could trace through substitu-
tions in C’s hands. When the car is bought for cash, the car is the traceable proceeds of
the money; that is the substitution in D’s hands. Clearly, from the other perspective the
money is the traceable proceeds of the car; that is the substitution in C’s hands. It is easy
to show that adding a period of credit does not change this conclusion … C gave up own-
ership of the car in exchange for a debt; that debt asset is therefore the traceable proceeds
of the car. Later, the debt is paid with the money in question. This money is therefore the
traceable proceeds of the debt; but since the debt was the proceeds of the car, therefore
the money is the proceeds of the car, via an intermediate step.5
When money is paid into a bank account, there is no difficulty on ‘forwards trac-
ing’ principles in determining the exchange of rights that has occurred. The bank
takes title to the money and gives value in exchange in the form of the increased
bank balance. The increased bank balance is, of course, the traceable proceeds of
the payment in of the money. Where, however, £500 is paid into an account that is
£500 in overdraft, resulting in a balance of zero, there are no forwardly traceable
proceeds. In exchange for the title to the money, the bank gives, in return, a reduc-
tion of the debt that it is owed by the customer, to zero in this case. No debt now
exists between the bank and the customer, and therefore no rights between them
that can be the forwardly traceable proceeds of the £500 payment. Whilst it is true
that nothing now in the account is traceable by the claimant, because there is no
existing right between the bank and customer, this does not mean that the tracing
exercise must end when the rights between the bank and its customer ‘run out’;
if you stop there, so backwards tracing reasoning goes, you have merely given up
the tracing exercise prematurely; the tracing exercise has not come to a ‘natural’ or
‘logical’ conclusion by itself. The overdraft was incurred, after all, by withdrawing
funds, and the payment of the overdraft is backwardly traceable into those funds,
and into whatever those funds were spent on.

5 L Smith, The Law of Tracing (Oxford, OUP, 1997) 146.

 ‘Sort of ’ Backwards Tracing 125

Conaglen raises the objection that this way of looking at things depends upon a
conceptual confusion. Forgive the long quotation:
It is useful to have in mind the example that Smith posits, of a car being bought on credit,
and the debt subsequently being paid with money that has been stolen (or paid away in
breach of trust). Smith argues that tracing the money backwards through payment of
the debt into the car is a natural corollary of the fact that the vendor of the car can trace
the car into the debt and thence into the money that is accepted in payment of the debt.
Smith describes the debt as a ‘red herring in the tracing exercise’.
Beguilingly simple as it is, the difficulty with this argument is that it is not the case, to
use Smith’s words, that
‘if from one perspective the money is the proceeds of the car, it follows that from the
other perspective, the car is the proceeds of the money’.
The trust beneficiaries’ rights to the car (if any) derive from those of the buyer, rather
than the seller, and there is no reason why a transaction of this sort must have sym-
metrical effects for buyer and seller alike. There is no doubt that, on the seller’s side, the
car can easily be traced into the asset that the seller acquires in return for parting with
title to the car (viz the debt), which in turn can be traced into the money that is paid to
satisfy the debt. But that is because ‘tracing is a process whereby assets are identified’ and,
at each stage, there is an asset that the seller can claim as the substitute for the asset that
he or she had at the outset of the process. The same cannot be said of the buyer’s side of
the transaction. The buyer begins with an original asset (for example, trust money) but
that money is retained by the buyer when he acquires the car. Thus, the buyer acquires a
new asset (the car) but the buyer also assumes a liability (the debt). It is that liability that
is later discharged by payment of the money to the seller, at which stage the buyer is left
with the new asset (the car).
The reason the two sides of the transaction are not simply mirror images of one another
is that the debt has a different juristic characteristic on each side of the transaction: the
debt is an asset in the hands of the creditor (the seller), and so it can provide a basis for
traditional tracing, but the debt is a liability—the opposite of an asset—in the hands
of the debtor (the buyer). As Smith says, ‘the thief parts with money in exchange for a
release from a liability’. That is not the same thing as the acquisition of an asset. Indeed,
an important part of the point of debt finance, from the borrower’s perspective, is to
enable him or her to make money by acquiring assets without paying for them until
later, so that the assets can in turn be used to generate funds with which to pay the debt,
ordinarily because the borrower does not, at the time of acquisition, either have or want
to lay out sufficient funds to pay for the assets. Thus, in a credit sale transaction, the
seller gives up an asset in return for another asset (the benefit of the debt) whereas the
buyer acquires an asset alongside a liability (the burden of the debt). The two sides of
the transaction are different, and so there is no reason why the same rules must apply to
each side …
[T]he acquisition and extinguishment of debts are two very different things. There is no
doubt that a debt can be acquired from the creditor, who holds it as an asset. But when
the debt is paid, the debt is not being acquired from the creditor—it is being destroyed.6

6 M Conaglen, ‘Difficulties with Tracing Backwards’ (2011) 127 LQR 432, 446–48.
126 James Penner

Conaglen’s point is well taken, but depending upon how stringently one follows
its logic, it may lead to a very drastic reduction in the ability of a beneficiary to
trace at all.
We can consider three cases: (1) over-the-counter shop sales, where I should
say that it is indisputable that the transfer of title to the money paid over to the
vendor is consideration for the transfer of title to the purchased goods. Case (2)
has two components: (i) the contract of sale is executory, ie, made on the basis
that the purchaser, under the contract, incurs a duty to pay the price, and the
vendor the duty to transfer title to the goods—in other words, the consideration
is an exchange of voluntarily undertaken obligations (colloquially, an ‘exchange of
promises’), the purchaser to discharge a debt, and the vendor to transfer title to
the goods; (ii) the second component is one of timing: title to the goods passes to
the purchaser after the purchaser discharges his duty to pay the price. Case (3) is
identical to case (2) as to (i), the contract’s being executory, but in this case (iii),
the title to the goods passes from vendor to purchaser prior to the latter’s paying
the price, ie, prior to the time he discharges his debt under the contract of sale.
Regarding (1), as I have set out in detail elsewhere,7 barter transactions and
over-the-counter cash sales in shops do not involve executory obligations. Rather
than an exchange of executory obligations, one to transfer title to the goods, one
to pay the price, these sales involve an exchange of performances, ie, the passing
by the vender of title to the goods by delivery, the passing of title to the money
likewise by the purchaser. If these actions are not more or less simultaneous, but
one party goes second, and before performing changes his mind and decides not
to proceed (‘Oh, sorry, I see this has already been sold. Here’s your money back’.
‘Oh, sorry, it seems I have come out without my wallet’) then that, legally, is the
end of the matter; there is no breach of contract because neither side undertook
an obligation to perform. The underlying idea is that it is no good, especially here,
to try to squeeze every legally valid exchange into the straitjacket of an exchange of
executory obligations. The terms of exchange must be agreed,8 but not necessarily
as obligations to do something in the future.9 There is no question that in case (1)
sales the goods are the traceable proceeds of the money, and vice versa, each being
the consideration given respectively by the vendor and the purchaser under the
contract of sale.
The trouble begins with case (2) and case (3). In each case, the money the pur-
chaser pays goes to discharge a debt. On Conaglen’s logic, if payment to discharge
a debt merely extinguishes the debtor’s liability, just ‘destroys the debt’, then it is
difficult to see how the receipt of title to the goods, either before and after the debt

7 JE Penner, The Idea of Property in Law (Oxford, Clarendon, 1997) 154–64.

8 And these are quite properly understood as sales, to which all the normal sale of goods law applies
regarding warranties, conditions, limitation periods, etc.
9 I draw some sustenance for this view from the maritime law consideration of ‘Himalaya’ clauses,

which have been found effective in terms of ‘mutuality of performance’, as opposed to ‘mutuality of
obligation’: see The Eurymedon [1974] UKPC 1, [1974] 1 Lloyd’s Rep 534, 539 (Lord Wilberforce); The
New York Star [1979] 1 Lloyd’s Law Reports 298, 304–05 (Barwick CJ).
 ‘Sort of ’ Backwards Tracing 127

under the contract of sale is actually paid, is the traceable proceeds of the payment
of the money: the goods are not the traceable proceeds of the money used to pay
the debt, but rather the traceable proceeds of the vendor’s executory promise to
deliver them; and the consideration for that was the debtor’s liability to pay the
price, ie, the contractual debt the purchaser incurred. My suspicion is that this
point has not been sufficiently noticed before because in type (2) cases, where
the payment is made and then title to the goods transferred, ie, where there is no
‘intervening period of credit’, the payment to discharge the contractual debt is
treated like the performance of payment in type (1) cases (‘Suppose that D buys a
car from C with some money’; ‘When the car is bought for cash, the car is the trace-
able proceeds of the money’),10 even when, on the strict logic Conaglen employs, it
is plainly incorrect to do so. Happily, as we shall see,11 the law on the sale of goods
seems to treat both cases (2) and (3) as ones where tracing should be allowed,
given its treatment of the concept of ‘price’ and ‘consideration’.

II. Authority on Backwards Tracing Prior to Brazil

Prior to Brazil, authority for the proposition that a claimant could backwards
trace was spotty and never explicitly framed as cases where backwards tracing was
allowed. Nevertheless, it is clear that the courts have actually backwards traced in
particular cases: in Agip (Africa) Ltd v Jackson12 the court allowed the plaintiff to
treat a payment by Lloyds Bank in London to the defendant as the transfer of his
money, even though the payment from the plaintiff to Lloyds’ correspondent bank
in New York was made later. Thus, Lloyds had made the payment to the defendant
before, and in expectation of, receiving a corresponding amount from the plaintiff
via a New York bank. Furthermore, backwards tracing necessarily underlies the
ability of equity to trace through bank cheque clearing systems generally, since the
settlement between banks is not simultaneous with the crediting and debiting of
accounts.
There is also the Canadian case of Agricultural Credit Corporation of Saskatch-
ewan v Pettyjohn.13 Farmers purchased cattle using an overdraft facility, and then
discharged the overdraft with money acquired from ACCS. ACCS was entitled to
claim that the cattle were the proceeds of the money then advanced. In giving the
judgment of the PC in Brazil, Lord Toulson had this to say about Pettyjohn:
37 On those facts the court was right in the view of the Board not to divide minutely the
connected steps by which, on any sensible commercial view, the purchase of the ­cattle

10 Taken from the quotation from Smith above, my italics.

11 Text to n 49 below, discussing the Sale of Goods Act 1979 (as amended).
12 Agip (Africa) Ltd v Jackson [1990] EWCA Civ 2, [1990] Ch 265; affirmed on appeal [1991] Ch 547;
see also the tracing through credit facilities in El Ajou v Dollar Land Holdings plc [1993] 3 All ER 717.
13 Agricultural Credit Corporation of Saskatchewan v Pettyjohn (1991) 79 DLR (4th) 22 (Sask CA).
128 James Penner

was financed by the credit corporation, but to look at the transaction overall. The inter-
position of the bank was purely to provide bridging finance to cover the gap in time
between the purchase and the credit corporation’s funds coming through as previously
arranged.
This looking at the ‘transaction overall’ is a point to which we shall have to return.
The House of Lords conducted a backwards tracing exercise in the most impor-
tant review of the law of tracing in a century, Foskett v McKeown,14 without explic-
itly stating that that was what they were doing. Trust money was used to pay the
last two premiums on an insurance policy. The trust beneficiaries were able to
trace into the policy proceeds when the insured committed suicide and claim a
co-ownership share in the proceeds, a share proportionate to the premiums the
trust money paid for out of all the premiums paid. Giving the leading judgment
for the majority, Lord Millett was explicit in finding that the chose in action, that
is, the right to receive the death benefit, was acquired under the contract of insur-
ance upon the payment of the first premium, and that single right remained in
existence throughout. No new right arose as each subsequent payment was made:
In the case of an ordinary whole life policy the insurance company undertakes to pay
a stated sum on the death of the assured in return for fixed annual premiums payable
throughout his life. Such a policy is an entire contract, not a contract for a year with a right
of renewal. It is not a series of single premium policies for one year term assurance. It is
not like an indemnity policy where each premium buys cover for a year after which the
policyholder must renew or the cover expires. The fact that the policy will lapse if the
premiums are not paid makes no difference. The amounts of the annual premiums and
of the sum assured are fixed in advance at the outset and assume the payment of annual
premiums throughout the term of the policy …
In the present case the benefits specified in the policy are expressed to be payable ‘in con-
sideration of the payment of the first premium already made and of the further premiums
payable’ … It is beyond argument that the death benefit of £1m paid on Mr Murphy’s
death was paid in consideration for all the premiums which had been paid before that
date, including those paid with the plaintiffs’ money, and not just some of them. Part of
that sum, therefore, represented the traceable proceeds of the plaintiffs’ money.15
And further on:
Why should the proceeds of the policy be attributed to the first premium when the policy
itself is expressed to be in consideration of all the premiums? There is no analogy with
the case where trust money is used to maintain or improve property of a third party. The
nearest analogy is with an instalment purchase.16
An instalment purchase, of course, is a purchase on credit, where title passes at
the outset in consideration of the discharge of a debt paid in instalments. In this
case, if later premiums were not paid, the initially acquired chose in action lapses.17

14 Foskett (n 3).
15 ibid 133E–H (emphasis added); see also 110E (Lord Browne-Wilkinson),116B (Lord Hoffmann).
16 ibid 137E (emphasis added).
17 ibid 137C, 137G.
 ‘Sort of ’ Backwards Tracing 129

Conaglen suggests that the result in Foskett can be explained without reference
to backwards tracing. Conaglen first discusses the case of Primeau v Granfield,
which Smith explains as a case of backwards tracing. Primeau was allowed to trace
money of his expended by Granfield to pay the rent on a lease into the lease itself.
Conaglen says:18
[W]hile the decision can be interpreted as depending on tracing Primeau’s money into
the payment of obligations owed by Granfield under the lease, H and J seemed to think
of the payments as being in the nature of rent. As the Privy Council has said, ‘the rent is
equivalent to the purchase money’19 for a lease—in other words, ‘the monetary compen-
sation payable by the tenant in consideration for the grant’.20 The lease entitled Granfield
to mine for gold, but that right was dependent on his payment of a price for the right
(the rent) and Primeau’s money had been used to pay that price. In substance, Primeau’s
money had been used to acquire the rights that the lease gave to Granfield …
It is not suggested that this interpretation of Primeau v Granfield is categorically incon-
sistent with Smith’s interpretation of the case: although it was not the case historically,
the modern cases have treated rent as a contractual obligation, so that payment of rent
can be considered payment of a debt and Primeau v Granfield can thus be interpreted
as supporting Smith’s thesis. But that support is weak given that the facts of the case
are also consistent with Primeau’s money having been used to procure the asset that
Granfield held, at least in terms of his continued holding of that asset … Treating the
use of Primeau’s money as payment of the rent for the goldmine lease makes Primeau
v Granfield similar to the House of Lords’ decision in Foskett v McKeown, where trust
beneficiaries were able to trace into an insurance policy after the premiums were paid
with trust funds.
In a footnote21 to the last sentence, Conaglen says:
Penner argues that Foskett itself involved backwards tracing, for this reason … But that
does not accurately reflect the Lords’ reasoning: Lord Millett, in particular, identified
substituted assets (rather than the payment of a debt) at each stage of his analysis of the
facts (see [2001] 1 AC 102 at 134).
With respect, it is not clear how these thoughts undermine the claim that Foskett
was a case of backwards tracing. It is immaterial how ‘rent’ is characterised so long
as it is understood to be consideration, ‘purchase money’, for an asset (the lease)
already acquired. Indeed, treating rent in this way seems to affirm that the law has
recognised later consideration as transactionally linked to the prior acquisition of
an asset. As to whether the preceding discussion of Foskett accurately reflects the
court’s reasoning, I regret that I cannot find anything on page 134 which ­unsettles
what I have said above. Of course I do not claim that either Lord Millett or
the other two of their Lordships in the majority, Lord Browne-Wilkinson or Lord

18 Conaglen (n 6) (emphasis added).

19 Malayan Credit Ltd v Jack Chia-MPH Ltd [1986] 1 AC 549, 560.
20 Property Holding Co v Clark [1948] 1 KB 630, 648.
21 Conaglen (n 6) fn 38.
130 James Penner

Hoffmann, explicitly endorsed the result as one of backwards tracing.22 It is their

characterisation of the chose in action under the policy as one acquired at the
outset into which later premiums could be traced which makes irresistible the
conclusion that backwards tracing was allowed. True, later on in his judgment
Millett, unlike Browne-Wilkinson and Hoffmann, would have treated the premi-
ums as going first to buy units under the policy’s formula for allocating part of the
premiums to the investment element of the policy, and part to the life insurance
element.23 But as to the latter, which generated the sought-after proceeds, it is still
clear on Millett’s reasoning that that allocation resulted in the relevant fraction of
the premiums in question serving as consideration for the chose in action which
he emphasised was acquired at the outset.24
Then we have the case of Law Society v Haider.25 Judge Richards QC allowed
the claimant to trace from a payment discharging a mortgage into the house that
was purchased with the mortgage loan, and thence into the proceeds of the sale
of that house and into another house purchased with those proceeds. Conaglen
argues that the result in the case can be explained by way of treating the ­claimant

22 They did not, in their judgments, address the defendant counsel’s argument that this was a case

of backwards tracing, and thus not to be allowed, but neither did this argument succeed: Foskett (n 3)
105G–H, 106A.
23 ibid 140H–145D.
24 Joe Campbell has suggested to me an alternative analysis of Foskett that does not turn on back-

wards tracing. He asks us to consider a bank account. Upon entering into the banker–client contract,
the client acquires a chose in action, a right to be paid the current balance of the cleared funds in the
account upon demand. So in a way the contract provides the client with a single chose in action at the
outset of the contract. But the value of that chose in action fluctuates with payments in and withdraw-
als out. Thus, it seems to be the case that the various payments in can be traced ‘forward’ into the later
balance in the account. By parity of reasoning, whilst the chose in action represented by the complex of
rights under the insurance policy was acquired at the outset of the contract of insurance, the payments
of the policy premiums can be traced forwards into the complex of rights making up that chose in
action, the value of which fluctuated as further premiums were paid. At any particular time, the precise
rights that the policyholder had would not be identical to the rights the day the policy was taken out.
In the insurance contract in Foskett, premiums were allocated under a formula (expressed in terms of
‘units’) whereby part of any premium was allocated to the ‘investment’ component of the policy, part
to the ‘insurance’ component. But, with respect, this bank balance analogy does not justify the actual
result in Foskett. On the facts it was clear that the 4th and 5th premiums paid with trust money did not
contribute, or contribute much, to the ‘insurance’ component of the policy, into the proceeds of which
the court allowed the beneficiaries to trace. The payments of trust money marginally enhanced the
surrender value of the policy, by contributing to the policy’s investment component which, at the time
of the policyholder’s death five years after its inception, would have had investment contributions of
somewhat less than £50,000 (part of each premium going to sustain the ‘insurance’ component). It was
clear on the facts that even had the 4th and 5th premiums not been paid, the result would have been a
significant decline in the surrender value of the policy, as money from the ‘investment’ side would have
been ‘cancelled’ to keep the ‘insurance’ side on foot. So on principles analagous to the banker–client
accounting, the beneficiaries would have at most had a claim to the enhanced surrender value of the
policy immediately prior to the death of the policyholder; at most (assuming that the insurance com-
pany was not a fantastically good investor) this would have been in the region of somewhat less (again
accounting for the fact that part of each premium went to keeping the ‘insurance’ component on foot)
than £20,000 plus investment returns. Perhaps £20,000 or thereabouts. But the beneficiaries received
two-fifths of the £1 million payout.
25 Law Society v Haider [2003] EWHC 2486.
 ‘Sort of ’ Backwards Tracing 131

as subrogated to the mortgagee whose loan was initially discharged with the trust
money.26 That may be so,27 but it was not how the court reasoned. The judge
explicitly treated the case as a ‘tracing exercise’,28 and there is no mention whatso-
ever of a subrogation claim.
Bishopsgate Investment Management Ltd v Homan29 is the first case where back-
wards tracing was explicitly considered. At first instance Vinelott J was willing to
allow backwards tracing in limited circumstances, ie,
where an asset was acquired by [the defendant] with moneys borrowed from an over-
drawn or loan account and there was an inference that when the borrowing was incurred
it was the intention that it should be repaid by misappropriation of [the plaintiff ’s]
money. Another possibility was that moneys misappropriated from [the plaintiff] were
paid into an overdrawn account of [the defendant] in order to reduce the overdraft and
so make finance available within the overdraft limits for [the defendant] to purchase
some particular asset.30
Dillon LJ accepted elements of Vinelott’s reasoning, but Leggatt LJ found the con-
tention utterly wrong on the basis that it was simply impossible for a claim to be
made in respect of an asset acquired before the misappropriation took place.31
Henry LJ simply agreed with both judgments, so the case is frail authority on the
status of backwards tracing.
We now come to Relfo and Brazil. Schematically, both cases involved payments
of the following kind: A caused B to make a payment to C; A then afterwards paid
B with funds, which payment was equivalent to a misapplication of trust moneys;
in both cases, the court held that the claimant could trace the second payment to B
into the first, prior payment from B to C, so that C held those funds as a recipient
of trust property.
In Relfo the payment of Relfo’s funds was made to Mirren Ltd. On the same day
a payment in like amount was made from Intertrade Group LLC to the defend-
ant. On the facts it was clear that ‘there was no transfer out of Mirren’s account
in advance of the Intertrade payment which could have funded it’.32 Neverthe-
less, Arden LJ, giving the leading judgment, held that Relfo could trace its money
into the payment received by the defendant. One feature of the case is that whilst
Arden LJ briefly referred to Leggatt’s judgment in Bishopsgate,33 there was no

26 Conaglen (n 6) 441–42.
27 The problem is that the report of the case does not disclose the content of the order agreed upon
by the parties. A subrogation claim will not provide the same valuation of the charge on the final trace-
able asset as would a backwards tracing claim. See the discussion of the different results arising from
subrogation as against a backwards tracing in the last section, examples (1) and (2) below.
28 Haider (n 25) [39]–[42].
29 Bishopsgate Investment Management Ltd v Homan [1995] Ch 211.
30 Bishopsgate Investment Management Ltd v Homan [1994] Pens LR 179 [156] (Vinelott J at first

instance).
31 Bishopsgate (n 29) 221F–G.
32 Relfo (n 1) [14].
33 ibid [31].
132 James Penner

­ iscussion of that case which was presumably binding upon a subsequent Court
d
of Appeal. The court held that the trial judge was right to infer that money from
the Mirren account was subsequently paid over to Intertrade to fund, ex post facto,
Intertrade’s payment to the defendant.34 In so holding, Arden J said the following:
61 The inference that the judge made means that he found that what had happened was
on the following lines. At the start of the chain of transactions, Relfo had money on
deposit with its bank, ie it had the benefit of a debt owed to it by its bank. It exchanged
this right for a debt owed to it by Mirren. The value of this debt lay in the credit balance
on this account. Mirren agrees to transfer this balance to another person or person at
some future date in exchange for Intertrade making the Intertrade payment.
62 I therefore accept Mr Shaw’s submission that the fact that Mirren did not reimburse
anyone for the Intertrade payment until after the Intertrade payment had been made
does not matter. On the judge’s findings, the Intertrade payment and the other payments
made throughout the chain of substitutions was made on the faith of the arrangement that
Mirren would provide reimbursement. By making that arrangement, Mirren exploited and
used the value inherent in Relfo’s money that had been paid into Mirren’s account (my
italics).
63 In my judgment, Mr Shaw is correct in his submission that Agip is authority for the
proposition that monies held on trust can be traced into other assets even if those other
assets are passed on before the trust monies are paid to the person transferring them,
provided that that person acted on the basis that he would receive reimbursement for the
monies he transferred out of the trust funds. The decision in Agip demonstrates that in
order to trace money into substitutes it is not necessary that the payments should occur
in any particular order, let alone chronological order. As Mr Shaw submits, a person may
agree to provide a substitute for a sum of money even before he receives that sum of
money. In those circumstances the receipt would postdate the provision of the substitute.
What the court has to do is establish whether the likelihood is that monies could have been
paid at any relevant point in the chain in exchange for such a promise. I see no reason in logic
or principle why this particular way of proving a substitution should be limited to payments
to or by correspondent banks (my italics).
The passages I have italicised throw up a difficulty in interpreting the ratio of the
case. In order for the payment from Intertrade to the defendant to be the back-
wardly traceable proceeds of the payment (whenever it came) to Intertrade, that
payment must have discharged a debt owed to Intertrade incurred when Inter-
trade made the payment to the defendant. So that was one inference, that the rogue
director of Relfo had promised Intertrade to reimburse it for the payment to the
defendant. But the first passage in [63] that I have italicised suggests that the court
made a further inference, that the arrangement between the rogue director and
Intertrade was also that the money to discharge the debt to Intertrade for making
the payment to the defendant was to come from Relfo. Call this the ‘second infer-
ence’. It is not clear why such a finding was either necessary or even relevant.

34 ibid [57]–[58].
 ‘Sort of ’ Backwards Tracing 133

Consider Smith’s criticism of Vinelott’s version of backwards tracing in

­ ishopsgate.35 It seems to violate the general principle of tracing to require that
B
the defendant intends in advance to use the trust property that was in fact misap-
propriated to purchase the asset. All that is generally required is that he actually
acquires the asset in exchange for passing title to the trust assets to the other party
to the exchange—his prior intentions are entirely irrelevant. Test the matter this
way. Let us assume the court held that making the second inference was essential
to the success of Relfo’s claim. Thus, if the rogue director had merely promised
to reimburse Intertrade, but did not disclose the source of the funds, then Relfo
would not have been successful. But this seems to impose an irrelevant require-
ment, since ex hypothesi it was Relfo’s funds which were actually used. Or weaken
the requirement to this: that an essential element of Relfo’s claim was that the
rogue director himself intended to reimburse Intertrade with Relfo’s funds at the
time he agreed to reimburse Intertrade for making the payment to the defendant.
Again, why should this matter? Imagine that he did thus intend, but when the time
for reimbursing Intertrade came along, he reimbursed them instead with money
from another company, Delfo, of which he was also a director. Why should Delfo
not have a claim in these circumstances? Because their being a source of funds
did not cause the rogue director to make the arrangment with Intertrade, whereas
Relfo’s being a source of funds did? Should this reasoning entitle Relfo to trace
into the payment made with Delfo’s funds? Another way of putting this objection
is that tracing is normally regarded as transactional, not causal. As Lord Millett put
it in Foskett in criticising the judgment in the Court of Appeal in that case:
[That] argument is based on causation and as I have explained is a category mistake
derived from the law of unjust enrichment. It is an example of the same fallacy that gives
rise to the idea that the proceeds of an ordinary life policy belong to the party who paid
the last premium without which the policy would have lapsed. But the question is one of
attribution not causation.36
Turning to Brazil, in his judgment for the Board Lord Toulson reviewed the
authorities and the arguments of both Smith and Conaglen. He said:
33 More particularly the plaintiffs submit, as Professor Smith argues, that money used to
pay a debt can in principle be traced into whatever was acquired in return for the debt.
That is a very broad proposition and it would take the doctrine of tracing far beyond
its limits in the case law to date. As a statement of general application, the Board would
reject it. The courts should be very cautious before expanding equitable proprietary rem-
edies in a way which may have an adverse effect on other innocent parties. If a trustee on
the verge of bankruptcy uses trust funds to pay off an unsecured creditor to whom he
is personally indebted, in the absence of special circumstances it is hard to see why the
beneficiaries’ claim should take precedence over those of the general body of unsecured
creditors.

35 L Smith, ‘Tracing, ‘Swollen Assets’ and the Lowest Intermediate Balance: Bishopsgate Management

Ltd v Homan’ (1994) 8 Trusts Law International 102.

36 Foskett (n 3) 137G.
134 James Penner

In context, the last sentence seems to be an endorsement of Conaglen’s view,37

cited by his Lordship at [31], viz:
When the already precarious position of unsecured creditors is weighed against the con-
comitantly far better protected position of trust beneficiaries, it is suggested that the
law ought not to recognise the possibility of tracing backwards. The unsecured creditors
should not have their position worsened further by effectively making them insurers for
the beneficiaries against trustee defalcations. Trust beneficiaries whose money has been
wrongly applied in satisfaction of a debt can stand in the position of the satisfied credi-
tor (by subrogation), but it is a step too far, in policy terms, to allow them to stand in
the position of the debtor and act as owners of property the trustee acquired before the
debt was paid.
However his Lordship went on to allow backwards tracing in this case, on the
­following basis:
38 The development of increasingly sophisticated and elaborate methods of money
laundering, often involving a web of credits and debits between intermediaries, makes
it particularly important that a court should not allow a camouflage of interconnected
transactions to obscure its vision of their true overall purpose and effect. If the court
is satisfied that the various steps are part of a co-ordinated scheme, it should not matter
that, either as a deliberate part of the choreography or possibly because of the incidents
of the banking system, a debit appears in the bank account of an intermediary before
a reciprocal credit entry. The Board agrees with Sir Richard Scott V-C’s observation in
Foskett v McKeown [1998] Ch 265 that the availability of equitable remedies ought to
depend on the substance of the transaction in question and not on the strict order in
which associated events occur.
…
40 The Board therefore rejects the argument that there can never be backward tracing,
or that the court can never trace the value of an asset whose proceeds are paid into an
overdrawn account. But the claimant has to establish a co-ordination between the deple-
tion of the trust fund and the acquisition of the asset which is the subject of the tracing claim,
looking at the whole transaction, such as to warrant the court attributing the value of
the interest acquired to the misuse of the trust fund. This is likely to depend on inference
from the proved facts, particularly since in many cases the testimony of the trustee, if
available, will be of little value.
41 The Board does not doubt the correctness of the decisions in James Roscoe (Bolton)
Ltd v Winder [1915] 1 Ch 62 and In re Goldcorp Exchange Ltd [1995] 1 AC 74, but in nei-
ther case was there evidence of an overall transaction embracing the co-ordinated outward
and inward movement of assets (my italics).
Apparently, then, the Privy Council has adopted a restricted application of back-
wards tracing, restricted that is to cases where the debt and the payment with
which it is discharged are in substance part of the same overall transaction, such
that there is some sort of co-ordination between the depletion of the trust fund
and the acquisition of the asset. Such a requirement, though not identical to the

37 Conaglen (n 6) 455.
 ‘Sort of ’ Backwards Tracing 135

‘second inference’ requirement canvassed above, would presumably treat such an

inference as relevant for determining that the separate transactions were in sub-
stance part of an overall scheme of co-ordination.
Perhaps, but only perhaps, some illumination of the concept of a ‘composite
transaction’ can be gleaned from the more or less contemporaneous UK Supreme
Court decision in Menalaou v Bank of Cyprus UK Ltd.38 The parents of the claim-
ant, M, were indebted to the defendant, ‘the Bank’, to the tune of £2.2 million,
secured by two charges on their family home. In order to reduce their indebted-
ness and free up some money for other purposes, they decided to sell the home
and buy a less valuable property for £785,000, which they intended to put in the
name of M to be held on trust for herself and two of her siblings. It was proposed
that following the sale of the old family home, the Bank would receive £750,000 to
reduce the parents’ indebtedness and would release its charges over that property,
but would acquire a charge over the property put in the name of M. The Bank
agreed to this plan of action. The proceeds of the sale of the old family home were
received by the parents’ solicitors and applied at their instructions according to
the agreement, that is, they were disbursed to the right persons under the parents’
agreement with the Bank. The Bank received its £750,000, and the purchase price
of £785,000 for the property in M’s name went to its vendor. Moreover, the solici-
tors secured a charge over M’s property in favour of the Bank. However, as events
later transpired, it became clear that M was unaware that the property in her name
was to be subject to a charge and did not consent to it, and in consequence, the
charge was improperly obtained and was void. Not aware that the charge was void,
the Bank released its charges over the old family home about a month after the
new property was purchased in M’s name.
The Bank claimed that, although the charge over M’s property was void, it was
entitled to be subrogated to an unpaid vendor’s lien over that property, and it
succeeded in this claim in the UK Supreme Court. In deciding in favour of the
Bank, the UK Supreme Court did so on the basis that the Bank had no proprietary
interest in the money received from the purchase of the old family home; in other
words, the parents received the proceeds of the sale of the old family home ben-
eficially (although through the receipt of their solicitors), though they were con-
tractually bound to spend it according to their agreement with the Bank.39 This
raised the problem that M could be characterised as at most an ‘indirect’ recipient
of value from the Bank, that is, M was not enriched by a direct transfer of value
from the Bank to her, but in some other way.
Both Lord Clarke and Lord Neuberger, endorsing in broad respects the reason-
ing of the Court of Appeal, held that there was sufficient connection between the
Bank, the parents, and M to hold that M’s acquistion of the uncharged freehold
to the new property was an enrichment at the expense of the Bank, and that it

38 Menalaou v Bank of Cyprus UK Ltd [2015] UKSC 66, [2015] 3 WLR 1334.
39 ibid [13], [53] (Lord Clarke), [85] (Lord Neuberger).
136 James Penner

was unjust.40 It is difficult to discern in quite what way M’s enrichment was at the
expense of the Bank, but Lord Clarke reasoned that ‘[t]he bank was central to the
scheme from start to finish’, and ‘[i]t was thus thanks to the bank that [M] became
owner of [the property], but only subject to that charge’.41 The sale of the old fam-
ily home and the purchase of property in M’s name ‘were not separate but part of
one scheme, which involved the bank throughout’:42
The question in each case is whether there is a sufficient causal connection, in the sense
of a sufficient nexus or link, between the loss to the bank and the benefit received by the
defendant, here [M].43
For his part Lord Neuberger found that it was ‘appropriate’ to treat the sale of the
old family home and the purchase of a new property in M’s name as ‘part of one
scheme, at least for present purposes’.44 He also said:
There was in reality a single transaction, and it was from that transaction that [M]
directly benefitted, even though the benefit was effected at the direction of [M’s] parents.
The benefit to [M] was direct because it arose as the immediate and inevitable result of the
very transaction to which she was party and which gave rise to the unjust enrichment …
I should add that, even if [M] could be characterised as an indirect recipient of any
enrichment, I do not consider that that would assist her: she would still properly be liable
on the facts of this case, essentially for the same reasons.45
Standing back, any fair-minded person would say that, as a matter of fairness and com-
mon sense, by acquiring the freehold [free] from any charge [M] was unjustly enriched
at the expense of the bank, albeit not because of any fault of hers.46
It is difficult to find any precise characterisation of the transaction in these pas-
sages which provides much in the way of guidance. The two passages I have itali-
cised seem to insist on some kind of causal connection between one transaction
and another, ie, that had the bank not agreed to the parents’ scheme then the
parents would never have received the money to buy the house in M’s name. It
is worthwhile pointing out that this seems to be a notion of ‘but for’ causation in
the strong sense that in the absence of 1, 2 could simply not have taken place. This
is to be distinguished from a weaker sense of ‘but for’ causation operating in the
realm of the defence of change of position. There the defendant must show that
his receipt of the money, say mistakenly transferred to her, prompted her to make

40 The reasoning of the Court of Appeal and Lord Clarke and Lord Neuberger can be criticised, and

was by Lord Carnwath: [107]-[40]. According to Lord Carnwath, the orthodox application of ­‘Quistclose’
trust principles would entail that the bank was beneficially interested in the money the solicitors received
from the sale of the old family home, and given that, the purchase of the house in M’s name with that
money made available to them a right to be subrogated to an unpaid vendor’s lien.
41 Menalaou(n 38) [24].
42 ibid [25].
43 ibid [27] (emphasis added), [33].
44 ibid [67].
45 ibid [73] (emphasis added).
46 ibid [77].
 ‘Sort of ’ Backwards Tracing 137

an expenditure that she otherwise would not have made, not necessarily one she
could not have made. Perhaps the most that can be gleaned from Menelaou and
Brazil is that the UK Supreme Court will be sensitive to treating linked transac-
tions, especially if an earlier one is a ‘but for’ cause of a later one in the strong sense
just identified, as a composite transaction if that reflects some sense of ‘economic
reality’, or ‘fairness and common sense’.

III. ‘Composite Transactions’ and Bona Fide Purchase

There are two axes upon which the acquisition of an asset and a payment to dis-
charge a debt can be treated as co-ordinate, or composite, so as to form, in sub-
stance, part of an overall transaction: (1) the relation of the incurring of the debt
to the asset into which one traces; and (2) the intentions of the defalcating trustee
or fiduciary. Regarding (1), we can make a distinction between two sorts of case.47
The first sort of case concerns what I shall dub ‘D-claims’, for direct backwards trac-
ing claims, those in which the debt arises under the same agreement under which
the asset is acquired. The obvious cases are sales of goods, and credits and debits
through the banking system (Agip, etc). Mortgage loans, and perhaps credit card
purchases, are a little trickier. The second sort of case is where the debt obligation
arises independently of any asset acquisition. In these cases, such as the grant of
overdraft facilities, the debt arises when the facility is made use of, but the debt is
not incurred in respect of any particular acquisition of an asset as a matter of the
contract in which the party in question incurred the debt. This is so even if the rea-
son for which the debtor acquired the loan facility was because a particular asset
acquisition was in mind. I shall call these IND-claims, short for indirect backwards
tracing claims. This brings us to (2). It is arguable, in the case of IND-claims, that
only where the defalcating trustee or fiduciary in charge of the property of others,
such as a company director (whose misapplications of his principal’s property is
treated as equivalent to a breach of trust,48 as in Relfo), incurred the debt with the
intention to acquire a specific asset and discharge the debt with trust moneys/the
money of his principal that the beneficiary/principal should be able to trace into
that asset. The idea is that the trustee/fiduciary’s intention makes the case more
or less equivalent to a D-claim. But let us begin with D-claims before tackling this
thorny issue.
My suggestion regarding D-claims is that they seem suited to satisfy Lord
­Toulson’s concern about the transaction being ‘in substance’ an overall transac-
tion or a co-ordinated scheme. The easiest case, it is submitted, is the case of a sale

47 My recognition of this distinction owes a lot to conversations with Rob Chambers. I am not sure

he would be willing to take much if any credit for the passages that follow.
48 Re Lands Allotment Co (1894) 1 Ch 616; JE Penner, The Law of Trusts, 10th edn (Oxford, OUP,

2016) para 11.15.

138 James Penner

of goods, and we can also draw some assistance here from the doctrine of bona
fide purchase.
The Sale of Goods Act 1979, which is well known as a statutory embodiment
for the most part of the pre-existing common law, treats the price paid by the
buyer as consideration for title to the goods acquired whether or not the price is
paid prior to or after title to the goods passes to the buyer.49 The important point
to note is that if one can trace into the payment of the price in a case where title
to goods passes in advance, this is essentially a case of backwards tracing through
the discharge of a debt, yet it is clear that whenever the price is paid, it counts as
consideration for acquiring title to the goods. The Act leads us to comprehend
a more capacious definition of ‘consideration’ than those purchases of property
which, for tracing purposes, would only entitle a beneficiary to trace where title to
the goods passed at the time of or following the payment of the price. But, as we
saw earlier in attending to Conaglen’s conceptual objection to backwards tracing50
even here we must be circumspect: on strict forward-tracing principles, tracing
into the goods acquired would not be allowed in so far as the money is used to dis-
charge a debt, here the debt incurred on entering into the contract of sale; strictly
speaking, only simultaneous shop counter transactions would count because only
in these cases would it seem that the payment of the price would not amount to
the discharge of a pre-existing contractually incurred debt. What the sale of goods
example illustrates is that the common law has never had such a restricted under-
standing of consideration. The sale of goods case also seems to diminish in respect
of D claims the worry expressed by Conaglen, and apparently endorsed by Lord
Toulson, about the trustee’s creditors. Why should not the beneficiary be entitled
to trace into the actual goods his money was used to acquire, as long as his money
was used to pay the price, ie, his money was the consideration in law for the trustee
acquiring title to the goods?
One last thought about sales cases, concerning causal and transactional links.
Consider the very common ‘all moneys’ version of retention of title provisions in
sales of raw materials. Such provisions prevent title passing under each individual
sale agreement until all outstanding debts owed to the supplier under any contract
of sale are discharged. Thus, in a simple case, A orders 100 gallons of orange paint,
incurring an obligation to pay his supplier, B, $1,000 on 1 May, and a month later
orders 100 gallons of green paint, the price of $1,200 falling due on 1 June. A
pays B on time under both contracts, and it would seem unremarkable to say that
if A paid B $1,000 on time under the first contract with trust money, the benefi-
ciaries should be able to claim that any remaining orange paint in A’s hand was the
traceable proceeds of trust money. Yet, notice, A’s payment of $1,000 was not the
cause of title to the paint passing to A—rather, as a matter of causation, it was the

49 This seems to be the clear effect of s 2(1), which defines the ‘price’ as the money consideration

for the goods, s 17, which would allow the property in the goods to pass prior to the price being paid,
and s 39 (unpaid seller’s rights), s 41 (seller’s lien), s 49 (action for price), and s 57(2) (auction sales).
50 Text to n 6.
 ‘Sort of ’ Backwards Tracing 139

second payment of $1,200 which did so. Such an example reinforces the point that
tracing is a transactional, not a causal, enquiry, that is an enquiry of determining
which rights served as consideration for other rights acquired by exchange.
The key here is to focus on the idea of consideration, and we can learn some-
thing from the doctrine of bona fide purchase in trusts law and the holder in due
course rule in the case of money and negotiable instruments. The receiver of trust
money is entitled to the defence51 of bona fide purchase if he accepts the money he
receives in discharge of a debt the trustee owes to him52 and, as Smith points out,
‘For the purposes of the [defence of holder in due course], the value which must
be given includes any consideration which would support a contract’.53
In each of the D-claims, the debt arises under the same agreement as that under
which title passes or in pursuance of which contract title can be acquired. This
was the case in Foskett (the contract of life insurance) and, arguably, in Relfo, in
the sense that the court inferred that the rogue director ‘purchased’ the Intertrade
payment to the defendant. Mortgage loans, as in Haider, or credit card purchases
are not strictly speaking D-claims because the debt is incurred to a different party,
through a contract of finance, from the person, the vendor, from whom title is
acquired. However, in purchases of land the two contracts, one of sale and one of
finance, are so closely linked—for instance the amount borrowed is used in the
mortgage loan case to pay part of the purchase price of the land and is imme-
diately secured by a mortgage on the land—that they would appear to meet any
sensible ‘composite’ transaction test. With credit card purchases, each debt under
the finance agreement arises simultaneously with the card holder’s purchase, so
again it is difficult not to see the transaction as an ‘overall’ one.
More difficult are IND-claims, where the debt discharged was undertaken with-
out any clear purchase in mind, and where the discharge of the obligation may
take place some substantial amount of time, perhaps many years, after the acqui-
sition of title to the sought-after proceeds. So, for example, consider the case of
someone who gets a loan of $10,000 secured by a second mortgage over his house
in 2001, which he then uses to purchase shares. In 2015, he discharges the debt and
accrued interest with money from the bank account of the company of which he
is a director, and the shares are now worth $35,000. It is in this sort of case, one
presumes, that Conaglen and Lord Toulson would not extend to the company the
facility to backwards trace, removing the shares from the director’s estate. I can see

51 Michael Bridge raises an interesting point about whether, pleading points aside, it is right to treat

bona fide purchase as a defence. For example, if someone brings a wholly unwarranted claim in conver-
sion against me, I might equally say that my acquisition of the goods from the true owner constitutes
a defence to the conversion claim. Where I have to rely upon the bona fide purchase doctrine in defend-
ing an action, I am equally relying upon the good title I acquired, albeit in this case from a non-owner.
At the point when the property in goods passed from the non-owner to me, the former true owner
ceased to have a good title that could be asserted against me so that I did not commit, as it were, the
actus reus of conversion when taking delivery from the non-owner.
52 Taylor v Blakelock (1885) 23 Ch D 560.
53 L Smith, ‘Security’ in A Burrows (ed), English Private Law, 3rd edn (Oxford, OUP, 2013)

para 5.119 (emphasis added).

140 James Penner

something of the force of this, but I would also say that I do not see that one can
turn such an IND-claim into an allowable composite IND-claim just because, for
example, the director always harboured an intention to pay off the mortgage with
money from his company or some other illegitimate source of funds. This seems
to me to be an illicit introduction of a causal consideration, something like ‘but for
his intention to pay off the loan with his company’s money, he would never have
taken out the loan in the first place and hence wouldn’t have acquired the shares’.

IV. Backwards Tracing and Subrogation

This last section concerns the interaction between backwards tracing and ‘reviving
subrogation’. In certain circumstances, if X pays off Y’s debt to Z, X will, by opera-
tion of law, be subrogated to Z’s right as a creditor. In other words, by paying off
Z, X will in effect ‘purchase’ Z’s right to the payment of the debt against Y. Notice
that unlike in the case of an indemnity insurer being subrogated to the claim of
the insured against a third-party tortfeasor, where the insurer takes over rights
that the insured continues to have against his tortfeasor, in the case of reviving
subrogation, by paying off Y’s debt, X extinguishes the debt and thus Z’s right as
a creditor. The right against Y that X acquires by subrogation is a new right that
arises by operation of law; in essence Y’s debt is revived in favour of X, hence the
label ‘reviving’ subrogation.54
The right to be subrogated to the creditor’s rights in this way has been explained
as a remedy which reverses the unjust enrichment of the original debtor,55 and
was most prominently applied in a breach of trust context in Boscawen v Bajwa56
by Millett LJ. Bajwa intended to sell his mortgaged land for a price roughly equal
to what he owed under the mortgage to the Halifax Building Society. On the sale
Bajwa would be required to use the purchase money to pay off the mortgage, which
would leave him with little if any proceeds for himself. The purchasers raised
£140,000 on a mortgage loan from Abbey National, and the money was trans-
ferred to solicitors in advance of the completion of the sale. In breach of trust the
money was advanced before completion and was applied to pay off the mortgage
loan to Halifax. The sale never occurred; because the contract of sale was not in
writing it was void, so there was no possibility of a decree of specific performance
or a vendor–purchaser constructive trust in favour of the intending purchaser. As a
result Bajwa ended up with an unmortgaged property, whilst Abbey National had
advanced funds and received no mortgage on the property in return. Giving the
judgment of the Court of Appeal, Millett LJ held that Abbey National was entitled
to be subrogated to Halifax’s mortgage on the land, thus entitling them to priority

54 C Mitchell, The Law of Subrogation (Oxford, OUP, 1994) 4.

55 Banque Financière de la Cite v Park (Battersea) Ltd [1998] UKHL 7, [1999] 1 AC 221.
56 Boscawen v Bajwa [1995] EWCA Civ 15, [1996] 1 WLR 328.
 ‘Sort of ’ Backwards Tracing 141

over a charge on the land that had been subsequently granted by the court to
Bajwa’s judgment creditors. The court clearly distinguished between the process
of tracing, which allowed Abbey National to show that its value was received by
Bajwa, and the claim to be subrogated.
In the course of so deciding Millett LJ said:
If the plaintiff succeeds in tracing his property, whether in its original or in some changed
form, into the hands of the defendant and overcomes any defences which are put forward
on the defendant’s behalf, he is entitled to a remedy. The remedy will be fashioned to the
circumstances … [I]f the plaintiff ’s money has been used to discharge a mortgage on
the defendant’s land, then the court may achieve a similar result by treating the land as
subject to a charge by way of subrogation in favour of the plaintiff … Tracing was the
process by which the Abbey National sought to establish that its money was applied in
the discharge of the Halifax’s charge; subrogation was the remedy which it sought in
order to deprive Mr Bajwa … of the unjust enrichment which he would otherwise obtain
at the Abbey National’s expense.57
For reasons which I shall now explore, I do not find the result or reasoning in this
case easy. The main difficulty is that the right to be subrogated here is understood
to be a remedy the beneficiary of a trust has to reverse the defendant’s unjust
enrichment, but the interaction between the rights of the beneficiary when the
trust has been breached and the law of unjust enrichment was not really explored.
Note first that subrogation, whilst achieving a similar result in the case of a secured
loan, is the opposite of backwards tracing. In backwards-tracing, one traces into
items purchased with the borrowed funds. In contrast, a subrogation claim allows
the beneficiary claimant to stand in the shoes of the paid-off creditor; in the case
of an unsecured debt, for example a credit card debt that is paid off with trust
money, the beneficiary will acquire by subrogation nothing more than a personal
claim for money against the defendant, because that is all the credit card company
had. In the case of a purchase-money mortgage, however, subrogation provides
a result similar to backwards tracing. A backwards tracing claim would allow the
beneficiary to trace his value into the property purchased with the credit given,
and in the case of a first mortgage of land, that will be the land itself, of course.
The beneficiary might then claim a proportionate share of the value of the land or,
if the recipient is a trustee or wrongdoer, elect for a lien over the property securing
the amount of trust money expended. By subrogation, the claimant will necessar-
ily acquire a proprietary right in the land too, since the loan is a secured one, and
the charge forms part of the right to which he is subrogated. But the claimant can-
not acquire by subrogation an ownership or co-ownership share. So the first thing
to note is that, if backwards tracing had been recognised and applied in this case,
whether explicitly or implicitly, the issue of subrogation might never have arisen.
But the real difficulty is that if the beneficiary is entitled to make a claim ­reversing
the defendant recipient’s unjust enrichment by way of subrogation, the question
is why the beneficiary should not have a restitutionary remedy for ­‘subtractive’

57 ibid 335.
142 James Penner

unjust enrichment in all cases where trust property (or its equivalent, eg, company
funds) is misapplied. I am still convinced that there should be no such general
remedy for the reasons given by Lionel Smith some 15 years ago:
It has been said that the claim in knowing receipt belongs to the law of unjust enrich-
ment, and since claims in unjust enrichment do not depend on fault, therefore it cannot
be right that the knowing receipt claim should depend on fault. The startling conse-
quence is that not some but all of the cases on the subject are wrong. More recently,
another line has been taken, to the effect that even if the claim in knowing receipt is based
on wrongdoing rather than unjust enrichment, nonetheless there is no reason that a
plaintiff cannot put to one side the claim based on wrongdoing, and sue instead in unjust
enrichment. The consequences of this view are only slightly less startling: the cases may
be right, but all of the lawyers and judges involved failed to notice that there was another
claim available to the plaintiff, and moreover one which renders otiose any inquiry into
cognition. That of course is the inquiry with which the cases are most concerned. It is
important to stress that no defendant appears ever to have been made strictly liable for
the receipt of trust property …
Writing on this subject, [Lord Nicholls (1998)] deploys the following example. A defend-
ant innocently receives some money, trust property, as a gift from the trustee. He spends it
on something which he would have bought anyway, and which leaves no traceable prod-
uct. If fault is required, there is no claim; if fault is not, then there probably is, because the
facts are intended to imply that the defendant cannot use the defence of change of posi-
tion. Lord Nicholls takes the view that this defendant should repay; he has been made
better off out of the claimant’s trust fund, and if the defendant is required to repay, he
will only be back to where he started. But of course the fact that someone is only back to
where he started does not justify liability. Otherwise all gifts would be recoverable, sub-
ject only to a defence of change of position. Presumably Lord Nicholls would say, this is
not a gift; the plaintiff never intended the defendant to be enriched. But in another sense,
it was a gift; it was a gift from the trustee. Ignoring that amounts to ignoring that there
is a trust. This defendant might reasonably ask why he should be required to account in
court for what he has done over the preceding several years with money that was legally
his own (subject only to the [plaintiff ’s] undiscoverable equitable interest), failing which
he will have to dig into his pocket to repay. He might ask why the plaintiff should not
instead look for relief to his trustee, the one to whom the money was entrusted in the first
place. But the argument for strict liability consistently ignores the essential fact that there
is a trust, and seeks to treat the trust beneficiary like a legal owner.58
The underlying idea here is that the beneficiary is only entitled to a personal claim
when he can falsify the account, essentially claiming that the payment did not
come from the trust funds, but from the trustee himself, whether the original trus-
tee or a third-party recipient whose knowledge of the trust makes any disposition
of the assets which is inconsistent with the beneficiary’s beneficial interest in the
assets similarly ‘falsifiable’. In such a case the trustee is personally liable to restore
the misapplied funds. On the other hand, where the beneficiary chooses to trace

58 L Smith, ‘Unjust Enrichment, Property and the Structure of Trusts’ (2000) 116 LQR 412, 412–13,

432–33.
 ‘Sort of ’ Backwards Tracing 143

into the proceeds of the misapplied trust assets, whether against the trustee ­himself
or a non-bona fide purchaser third-party recipient, the trustee or third party have
not been enriched; the beneficial interest in the assets is that of the beneficiary.
This way of seeing things flows from the very nature of the trust: (i) from the fact
that the trust is a fund in which one asset can serve as the substitute for another;
(ii) from the fact that non-bona fide third-party recipients of trust property are
bound by the beneficiary’s continuing trust interest in the assets received and in
any traceable proceeds that arise when those assets are exchanged; and from the
fact that the beneficiary’s personal remedy is always against someone conceived
of as a trustee, ie, as one whose dissipation of the trust assets in a way that fails
to comply with the beneficiary’s trust interest, ie, in breach of trust, entitles the
beneficiary to falsify the account, ie ‘disown’ the misapplication of the trust assets,
treating them as an expenditure by the trustee of his own funds. To repeat, on this
logic, either the recipient is enriched by a transfer from the trustee’s own assets, or
he is not enriched at all, for the beneficial interest in the property remains with the
beneficiary. If there is anything that seems ‘artificial’ about this, that is because the
trust itself is a creature of artifice, legal artifice.
In view of these considerations, Boscawen amounts either to a revolutionary
case in which the nature of the beneficiary’s claim against third-party recipients
has been affirmed as falling within the law of unjust enrichment, or a case that
mistakenly imports unjust enrichment principles into the property rules and
fault-based rules which govern liability for receipt of trust property.59
In Farah Constructions Pty Ltd v Say-Dee Pty Ltd60 the unanimous decision of
the High Court of Australia gave voice to concerns similar to those of Smith:
[T]he restitution basis is unhistorical. There is no sign of it in clear terms in any but
the most recent authorities. It is inherent in the Court of Appeal’s conclusion that for
many decades the courts have misunderstood the tests for satisfying [personal recipi-
ent liability]: that is improbable. It is inherent in the conclusion advocated by Say-Dee
that for many decades the courts have failed to notice the existence of a form of liability
co-existing with [it]: that is equally improbable.61
Perhaps more importantly, the Court also rejected the theoretical approach of the
proponents of the restitutionary approach:
The restitution basis reflects a mentality in which considerations of ideal taxonomy pre-
vail over a pragmatic approach to legal development. As Gummow J said [in Roxborough
v Rothmans of Pall Mall Australia Ltd (2001) at 544 [72]]:
‘To the lawyer whose mind has been moulded by civilian influences, the theory may
come first, and the source of the theory may be the writings of jurists not the decisions

59 In Primlake Ltd (in liquidation) v Matthews Associates [2006] EWHC 1227 Lawrence Collins J held

that a company was entitled to be subrogated to a mortgage loan owed by a dishonest de facto company
director and his innocent wife following its discharge by the latter using misappropriated company
funds. Backwards tracing was not considered, and Boscawen was not cited by the court.
60 Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22.
61 ibid [154].
144 James Penner

of judges. However, that is not the way in which a system based on case law devel-
ops; over time, general principle is derived from judicial decisions upon particular
instances, not the other way around.’
The restitution basis was imposed as a supposedly inevitable offshoot of an all-
embracing theory. To do that was to bring about an abrupt and violent collision with
received principles without any assigned justification.
Of course the decision has been criticised,62 although Hayton concludes his analy-
sis of the case by stating:
It would not be surprising if, when the unjust enrichment point is crucial to a dispute,
so that detailed argument from counsel on both sides is directed to the point, the House
of Lords refuses to strengthen equitable rights through developing unjust enrichment
principles so as to wholly undermine the knowledge requirements that restrict personal
liability [of the recipient]. Possession and the right to possession are at the core of the
notion of legal ownership of land and chattels, meriting protection in their own right
irrespective of any fault on the defendant’s part. That is not the case for equitable inter-
ests in property, lower down the hierarchy of property.63
This raises other issues of policy to which we must now turn. Lord Toulson and
Matthew Conaglen express sympathy for the plight of the trustee’s creditors if
backwards tracing were generally available. Yet Conaglen does not evince any simi-
lar sympathy for the plight of innocent third-party recipients of misapplied funds
who face a beneficiary’s subrogation claim.
Notice that the subrogation claim does not turn on whether the debt that was
discharged with trust money is a secured debt.64 The right to be subrogated applies
prima facie to the payment of any debt the recipient makes with trust property.

62 R Chambers, ‘Knowing Receipt: Frozen in Australia’ (2007) 2 Journal of Equity 40.

63 D Hayton, ‘Lessons from Knowing Receipt, Liability and Unjust Enrichment from Australia’
(2007) 21 Trusts Law International 55, 61.
64 Historically, subrogation to an unsecured debt has occurred in a number of instances; see

JD Heydon, MJ Leeming and PG Turner, Meagher, Gummow and Lehane’s Equity: Doctrines and Rem-
edies, 5th edn (Chatswood, NSW, LexisNexis Butterworths, 2015) paras 9-005, 9-295 (where a surety
or guarantor has discharged the debt of the primary obligor); 9-035 (the right of an employer’s insurer
to be subrogated to an employer’s indemnity against an employee where the employer has been found
vicariously liable for the employee’s tort); 9-125 (in the case of borrowings unenforceable owing to
incapacity). Mitchell, however, seems to doubt the availability of a right to be subrogated to the credi-
tor in the case of an unsecured debt: ‘[The courts] have forgotten that a claimant cannot be entitled to
subrogation in this sort of case unless he also has a direct personal claim in unjust enrichment deriving
from the fact that he has discharged the defendant’s debt. Hence the fictional “acquisition” of the credi-
tor’s rights is redundant unless these rights were secured. The courts have sometimes failed to recognise
this, or have chosen to ignore it, and have awarded a personal remedy in the form of a subrogation
order while simultaneously denying the claimant a direct personal claim. This is self-contradictory’:
C Mitchell, ‘Subrogation’ in A Burrows (ed), English Private Law, 3rd edn (Oxford, OUP, 2013) (n 53)
para 18.280. Mitchell’s position seems to be based on the idea that the principle of unjust enrichment
provides a direct personal remedy against B where A pays B’s debts, so the right to be subrogated to the
personal debts of others is redundant. This reasoning will not apply in jurisdictions, such as Australia,
where subrogation is awarded on the basis of equitable principles not analysed in terms of a general
liability for unjust enrichment.
 ‘Sort of ’ Backwards Tracing 145

Of course, this right to be subrogated to the payment of an unsecured debt will

only give the beneficiary a personal right against the recipient to repay the money
expended on the debt, and where the recipient is a trustee this will be a pointless,
additional right, because the trustee is strictly personally liable to restore the trust
anyway; the same applies to the case of a third-party recipient who knows that the
property in his hands is trust property; he will be strictly personally liable as well;
but an innocent recipient, whilst liable to hold the trust property or traceable pro-
ceeds in his hands as trust property—ie, the beneficiary can specifically enforce the
trust over this property against him—on conventional knowing receipt/knowing
dealing principles65 is not personally liable to dig into his own pocket to restore
the trust. But if the subrogation claim is generally available, then it is likely that
the innocent recipient will be personally liable to restore the trust to a large extent,
because if you think of the way people spend money, they almost always do so in
the discharge of debts. As we have seen, except for gifts and over-the-counter shop
sales,66 most expenditures of money pay off contractually incurred debts of one
kind or another. When you pay your restaurant bill at the end of dinner, you pay
off a contractual debt incurred when you ordered the meal; when you pay for your
vacation you pay off the debt incurred when you booked the holiday. Everything
you ever buy on a credit card, ie, on credit, creates a debt that you must ultimately
discharge. Thus, if a beneficiary can be subrogated to the rights of all the debtors
whom a recipient pays off with trust money and, as we have just seen, most pay-
ments a person makes discharge debts, then the beneficiary is subrogated to an
array of personal claims against this innocent recipient, with the result that, con-
trary to what the traditional law teaches us, the innocent recipient is largely per-
sonally liable to restore the trust out of his own pocket. Although those in favour
of an unjust enrichment analysis of liability for receipt of trust property would be
happy with, perhaps exult in, this result, it cannot be the case that this general right
of subrogation can stand alongside the conventional law under which an innocent
recipient of trust property is not personally liable to restore the value of any trust
property or traceable proceeds he receives. It is perhaps worth noting that Lord
Millett, when giving the leading decision in Foskett, the most important tracing
and claiming decision in a century, specifically denied that tracing had anything
to do with unjust enrichment and, further, when discussing the claims available
to a beneficiary when he traces his equitable interest into the hands of a recipient,
did not even mention the Boscawen subrogation claim. (To the extent subrogation
was raised, it was in respect of the CA holding that Mr Murphy, the insured who
applied trust moneys to pay the premiums under the policy of insurance, would
be entitled to a lien over the proceeds for repayment of the premiums, a lien to
which the trust beneficiaries would be subrogated. We will return to Lord Millett’s
holding on this point below.)

65 Penner, The Law of Trusts (n 48) para 11.162.

66 See text to n 7.
146 James Penner

Rob Chambers has recently argued that the trustee (or equivalent fiduciary in
charge of his principal’s funds), not the beneficiary, should have a restitutionary
claim against the third-party recipient in cases where the trustee misapplied trust
property. He states:
There are three different potential claims against a recipient of assets transferred in
breach of trust: (i) an equitable property claim to the assets or their traceable proceeds
(which might be regarded as restitution of unjust enrichment); (ii) an equitable personal
claim for knowing receipt (which might be regarded as the equitable equivalent to dam-
ages for breach of duty); and (iii) a common law personal claim for restitution of unjust
enrichment. The first two belong to the beneficiaries and the third to the trustees. There
is no need to give the beneficiaries a new equitable claim for restitution of unjust enrich-
ment, since they can compel the trustees to assert their common law claim.67
Now of course the trustee of a trust has all the common law rights available to
him. If the trustee makes a mistaken payment, say mistakenly pays a second time
a brokerage fee to a broker who sells trust shares, then he is entitled to a personal
claim against the broker for return of the same amount, and of course he holds
that claim on trust for the beneficiaries. So far, so conventional. The further ques-
tion is whether his second payment can be treated as a misapplication of trust
property. Arguably, the broker is not a bona fide purchaser of the funds since, ex
hypothesi, he provided no consideration for the second mistaken payment. But
I, for one, would hesitate to so characterise the situation with the consequence
that the broker holds the received funds on trust, exposing him to liability as a
knowing recipient/knowing dealer. Assuming for the sake of discussion that not
all recipients of mistaken payments hold the amounts they receive on some sort
of unjust enrichment trust,68 there seems no reason that the beneficiaries should
have a different, better claim than the trustee’s own when this sort of claim arises
in the course of the trustee properly, albeit mistakenly, pursuing trust business. I
should say the same sort of reasoning should apply when a trustee is defrauded,
say selling a trust painting for a worthless cheque. The trustee would be entitled
to rescind the transaction, both in law and equity,69 and that right would be held
for the beneficiaries’ benefit; it is not clear why these rights should be enhanced by
further allowing the beneficiaries to claim that the painting remains beneficially
theirs, ie, trust property, throughout.
But Chambers’ suggestion is that the trustee has a claim for restitution of unjust
enrichment in cases where it is definite that the beneficiary can rightly claim the
beneficial, equitable ownership of the funds received by the third-party recipient.
Consider two cases: (1) the trustee innocently overpays a trust beneficiary, say
because he miscalculates the money representing the income and overpays the

67 R Chambers, ‘The End of Knowing Receipt’ (2016) 2 Canadian Journal of Comparative and

­Contemporary Law 1, 24–25.

68 The position favoured by Rob Chambers; for discussion see Penner, The Law of Trusts (n 48)

paras 5.22–5.24.
69 eg Heydon, Leeming and Turner (n 64) ch 25.
 ‘Sort of ’ Backwards Tracing 147

income beneficiary by $10,000; the beneficiary spends the property on shares

which fall in value to $7,000; (2) the trustee mala fide transfers trust property to a
non-beneficiary, giving, for example, his niece a gift of $10,000 from trust funds
to celebrate her graduation; the niece uses the funds to discharge a mortgage loan
incurred in the usual way, the loaned funds used to pay the vendor of the land
acquired. Let us also say that the value of the land purchased has fallen by half.
As to (1), it would not seem right that the trustee should just have a restitu-
tionary claim for the value received, of $10,000, unconnected to the beneificaries’
continuing rights in the traceable proceeds. If that were right, both the trustee
would have this personal claim, and the beneficiaries would have a proprietary
claim to the shares. Whilst it might be said that the trustee would have to hold any
money received under the personal, restitutionary claim on trust for the benefi-
ciaries, the income beneficiary in this example would be ill-advised to pay it, for it
is not clear how the trustee’s enforcing his claim in this way would extinguish the
beneficiaries’ interest in the shares. It is also not clear how the trustee’s enforcing
his claim is to be understood on falsification/adoption principles according to the
conventional way of understanding the trustee’s liability to account. Let us say the
beneficiaries falsify the account. The restitutionary claim he is supposed to hold
for the beneficiaries would then be unburdened by the trust interest. His liability
to the beneficiaries would then be a personal one to restore the account from his
own pocket, and so the nature of his claim against the overpaid income beneficiary
would be that he paid his own funds to the income beneficiary. Why should this
payment, a gift, be reversible? The ‘mistake’ he wishes to rely upon is no longer
relevant, since his payment is now not to be conceived of as a mistaken application
of trust funds. But neither does any claim for restitution of an unjust enrichment,
whether held by the trustee or the beneficiaries, make sense if the beneficiaries
choose to ‘adopt’ the payment to the income beneficiary, in the sense of claiming
that trust money did go to the income beneficiary, who received it bound by their
trust interests, and traceable into the shares; on that way of seeing the transac-
tion, the income beneficiary is not unjustly enriched, for she is not enriched at all.
Assets held on trust for another, or held subject to the beneficial equitable interests
of another, are not part of one’s own wealth. Of course, on conventional rules for
assessing recipient liability, the income beneficiary is not personally liable at all for
any innocent dissipation of the traceable proceeds.
Three more points on this case: in conversation Robert Chambers has sug-
gested to me that the trustee’s personal restitutionary claim would be reduced to
$7,000 because the income beneficiary could claim a change of position defence.
But that is not straightforward. One would need to show that the share purchase
was an extraordinary expenditure, ie, but for the overpayment the shares would
not have been purchased. If the income beneficiary had planned to purchase the
shares anyway and just happened to use the trust fund overpayment, no change
of position defence would be allowed. Unjust enrichment reasoning is causal, not
transactional. Consider also the case where the shares rose in value to $14,000.
It can hardly be right that the income beneficiary could escape her proprietary
148 James Penner

liability to the beneficiaries as a group for the shares by discharging her restitu-
tionary liability to the trustee. But if not on the unjust enrichment perspective,
why not? How is her ability to invest well causative of an unjust enrichment at the
expense of the beneficiaries? Finally, consider the case if the beneficiaries have a
right to be subrogated to the debt that the income beneficiary discharged under
her share transfer contract with the vendor of the shares. Why should the inno-
cent income beneficiary, willing and able to return the traceable proceeds of the
money she received, be subject to a superior personal liability to the beneficiaries.
Is the change of position defence supposed to reduce the ‘value’ of the debt she
discharged to $7,000?
Now consider (2). The restitutionary claim Chambers proposes is supposed to
be held by the trustee on trust for the beneficiaries. In this case the ‘unjust factor’
in which the trustee would ground his personal claim for restitution against his
niece would be his own (intentional) wrong; there is no mistake in such a case. It is
not clear why the court should allow him to proceed, and surely the ex turpi causa
principle would apply here.70 Relevantly, Lord Millett said in Foskett, dismissing
the reasoning of the Court of Appeal:
I do not for my own part see how [Mr Murphy’s] intention to make further advance-
ments into the settlement [by paying money to the trustees to fund the later premiums
on the life insurance policy] can be rebutted by showing that he was not using his own
money; as between himself and his children the source of the funds is immaterial. He
could not demand repayment from the trustees by saying: ‘I used stolen money; now that I
have been found out you must pay me back so that I can repay the money’. Moreover, even
if the presumption of advancement were rebutted, there would be no resulting trust.
Mr Murphy was either (as I would hold) a father using stolen money to make further
gifts to his children or a stranger paying a premium on another’s policy without request:
see Falcke v Scottish Imperial Insurance Co 34 Ch D 234.71
As to the subrogation claim, in this case giving the beneficiaries an election
between pursuing the backwards tracing claim and being subrogated to the mort-
gage lender would place the niece at a serious disadvantage; to adapt Conaglen’s
concern about the trustee’s creditors, it would seem to make her an insurer of the
value of the trust assets. Clearly, tracing backwards through the loan into the land
will give rise to a beneficial co-ownership share in the land the value of which will
be significantly less than the $10,000 used to discharge the mortgage loan because
of the decline in the value of the land. On conventional principles, in such a case
the alternatives which present themselves to the beneficiaries would be to falsify
the account to make the trustee personally liable or to claim the co-ownership
interest in the land. For the reasons canvassed above, I do not see the justice in a
third claim, either held by the trustee or by the beneficiaries, sourced in the law of
subtractive unjust enrichment.

70 Patel v Mirza [2016] UKSC 42, [2016] 3 WLR 399.

71 Foskett (n 3) 140E–F (emphasis added).
 ‘Sort of ’ Backwards Tracing 149

V. Conclusion

Any conclusion at this stage of the development of the law of backwards tracing
is necessarily inconclusive. It is good that the Privy Council, at least, is discussing
the issue in terms and is willing to recognise backwards tracing in at least some
cases. But neither the scope of the beneficiary’s rights to backwards trace, nor the
‘opposite’ remedy of subrogation where trust money is used to discharge a debt,
has been explored in sufficient detail. This chapter is merely a first step in that
direction.72

72 I must draw the reader’s attention to JC Campbell, ‘Republic of Brazil v Durant and the equities

justifying tracing’ (2016) 42 Australian Bar Review 32, in which the author takes an entirely different
line from the one taken here, in essence denying that ‘backwards tracing’ is a concept doing meaningful
work. It is well beyond the scope of this chapter to address all the intricate matters the author raises
there.
150
 7
Invoking the Administrative
Jurisdiction: The Enforcement
of Modern Trust Structures

RICHARD NOLAN*

I. Introduction

Modern settlements are very often discretionary in form. This means that they
generally consist in various, often very wide form, discretionary dispositive pow-
ers, with some final default trust or trusts. The powers might be powers of appoint-
ment over capital or income or both, or powers of advancement, or a combination
of these. A particular power might be vested in the trustees, a named appointor or
a protector or, again, a combination of them, such as where trustees may appoint
an interest in the trust fund but only with the prior (often written) consent of the
protector. There might be powers to add or subtract beneficiaries. The variety is
nigh on limitless.
Yet the width of the discretions in these settlements has led some to raise ques-
tions about their enforceability, and hence their validity. The first purpose of this
chapter is to address those concerns, and to demonstrate just how such settlements
are enforceable. This involves a clear focus on the fundamental mechanisms for
the enforcement of trusts. A proper appreciation of basic, but often overlooked,
principles provides the answers. The key is the inherent administrative jurisdic-
tion of the court, which works in a manner fundamentally different from the
paradigm common law bipartite right-remedy form of action. The chapter shows
how, and to what extent, the objects of a dispositive fiduciary power may invoke
the administrative jurisdiction of the court in order to enforce the obligations of
a trustee to replenish the trust fund. Next, it briefly considers whether the objects

* The author is grateful to Professor Matthew Conaglen, Dr David Fox, Professor Jenny Steele,

Dr Peter Turner and Professor Peter Watts for comments on earlier drafts of this chapter. The views
expressed in the chapter should not necessarily be attributed to anyone other than the author. The
errors are his alone.
152 Richard Nolan

of a mere (non-fiduciary) power may do likewise, before considering the same

question in relation to protectors. The chapter then goes on to consider the prac-
tical and theoretical implications of this body of law. Before that, however, some
historical background to the questions is useful.

II. History

Discretionary dispositive powers in settlements have a long history and were

used first to allow trustees (and others) to react to changing circumstances.1 The
importance of these powers in this regard has not diminished. Indeed, the present
author, when an articled clerk in private client practice over 25 years ago, was
advised never to create a settlement whose funds could not be distributed fully at
a moment’s notice by the use of powers. But it was the introduction of Estate Duty
in the Finance Act 1894 that really brought discretionary settlements into vogue.
Estate Duty was imposed on the full capital value of land, and all other prop-
erty, real or personal, settled or free, which passed or was deemed to pass on the
death of an individual. As part of that scheme, the 1894 Act contemplated, and
taxed, strict settlements.2 Indeed, while Estate Duty was originally introduced as
a source of revenue, it later was used as a deliberate instrument for the redistribu-
tion of wealth, particularly the break-up of large aristocratic, often settled, estates.
A feature of the duty, controversial at the time of its introduction, was its progres-
sive nature with a rate of 1 per cent for estates between £100 and £500 rising to a
maximum of 8 per cent for estates exceeding £1 million.3
It comes as no surprise that those who, today, would be called ‘wealth manage-
ment advisors’—lawyers, accountants and the like—immediately set out to devise
means of mitigating the new tax. One of these was to create discretionary settle-
ments, under which the trustees had power to distribute the income at their dis-
cretion amongst a named group of beneficiaries, but no beneficiary had any right
to any part of the income, and thus no interest in the settled property terminated
on death to trigger a charge to tax: discretionary settlements were simply outside
the scope of the charging provisions in the 1894 Act, as originally enacted. Income
tax considerations also drove the growing use of discretionary settlements and
offshore discretionary settlements.4

1 See generally, JS Vaizey, Vaizey on Settlements, vol 1 (London, H Sweet & Sons, 1887) ch VIII.
2 See Finance Act 1894, ss 2(1)(b) and 5.
3 See generally UK Valuation Office Agency, Inheritance Tax Manual, section 2: manuals.voa.gov.

uk/corporate/publications/Manuals/InheritanceTaxManual/sections/b-section_2/b-iht-man-s2.html.
4 eg the affairs of the Vestey family as disclosed in Lord Vestey’s Executor v Inland Revenue Comrs

[1949] 1 All ER 1108 and Vestey v IRC [1980] AC 1148.

 The Enforcement of Modern Trust Structures 153

Lord Walker usefully summarised the increasing use of discretionary settle-

ments, and the fiscal reasons for that, in Schmidt v Rosewood Trust Ltd. As he noted:
Counsel have very properly referred the Board to a considerable number of authori-
ties, some of them going back to the early years of the 19th century. It is appropriate to
reflect that during the long period covered by these authorities (but especially during the
second half of the 20th century) the forms and functions of settlements have changed
to a degree which would have astonished Lord Eldon. By the 1930s high rates of per-
sonal taxation led some wealthy individuals to make settlements which enabled funds
to be accumulated in the hands of overseas trustees or companies: see for instance Lord
Vestey’s Executor v Inland Revenue Comrs [1949] 1 All ER 1108. This practice increased
enormously with the introduction of capital gains tax in 1965…
There is another element, also linked (though less directly) to taxation, which has
encouraged the inclusion in settlements of very widely defined classes of beneficiaries.
After the Second World War estate duty was charged in the United Kingdom at very high
rates, with much less generous reliefs for agricultural and business property than those
now available. A wealthy landowner or businessman might be advised that the safest way
to preserve his fortune was to give most of it away, while he was still in the prime of life,
to trustees of an irrevocable settlement in discretionary form under which the settlor
himself was not a beneficiary. It is not surprising that a settlor in such a position should
wish to cover as comprehensively as he could all possible current and future claims on
his bounty, since he was being asked to make an immediate, irrevocable disposition of
much of his wealth, rather than being able to review from time to time the ambulatory
dispositions in his will and codicils. But his lawyers might also advise him that the most
natural expressions for defining discretionary objects of his bounty (such as ‘relatives’,
‘old friends’, ‘dependants’ or ‘persons with moral claims’) were of doubtful legal efficacy.
So there was a tendency to define the class in the widest possible terms. The process can
be seen in a long line of cases starting with In re Gestetner Settlement [1953] Ch 672.
It led to In re Manisty’s Settlement [1974] Ch 17, upholding the validity of an ‘intermediate’
power comparable to that in clause 3.3 of the Everest Trust [at issue in the case] (that
is, a power to add as beneficiaries anyone in the world apart from a very small class of
excluded persons).5
In all these contexts, the state had imposed tax—income tax or estate duty—by
reference to fixed entitlements, and settlors, and their advisers, sought to avoid
that tax by creating settlements in which there were no fixed entitlements in pos-
session, that is, settlements which were very largely discretionary in form, with
only remote fixed entitlements in remainder: ‘[r]arely did a beneficiary take an
indefeasibly vested interest with an ascertainable market value’.6 But the state, as is
only to be expected, reacted with ever stricter tax legislation.
Two Acts of Parliament deserve mention as major factors in bringing to an end
the ‘glory days’ of discretionary settlements. These were the Finance Act 1965,
which, in Part III, introduced Capital Gains Tax,7 and the Finance Act 1975, which,

5 Schmidt v Rosewood Trust Ltd [2003] UKPC 26, [2003] 2 AC 709 [34]–[35].
6 ibid [34] (Lord Walker).
7 See now Taxation of Chargeable Gains Act 1992, as amended.
154 Richard Nolan

also in Part III, introduced Capital Transfer Tax, that later became Inheritance
Tax.8 Capital Gains Tax was charged on trustees as a single continuing body of
persons. This taxation of the trustees made it much harder to avoid tax through
the creation of ever more refined beneficial interests under the settlement.9 ­Capital
Transfer Tax simply devised a special regime for discretionary settlements—
or, as the 1984 Act more precisely calls them, ‘settlements without interests in
­possession’.10 Of course, that is not to say the legislation was perfect in its aim
of taxing trusts; and much amending legislation has since been passed. But the
basic principles of the two new taxes did make discretionary settlements much less
effective as devices for tax planning.
Still, discretionary settlements held their enduring attraction for some settlors,
as witness Schmidt v Rosewood Trust Ltd itself, and there are still many such settle-
ments in existence which were created before the tax regime became as strict as it is
today. So the question of how such settlements are enforced retains its importance.
The rights, if any, of protectors to enforce an obligation of the trustees to replen-
ish the trust fund are also important. Again, some background is useful in order
to appreciate this. The use of ‘protectors’ in settlements has become much more
common, particularly in offshore settlements. To quote Lord Walker once more:
It has become common for wealthy individuals in many parts of the world (including
countries which have no indigenous law of trusts) to place funds at their disposition into
trusts (often with a network of underlying companies) regulated by the law of, and man-
aged by trustees resident in, territories with which the settlor (who may be also a ben-
eficiary) has no substantial connection. These territories (sometimes called tax havens)
are chosen not for their geographical convenience … but because they are supposed to
offer special advantages in terms of confidentiality and protection from fiscal demands
(and, sometimes from problems under the insolvency laws, or laws restricting freedom
of testamentary disposition, in the country of the settlor’s domicile). The trusts and
powers contained in a settlement established in such circumstances may give no reliable
indication of who will in the event benefit from the settlement. Typically it will contain
very wide discretions exercisable by the trustees (sometimes only with the consent of a
so-called protector) in favour of a widely-defined class of beneficiaries. The exercise of
those discretions may depend on the settlor’s wishes as confidentially imparted to the
trustees and the protector …
All these considerations may encourage a settlor to entrust substantial funds to an
apparently secure and confidential off-shore shelter.11
A recent text on protectors puts the point as follows:
For at least 40 years instruments establishing international trusts in many relevant juris-
dictions have often appointed a protector of the trust, as well as a trustee. Protectors

8 See now Inheritance Tax Act 1984, as amended.

9 See Finance Act 1965, s 25, now reflected in Taxation of Chargeable Gains Act 1992, s 69.
10 Finance Act 1975, s 21 and Schedule 5, paras 12–13, now reflected in Inheritance Tax Act 1984,
Part III, Chapter III.
11 Schmidt (n 5) [1]–[2].
 The Enforcement of Modern Trust Structures 155

of trusts governed by English law have also been appointed, but their use in domestic
­contexts has not as yet become commonplace.
…
The modern use of protectors of trusts can be argued to have arisen as an alternative
to the reservation of powers by the settlor and as a way of extending the idea of the
reservation of powers beyond the settlor’s lifetime … The idea being that the appointee
would not have the trust assets vested in him and hence would not be a trustee. This
was understood to mean that there would normally be no fiscal or other reason why the
protector would need to be resident offshore. The appointee would be, or would appear
to be, independent of the settlor, so the latter could not be said to be retaining control
over the trust assets.12
In other words, the appointment of a protector was a means of squaring the circle.
The settlor could appoint offshore trustees, with the fiscal benefits, and protection
from creditors and forced heirship laws, that comes from vesting assets in residents
of a jurisdiction that is generally sympathetic to trustees. Yet by appointing a pro-
tector, the settlor could solve the problem that he does not know or necessarily trust
(in the colloquial sense) the trustee he has appointed, without endangering the
advantages which flow from appointing offshore trustees. Equally, the settlor would
not retain such control himself because of anti-avoidance provisions in the tax leg-
islation: were he to do so, he would put in jeopardy the very tax benefits prima facie
associated with appointing offshore trustees.13 So custody of the trust assets could
be vested in offshore trustees, but at the same time control over the trust assets
could be given to someone whom the settlor actually trusts—a protector.
When discussing protectors, however, it is important to remember that the
word ‘protector’ is not an unvarying term of art, though it is occasionally defined
in the trust legislation of some (often offshore) jurisdictions.14 But all it means,
essentially, is a person who is not acting as a trustee but who nevertheless has
certain powers in relation to the administration and/or distribution of a trust
fund, and may or may not be acting as a fiduciary in relation to those powers.15
Other words are sometimes used to describe a person in this situation, such as
­‘supervisor’, ­‘special appointor’ or such like; nothing, however, turns on nomen-
clature for present purposes.
Still, for reasons outlined above, the use of protectors in offshore settlements has
grown. And it has become correspondingly important to understand the rights of
the protector under the settlement.

12 M Hubbard, Protectors of Trusts (Oxford, OUP, 2013) paras 1.1 and 1.15.
13 For examples of such anti-avoidance laws in the context of UK taxation, see Finance Act 1986,
ss 102–102C (inheritance tax); Taxation of Chargeable Gains Act 1992, s 86 (capital gains tax); and
Income Tax (Trading and Other Income) Act 2005, ss 624–25 (income tax).
14 eg Trustee Act 1998 (Bahamas), ss 3, 81.
15 See Kan v Poon [2014] HKCFA 65, (2014) 17 HKCFAR 414 [67] (Ribeiro PJ), citing with approval

M Conaglen and E Weaver, ‘Protectors as Fiduciaries: Theory and Practice’ (2012) 18 Trusts & Trustees 17.
The other Justices agreed with Ribeiro PJ.
156 Richard Nolan

III. The Enforcement of Trusts: Basic Principles

of Enduring Significance

The inherent jurisdiction of the Court of Chancery, and all its successor courts in
common law jurisdictions across the world, to supervise, and if necessary inter-
vene in, the administration of trusts is an ancient and well-established jurisdiction
of such courts. It is a jurisdiction that marks a radical distinction between the law
of trusts and the wider law of obligations. Lord Eldon LC referred to the jurisdic-
tion as long ago as 1805, though it is older than that by far:
As it is a maxim, that the execution of a trust shall be under the controul [sic] of the court,
it must be of such a nature, that it can be under that control; so that the administration
of it can be reviewed by the court; or, if the trustee dies, the court itself can execute the
trust: a trust therefore, which, in case of maladministration could be reformed; and a due
administration directed; and then, unless the subject and the objects can be ascertained,
upon principles, familiar in other cases, it must be decided, that the court can neither
reform maladministration, nor direct a due administration.16
More recently, Lord Browne-Wilkinson stated in Target Holdings Ltd v Redferns
that:
The basic right of a beneficiary is to have the trust duly administered in accordance with
the provisions of the trust instruments, if any, and the general law … Accordingly, in the
case of a breach of such a trust involving the wrongful paying away of trust assets, the
liability of the trustee is to restore to the trust fund, often called ‘the trust estate’, what
ought to have been there.17
In the context of beneficiaries’ rights to information about a trust, Lord Walker
supplemented these statements with a dictum that has become highly influential,
as will be seen:
The right to seek the court’s intervention does not depend on entitlement to a fixed and
transmissible beneficial interest. The object of a discretion (including a mere power)
may also be entitled to protection from a court of equity, although the circumstances in
which he may seek protection, and the nature of the protection he may expect to obtain,
will depend on the court’s discretion: see Lord Wilberforce in Gartside v Inland Revenue
Comrs [1968] AC 553, 617–618 and in In re Baden [1971] AC 424, 456–457, Templeman J
in In re Manisty’s Settlement [1974] Ch 17, 27–28 and Warner J in Mettoy Pension Trustees
Ltd v Evans [1990] 1 WLR 1587, 1617–1618.18
Lord Walker’s views have since been cited with approval by the High Court of
Australia.19

16 Morice v Bishop of Durham (1805) 10 Ves 522, 539–40; 32 ER 947, 954.

17 Target Holdings Ltd v Redferns [1996] AC 421, 434.
18 Schmidt (n 5) [51].
19 CPT Custodian Pty Ltd v Commissioner of State Revenue [2005] HCA 53, (2005) 224 CLR 98 [17].
 The Enforcement of Modern Trust Structures 157

The inherent jurisdiction of the court in relation to trusts is wide and extends to
much more than simply enforcing the obligations of the trustee.20 But for present
purposes, what is important to understand is that it is this inherent jurisdiction
of the court to secure the performance and execution of trusts that lies at the root
of enforcing trustees’ obligations. A beneficiary had, and has, standing to invoke
that jurisdiction, and to have the administration of the trust reformed: the ben-
eficiary’s powers extend to more than merely recovery of compensation for harm
done to him.
Where trustees’ liabilities are concerned, the beneficiary’s power was given
effect through the process of accounting, and the orders made consequent on the
account. Professor Conaglen puts it thus:
Equity traditionally approached a trustee’s liability for a breach of trust through the
mechanism of taking an account of the trust: ‘[t]he taking of an account is the means
by which a beneficiary requires a trustee to justify his stewardship of trust property. The
trustee must show what he has done with that property’.21
The account might be in common form, or on the footing of wilful default.22 In
either case, if the claimant beneficiary was successful, the account would show that
the state of the trust fund as it ought to be, if the trustee’s unjustified action(s) were
ignored. This would very likely be more than the trust fund actually c­ omprised.23
Consequently, there would be an order for reinstatement of the trust fund, usually
by the payment of a sum of money by the trustee personally into the trust fund,
perhaps from funds realised by the sale of an asset found to be subject to an equi-
table lien, but occasionally by means of the transfer of an asset in specie.
Lord Millett NPJ put the point as follows. It is worth quoting his judgment at
some length:
[A]n order for an account does not in itself provide the plaintiff with a remedy; it is
merely the first step in a process which enables him to identify and quantify any deficit in
the trust fund and seek the appropriate means by which it may be made good. Once the
plaintiff has been provided with an account he can falsify and surcharge it. If the account
discloses an unauthorised disbursement the plaintiff may falsify it, that is to say ask for
the disbursement to be disallowed. This will produce a deficit which the defendant must
make good, either in specie or in money. Where the defendant is ordered to make good
the deficit by the payment of money, the award is sometimes described as the payment of
equitable compensation; but it is not compensation for loss but restitutionary or restora-
tive. The amount of the award is measured by the objective value of the property lost
determined at the date when the account is taken and with the full benefit of hindsight.

20 See generally R Nolan, ‘“The Execution of a Trust shall be under the Controul of the Court”:

A Maxim in Modern Times’ (2016) 2 Canadian Journal of Comparative and Contemporary Law 469,
and the authorities cited there.
21 M Conaglen, ‘Equitable Compensation for Breach of Trust: Off Target’ (2016) 40(1) Melbourne

University Law Review 126, 128, citing Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638 (Ch) [1513]
(Lewison J).
22 Conaglen, ‘Equitable Compensation for Breach of Trust: Off Target’ (n 21) 132–35.
23 Occasionally there may be no loss: eg Blades v Isaac [2016] EWHC 601 (Ch).
158 Richard Nolan

But the plaintiff is not bound to ask for the disbursement to be disallowed. He is entitled
to ask for an inquiry to discover what the defendant did with the trust money which he
misappropriated and whether he dissipated it or invested it, and if he invested it whether
he did so at a profit or a loss. If he dissipated it or invested it at a loss, the plaintiff will
naturally have the disbursement disallowed and disclaim any interest in the property in
which it was invested by treating it as bought with the defendant’s own money. If, how-
ever, the defendant invested the money at a profit, the plaintiff is not bound to ask for
the disbursement to be disallowed. He can treat it as an authorised disbursement, treat
the property in which it has been invested as acquired with trust money, and follow or
trace the property and demand that it or its traceable proceeds be restored to the trust
in specie.
If on the other hand the account is shown to be defective because it does not include
property which the defendant in breach of his duty failed to obtain for the benefit of
the trust, the plaintiff can surcharge the account by asking for it to be taken on the basis
of ‘wilful default’, that is to say on the basis that the property should be treated as if the
defendant had performed his duty and obtained it for the benefit of the trust. Since
ex hypothesi the property has not been acquired, the defendant will be ordered to make
good the deficiency by the payment of money, and in this case the payment of ‘equitable
compensation’ is akin to the payment of damages as compensation for loss.
In an appropriate case the defendant will be charged, not merely with the value of the
property at the date when it ought to have been acquired or at the date when the account
is taken, but at its highest intermediate value. This is on the footing either that the
defendant was a trustee with power to sell the property or that he was a fiduciary who
ought to have kept his principal informed and sought his instructions.
At every stage the plaintiff can elect whether or not to seek a further account or inquiry.
The amount of any unauthorised disbursement is often established by evidence at the
trial, so that the plaintiff does not need an account but can ask for an award of the appro-
priate amount of compensation. Or he may be content with a monetary award rather
than attempt to follow or trace the money, in which case he will not ask for an inquiry as
to what has become of the trust property. In short, he may elect not to call for an account
or further inquiry if it is unnecessary or unlikely to be fruitful, though the court will
always have the last word.24
As Lord Millett notes, sometimes the process of accounting can be short-circuited
by an application for an award of equitable compensation. Professor Conaglen
has provided a fuller account of the evolution of a direct award of equitable com-
pensation for breach of trust out of the process of accounting.25 In the case of a
breach of trust:
It is not a question of concurrent liabilities under different causes of action generated by
the same conduct. There is only one claim and the only question is whether the remedy

24 Libertarian Investments Ltd v Hall [2013] HKCFA 93, (2013) 16 HKCFAR 681 [168]–[172].
25 Conaglen, ‘Equitable Compensation for Breach of Trust: Off Target’ (n 21) 146–50; see also
JD Heydon, MJ Leeming and PG Turner, Meagher, Gummow and Lehane’s Equity: Doctrines & ­Remedies,
5th edn (Chatswood, NSW, LexisNexis Butterworths, 2015) para 23-030.
 The Enforcement of Modern Trust Structures 159

for that claim differs depending on how it is brought. It is suggested that there is no
­reason why the result should differ simply because the plaintiff seeks equitable compen-
sation directly rather than following the taking of an account.26
Notwithstanding the evolution of a direct claim by a beneficiary for equitable
compensation to be paid into the trust fund, or occasionally to himself personally
if he is or was solely entitled to the fund, the right to an account, and the right to
orders made in consequence of the state of the account, remain the fundamental
means of enforcing trustees’ obligations. To put the point in more general terms,
notwithstanding the evolution of direct actions for equitable compensation, the
invocation and utilisation of the administrative jurisdiction of the court is and
remains fundamental to the enforcement of trusts.
It follows that the ability to invoke the administrative jurisdiction is the key to
the enforcement of a trust. Standing to invoke the administrative jurisdiction in
connection with a trust is a necessary (but, as will be seen, possibly not sufficient)
condition to enforce the trust. The question of just who may invoke that jurisdic-
tion for the purpose of enforcing the trustees’ obligations is, therefore, crucial to
understanding the enforcement of trusts.

IV. Claims for Breach of Trust: Claims by Fixed

Beneficiaries and by Objects of Dispositive
Fiduciary Powers

It is axiomatic that a trust may be enforced by a beneficiary who has some positive
claim to benefit from the trust fund, whether income or capital or both, which
does not depend on the exercise of any discretion. Trusts are, ex hypothesi, mat-
ters of enforceable obligation, unless and until validly revoked or else set aside
on the basis of some recognised vitiating factor. As Sir William Grant MR said in
Morice v Bishop of Durham: ‘There can be no trust, over the exercise of which this
Court will not assume a control; for an uncontrollable power of disposition would
be ownership, and not trust’.27 Cases also clearly establish that a trust providing
that some members of a class must receive benefit, though there is discretion as
to which members of the class and how much benefit, are also valid if the class is
expressed with sufficient certainty.28 Given that such an arrangement constitutes

26 Conaglen, ‘Equitable Compensation for Breach of Trust: Off Target’ (n 21) 150; see also PG

Turner, ‘The New Fundamental Norm of Recovery for Losses to Express Trusts’ (2015) 74 CLJ 188, 190.
27 Morice v Bishop of Durham (1804) 9 Ves Jun 399, 404–05; 32 ER 656, 658; see also Armitage

v Nurse [1998] Ch 241 (CA).

28 McPhail v Doulton [1974] AC 421, supplemented by Re Baden’s Deed Trusts (No 2) [1973] Ch 9

(CA).
160 Richard Nolan

a trust in favour of such persons, it necessarily follows that they are beneficiaries
with standing to enforce the trust.
But what of a person who is simply the object of a power to benefit him (and
likely others as well)? Modern trusts make enormous use of such powers, and the
objects of the powers are very often intended to take the benefit of the trust fund
to the exclusion of the (fixed) default beneficiaries. Again, to quote Lord Walker:
[I]ncreasingly stringent anti-avoidance measures encouraged legal advisers to devise
forms of settlement under which the true intended beneficiaries were not clearly identi-
fied in the settlement. Indeed their interests or expectations were often barely percep-
tible. Rarely did a beneficiary take an indefeasibly vested interest with an ascertainable
market value.29
In these circumstances, it is vital to understand the rights of the object of such a
power to enforce the trustees’ duties. Three recent cases have addressed this issue,
one quite directly. All three cases concerned the objects of dispositive fiduciary
powers; so the position of the object(s) of a mere personal power will be examined
separately in the next section.
The first of the recent cases is Lemos v Coutts (Cayman) Ltd.30 The issue of inter-
est to the present enquiry was raised only obliquely; but the case is still important
in its impact on later decisions.
In 1984, Captain Lemos, a wealthy Greek shipowner, had established a discre-
tionary settlement known as the Trofos Foundation: both income and capital were
subject to discretionary powers of appointment and trusts in default of appoint-
ment. The principal beneficiaries of the trust were the four children of Captain
Lemos and their issue. Captain Lemos died on 3 December 1989, and subsequently
a rift developed between his sons and daughters. This resulted in litigation which
was settled by compromise in early 1994. The compromise involved a substan-
tial rewriting of the trusts, with the court supplying approval of the compromise
on behalf of unborn beneficiaries and beneficiaries incapable of giving their own
consent. The capital of the settlement comprised, inter alia, substantial shipping
assets and investments. By 1998, the first and second plaintiffs, who were ben-
eficiaries of the trust, had become very concerned about the performance of the
shipping investments. On 29 July 1998, the plaintiffs issued the present proceed-
ings in the Grand Court of the Cayman Islands, alleging negligence by the trustees
in their management of the trust fund, which had caused it loss.
The proceedings were slow to progress. In part at least, this was because there
was another action, commenced in October 1998, originally seeking the Court’s
directions for the management of the settlement, and the replacement of its trus-
tees, but resulting in the division of the settlement into four new settlements,

29 Schmidt (n 5) [34].
30 Lemos v Coutts (Cayman) Ltd (2005) 8 ITELR 153.
 The Enforcement of Modern Trust Structures 161

one for each of the families of Captain Lemos’s children. This was achieved by
appointments out of the original settlement to create the four new settlements.
Eventually the July 1998 action progressed to the stage of discovery. At that
point, further facts came to light which led the plaintiffs to seek leave to re-amend
the statement of claim to include allegations of wilful misconduct by the trustees.
It is this application for leave that is of present interest.
The trustees sought to resist the application on grounds of limitation. They
alleged that if the new allegations had been made in a new action begun by a
separate writ, they would be time barred. Therefore, they argued, any such action
should not be allowed to proceed by way of amendment to an existing statement
of claim, because that would amount to an end-run around the protection of the
statute of limitation. However, section 27(3) of the Limitation Law (Laws of the
Cayman Islands, 1996 Revision) provided:
For the purposes of this subsection [dealing with limitation periods applicable to an
action for breach of trust], the right of action shall not be treated as having accrued to
any beneficiary entitled to a future interest in the trust property until the interest fell into
possession.31
This could be read so as to mean that the plaintiffs’ claims were not yet time
barred: if the plaintiffs had ‘a future interest in the trust fund’, the limitation
period applicable to their claims would not run until the later date contemplated
by the section. In response, the trustees alleged that the plaintiffs, as mere objects
of fiduciary dispositive powers, did not have a ‘future interest in the trust property’
within the meaning of the statute, so it could not apply to extend the limitation
period applicable to their claims.
Levers J was ultimately able to avoid this question and allow the plaintiffs’ appli-
cation. He held that:
[T]he facts relevant to this particular amendment are substantially the same facts as
those that founded the original cause of action albeit cast in a different light after the
specificity which only discovery can expose came to light. Accordingly, these amend-
ments are expressly permitted by the Rules of Court.32
Levers J went on to say, in the alternative, that:
Even if I am wrong in that [above] assessment of the facts forming the basis of these
amendments, it can only be because they are sufficiently distinct from the original facts
to be considered entirely new facts in which event, these facts having come to light as a
result of discovery by the defendants must be presumed to have been entirely within the
defendants’ purview prior to discovery and, as such, deemed to have been deliberately
concealed. In that event … the time for limitation purposes did not start to run until the
plaintiffs obtained discovery.33

31 This text follows exactly the equivalent text of the Limitation Act 1980 (UK), s 21(3).
32 Lemos (n 30) [50].
33 ibid [51].
162 Richard Nolan

Nevertheless, Levers J, while not ruling on the point, appears to prefer the view
taken by the English Court of Appeal in Armitage v Nurse,34 and by the New Zea-
land Court of Appeal in Johns v Johns,35 that the object of a discretionary, disposi-
tive power did not have a ‘future interest’ in the trust fund within the meaning of
the Limitation Law.
However, the key point to remember is Lord Wilberforce’s admonition in Leed-
ale (Inspector of Taxes) v Lewis,36 repeated by Millett LJ in Armitage v Nurse,37 that,
‘The word “interest” is one of uncertain meaning and it remains to be decided
on the terms of the applicable statute which, or possibly what other, mean-
ing the word may bear’.38 While the object of a discretionary dispositive power
may not have a ‘future interest’ within the meaning of the Cayman, English and
New ­Zealand statutes of limitation, that is a matter of the proper construction of
the statutory language in context: it does not necessarily follow that the object of
such a power has no rights at all to enforce the trustees’ duties.
This was explicitly recognised in Lemos v Coutts (Cayman) Ltd. After consider-
ing the implications of Target Holdings Ltd v Redferns39 and Schmidt v Rosewood
Trust Ltd,40 noted above, Levers J said:
The cases state the principle very clearly that a discretionary beneficiary has the right to
invoke the court’s power to ensure that the trust fund is properly administered. However,
does that then give them a future interest in the trust fund? Mr Briggs argues that it does
not. He concedes that a discretionary beneficiary, the object of a mere power, has the
right to invoke the court’s inherent jurisdiction to seek the proper administration of the
trust fund and the relief claimed can be the reconstitution of the trust fund. However,
he submits, that since the discretionary beneficiary has no proprietary interest, then it
cannot be said that he has a future interest in the trust fund. He further submits that the
discretionary beneficiaries in this case do not have a future interest. What they have is an
immediate interest to ensure that the breach is rectified forthwith by invoking the court’s
jurisdiction here and now.41
The clear view of the judge, albeit obiter—and the considered concession of coun-
sel for the trustees, Michael Briggs QC, now Briggs LJ—was that the object of a
fiduciary dispositive power may enforce obligations of the trustees. Which of the
trustees’ obligations he may enforce is another matter, of course.

34 Armitage (n 27), considering the Limitation Act 1980 (UK), s 21(3).

35 Johns v Johns [2004] NZCA 42, [2004] 3 NZLR 202, considering the Limitation Act 1950 (NZ),
s 21(2).
36 Leedale (Inspector of Taxes) v Lewis [1982] 1 WLR 1319, 1329.
37 Armitage (n 27) 261.
38 See also Gartside v IRC [1968] AC 553; Martin v Martin [1988] 1 NZLR 722; Commissioner of

Taxation v Linter Textiles Australia Ltd (2005) 220 CLR 592; CPT Custodian Pty Ltd (n 19).
39 Target Holdings Ltd (n 17).
40 Schmidt (n 5).
41 Lemos (n 30) [47].
 The Enforcement of Modern Trust Structures 163

The views of Levers J and Briggs QC are entirely consistent with earlier learning.
In Gartside v IRC, Lord Wilberforce said:
No doubt in a certain sense a beneficiary under a discretionary trust has an ‘interest’: the
nature of it may, sufficiently for the purpose, be spelt out by saying that he has a right
to be considered as a potential recipient of benefit by the trustees and a right to have his
interest protected by a court of equity. Certainly that is so, and when it is said that he has
a right to have the trustees exercise their discretion ‘fairly’ or ‘reasonably’ or ‘properly’
that indicates clearly enough that some objective consideration (not stated explicitly in
declaring the discretionary trust, but latent in it) must be applied by the trustees and that
the right is more than a mere spes. But that does not mean that he has an interest which
is capable of being taxed by reference to its extent in the trust fund’s income: it may be a
right, with some degree of concreteness or solidity, one which attracts the protection of a
court of equity, yet it may still lack the necessary quality of definable extent which must
exist before it can be taxed’.42
More recently, in Johns v Johns, Tipping J, delivered the judgment of the
New Zealand Court of Appeal that the object of a discretionary power did not
have a ‘future interest’ within the meaning of section 21(2) of the Limitation
Act 1950 (NZ), but said (again obiter) that:
Nevertheless a discretionary beneficiary may well be able to bring proceedings to compel
proper administration of the trust. In this respect we note that in Jacobs’ Law of Trusts
in Australia (6th ed, 1997) at para 317 (p 68) the learned authors, Justices Meagher and
Gummow, state that although a discretionary beneficiary has no proprietary interest in
the trust assets he has sufficient standing to compel proper administration of the trust.43
The point actually arose for decision in the second of the recent cases to be consid-
ered, Freeman v Ansbacher Trustees (Jersey) Ltd.44 This case involved three claims
against Ansbacher, the former trustee of a settlement, for breaches of its duties
of care and skill in managing the trust fund during its tenure as trustee of the
fund. The claims arose out of facts which were complex but for present purposes
need no further explanation. The law applicable to the claims was Jersey law, and
the proceedings in respect of them were brought before the Jersey Royal Court
(Samedi Division).
Ansbacher applied to have the claims struck out before trial. It put forward
five grounds in support of its application, four applicable to all the claims, the
fifth applicable only to one of them. Just one of those grounds is of present inter-
est: Ansbacher alleged that the plaintiffs in the action lacked ‘the necessary stand-
ing to bring the claims, being simply the objects of a mere power’.45 (Later in its

42 Gartside (n 38) 617–18.

43 Johns (n 35) [34].
44 Freeman v Ansbacher Trustees (Jersey) Ltd [2009] JRC 003, [2010] WTLR 569.
45 ibid [27(ii)].
164 Richard Nolan

j­udgment, the Court made it clear that the relevant power was a fiduciary power
vested in the trustee—the words ‘mere power’ simply indicated that there was no
duty to distribute trust property.)46 The Court emphatically rejected Ansbacher’s
allegation. And it did so on the explicit basis that the applicable Jersey law was the
same as English law.47
The Court could have chosen simply to rule that the claimant’s locus standi was
at least arguable and therefore should be considered at trial. But it thought the
point was one of pure law, on which full argument had been heard, and Deputy
Bailiff Birt therefore made a definitive ruling on the point:
I am in no doubt that I should declare Jersey law to be … that the object of a fiduciary
power (whether a trust power or a mere power) has locus standi to apply to the Court for
relief and that such relief can include the reconstitution of the trust fund where loss has
been caused by a trustee’s breach of trust.48
The view taken obiter by Levers J in Lemos, and conceded by counsel, was upheld.
The main argument put by Ansbacher against that conclusion was that it was
contrary to the traditional’ position:
The traditional approach of the court was to draw a line between discretionary trusts
and fiduciary powers. Objects of discretionary trusts had locus standi to bring an action
to secure the trust fund and their right in it, while objects of fiduciary powers had locus
standi to seek a removal of trustees who failed to give due consideration to an exercise of
their fiduciary powers, but none to seek any other kind of relief, with the possible excep-
tion of a claim to enforce an exercise of the power in special circumstances.49
This position was said to be illustrated by dicta of Templeman J in Re Manisty’s
Settlement Trusts:
If a person within the ambit of the power is aware of its existence he can require the trus-
tees to consider exercising the power and in particular to consider a request on his part
for the power to be exercised in his favour. The trustees must consider this request, and if
they decline to do so or can be proved to have omitted to do so, then the aggrieved person
may apply to the court which may remove the trustees and appoint others in their place.
This, as I understand it, is the only right and only remedy of any object of the power.50
Deputy Bailiff Birt, following the learned authors of Lewin, considered that this
position could not survive the decision of the Privy Council in Schmidt v Rosewood
Trustees Ltd.51 He gave four reasons for this conclusion.

46 ibid [34]–[36].
47 ibid [38], [42], [44].
48 ibid [42].
49 See L Tucker, N Le Poidevin and J Brightwell (eds), Lewin on Trusts, 19th edn (London, Sweet &

Maxwell, 2015) para 39-073, repeating text from L Tucker, N Le Poidevin and J Brightwell (eds), Lewin
on Trusts, 18th edn (London, Sweet & Maxwell, 2014) para 39-069, cited with approval in Freeman
(n 44) [39].
50 Re Manisty’s Settlement Trusts [1974] Ch 17, 25.
51 Schmidt (n 5).
 The Enforcement of Modern Trust Structures 165

First, the dicta of Templeman J needed to be understood in context: the Manisty

case was concerned with what, if anything, the object of a dispositive power might
do to remedy failure by the holder of the power to consider exercising it. It was not
concerned with, and did not even address, what the object of such a power might
do in response to a breach of trust which had depleted the trust fund. The dicta
should therefore not necessarily be taken as a comprehensive statement of the
rights of an object of a fiduciary dispositive power.
Second, even if Manisty were to be read widely—too widely—as suggesting that
the object of a fiduciary dispositive power has no standing to bring proceedings
to remedy a breach of trust that has depleted the trust fund, such a reading of
Manisty could not survive Schmidt.52 Lord Walker, in Schmidt, asserted the court’s
general jurisdiction to secure the due administration of a trust, and to reform
its maladministration; and he did so in terms that did not draw a dividing line
between the holders of fixed interests or discretionary interests and those who
were merely the object of a dispositive fiduciary power.
Third, the practicalities of the situation—which should never be forgotten, par-
ticularly in a case where there is argument about the correct view of the law—
spoke strongly in favour of acknowledging that the object of a dispositive fiduciary
power had locus standi to bring proceedings to have the trust fund which is subject
to that power restored to its proper state. As Deputy Bailiff Birt said:
It would in my judgment be a highly unsatisfactory situation if such beneficiaries
[ie objects of a fiduciary power, who are often those realistically expected to benefit from
the trust fund] were held not to have standing to sue the trustees for breach of trust
where, for example, the trustees had made speculative investments which had resulted in
devastating loss to the trust fund.53
Finally, Deputy Bailiff Birt noted that: ‘As was made clear in Schmidt (see para
[66]) the differences in this context between trusts and powers are a good deal less
significant than the similarities’.54 He also noted for completeness that none of the
foregoing reasoning based on English law was precluded by, or inconsistent with,
the written provisions of the Jersey Trusts Law.
Support for this conclusion, albeit obiter, can be found in the third of the
trio of recent cases considered in this part, the English case of Blades v Isaac.55

52 Schmidt, of course, is Isle of Man authority. But it has been accepted as representing English law

in Breakspear v Ackland [2008] EWHC 220 (Ch), [2009] Ch 32. So Deputy Bailiff Birt was correct to
treat Schmidt as representing English law, and justified in using the case in reasoning explicitly based
on English law (see text to n 47). New Zealand law also follows Schmidt and allows a discretionary ben-
eficiary standing to seek disclosure of trust documents and information: Foreman v Kingstone [2004]
1 NZLR 841; Re Maguire (dec’d) [2010] 2 NZLR 845; Erceg v Erceg [2016] NZCA 7. Australian law is
in more of a state of flux on this point: see JD Heydon and MJ Leeming (eds), Jacobs’ Law of Trusts in
Australia, 7th edn (Chatswood, NSW, LexisNexis Butterworths, 2006), para 1716, criticising Schmidt;
and Deutsch v Trumble [2016] VSC 263 [71]–[72] (Hargrave J).
53 Freeman (n 44) [43(iii)].
54 ibid [43(iv)].
55 Blades (n 23).
166 Richard Nolan

The case concerned a discretionary trust established by will. The trustees were
legatees under the will and held their gift upon trust and, inter alia, subject to a
dispositive fiduciary power of which the claimant was an object. When consider-
ing the extent to which the claimant could obtain information about the estate, of
which she was not a direct beneficiary, Master Matthews noted that:
[T]the Claimant could hold the trustees to account, for what the trustees had received
and for what they had done with it: see Schmidt v Rosewood Trust Co Ltd [2003] 2 AC 709.
But what she could not claim to be was a legatee of the estate, and therefore directly to
enjoy the information rights of a legatee …
Nevertheless, in my judgment the rights of the trustees as legatees to information about
the estate (whatever they were) were properly part of the trust estate in which she was
interested as a trust beneficiary. If need be, therefore, she could claim as against the trus-
tees that they as trustees should exercise those rights, or, if they could not or unreason-
ably would not do so, claim to exercise them herself, though in that case on behalf of the
trust: Parker-Tweedale v Dunbar Bank plc [1991] Ch 12.56
The clear doctrinal conclusion is that the object of a fiduciary dispositive power
has standing to invoke the jurisdiction of the court to remedy a breach of trust,
though that does not mean the court has to grant his claim, as will be seen. And the
practical conclusion implicit in that doctrinal position is that settlements which
make great use of dispositive fiduciary powers, and which, in practical terms, con-
template that the objects of those powers are to be the economically and socially
significant beneficiaries of the settlement (rather than the default beneficiaries,
who usually have fixed interests), are trust structures that can perfectly well be
enforced. They are not beyond control. Their widespread use is entirely consistent
with the axiomatic proposition that ‘the execution of a trust shall be under the
controul [sic] of the court, [so] it must be of such a nature, that it can be under
that control’.57 There may be practical risks in the use of such settlements—for
example, trustees who do not properly understand or properly use their powers,
or objects of those powers who decide that they have no practical motivation to
use their standing to enforce obligations of the trustees, because the objects believe
they stand to gain little or nothing personally by taking such action. But those are
practical, not legal, risks.
There is one further issue to consider in relation to enforcement of a trust by
the object of a dispositive fiduciary power. It is one thing to establish that such an
object has standing to invoke the court’s jurisdiction to administer trusts and rem-
edy their maladministration. What the court does in response to that invocation
is another matter. This is because the claim to enforce a trust is not conceptualised
as an absolute right in the fashion of the common law. It is worth remembering
here words of Lord Millett, cited earlier, that in remedying a breach of trust, ‘the

56 ibid [53]–[54].
57 See text to n 16.
 The Enforcement of Modern Trust Structures 167

court will always have the last word’.58 As in the case of all equitable remedies, the
court retains its own discretion whether or not to allow the remedy;59 and, if it
allows the remedy, the discretion to mould it.60 The existence and importance of
this discretion is evidenced very clearly in Schmidt v Rosewood Trust Ltd itself, in
the court’s attitude to applications for the disclosure of documents or information
relating to a trust.61
So any object of a dispositive fiduciary power should have standing to invoke
the jurisdiction of the court. But it does not follow that the court must accede to
every such invocation. If the object can demonstrate that he or she has a signifi-
cant claim on the trustees’ consideration, it might well be appropriate to allow the
case to proceed. But if the object only has a very remote chance of benefit—for
example, he is a member of a very widely drafted class but there is nothing to show
the settlor had any intention that the power should be used to benefit him—then
the court could dismiss the case. Again, the point has been made in the context of
access to documents and information concerning a trust:
Evaluation of the claims of a beneficiary (and especially of a discretionary object) may
be an important part of the balancing exercise which the court has to perform on the
materials placed before it. In many cases the court may have no difficulty in concluding
that an applicant with no more than a theoretical possibility of benefit ought not to be
granted any relief.62
So in practical terms, recognising that objects of dispositive fiduciary powers, even
very wide powers, all have prima facie standing to apply to court to remedy the
maladministration of a trust certainly does not mean that the court will have to
accede to claims by those with very little expectation of benefit under the trust. The
court can limit the claims it hears to those made by an object who has a substantial
possibility of seeing benefit from the trust, or other good reason for bringing the
proceedings—one of ‘the true intended beneficiaries’ of the settlement.63 And even
if it hears a claim, it does not have to accede to it, or do so in full. But the court
need not even entertain claims brought by those who have no substantial expecta-
tion of benefit. Who are the ‘true intended beneficiaries’, and who are not, simply

58 See text to n 24.

59 eg British Steel v Granada Television Ltd [1981] AC 1096, 1114 (Megarry VC in the High Court)
1174 (Lord Wilberforce in the House of Lords); Warman International v Dwyer [1995] HCA 18, (1995)
182 CLR 544, 559 (Mason CJ, Brennan, Deane, Dawson and Gaudron JJ); Westdeutsche Landesbank
Girozentrale v Islington LBC [1996] AC 669, 722 (Lord Woolf); Sempra Metals Ltd v IRC [2007] UKHL
34, [2008] 1 AC 561 [150] (Lord Scott), [186] (Lord Walker). See generally, WMC Gummow, ‘Equity:
Too Successful?’ (2003) 77 Australian Law Journal 30, 39–42.
60 eg Warman (n 59).
61 Schmidt (n 5) [67]–[68] (Lord Walker).
62 ibid [67]; see also Hartigan Nominees Pty Ltd v Rydge (1992) 29 NSWLR 405, 432; SAS Trustee

Corp v Cox [2011] NSWCA 408, (2011) 285 ALR 623 [148]; Segelov v Ernst & Young Service Pty Ltd
[2015] NSWCA 156 [130]; Erceg (n 52).
63 See Schmidt (n 5) [34] (Lord Walker); see also Murphy v Murphy [1999] 1 WLR 282, 293

­(Neuberger J).
168 Richard Nolan

turns on the evidence, and the court’s evaluation of that evidence. And there will
often be a letter of wishes which makes the distinction clear, something that the
court can always demand to see.
If the object of a fiduciary power succeeds in his application to remedy a breach
of trust, his remedy is not confined to a sum that reflects only the infringements of
his rights personally. His remedy is to compel the trustees to restore the trust fund
to its proper state.64 Of course, the object, like any beneficiary, can only complain
in respect of a fund, or part of a fund, from which he might see benefit.65
In normative terms, the rights of an object of a fiduciary dispositive power war-
rant his standing to sue to remedy a breach of trust. A fund exists in respect of
which they have claims. The claims may be weak claims in legal theory, though
perhaps more significant in reality where they are ‘the true intended beneficiaries’:
interesting as that contrast is, it is not relevant for present purposes. These objects
have claims in relation to a fund and should therefore be prima facie entitled to
complain if the integrity of that fund has been jeopardised or compromised. In
short, the beneficiary principle, to which English law still adheres,66 gives stand-
ing to enforce a trust to those who have some claims on or in respect of the trust
property.

V. Claims for Breach of Trust: Claims by Objects

of Personal, Non-Fiduciary Powers

Personal, non-fiduciary powers are much less commonly encountered in set-

tlements than fiduciary dispositive powers. And it is unlikely that the objects of
personal powers have rights of enforcement similar to those just outlined in the
context of fiduciary powers.67
The holder of a fiduciary dispositive power owes positive duties to the objects
of that power. The holder must consider whether to exercise the power, consider
the range of objects of the power, and consider the appropriateness of individual
(proposed) exercises of the power.68
By contrast, the holder of a merely personal power does not owe duties to
the donor or the objects of the power.69 So the holder can ignore the power if

64 Target Holdings Ltd (n 17) 434, cited in text to n 17.

65 See Tucker, Le Poidevin and Brightwell (n 49) para 39-076.
66 Morice (n 16); see generally Tucker, Le Poidevin and Brightwell (n 49) para 39-076 and paras
4-043–4-046.
67 ibid para 39-074.
68 Re Gulbenkian’s Settlement [1970] AC 508, 518 (Lord Reid); Re Hay’s Settlement Trusts [1982]

1 WLR 202, 210 (Megarry VC).

69 See, eg, Re Somes [1896] 1 Ch 250, 255 (Chitty J); Re Gulbenkian’s (n 68) 518 (Lord Reid); Re Wills’

Trust Deeds [1961] Ch 219, 227–29 (Buckley J); Re Hay’s Settlement Trusts (n 68) 208–09 (Megarry VC).
 The Enforcement of Modern Trust Structures 169

he chooses; and he does not have to consider the objects of the power or their
­interests. He can release the power at will.70 The only constraint on the holder
of the power is that he must stay within its bounds—both its express terms, and
the implicit limitations which apply even to personal powers, such as the require-
ments to act in good faith and for proper purposes.71 However, those constraints
on the holder of the power exist for the benefit of those who take in default of any
exercise of the power: they are to be benefited by the fund in question save to the
extent that benefit is validly deflected away from them by proper exercise of the
power. The constraints do not entitle the objects of the power to anything; they
merely delimit the extent to which benefit can be taken away from the default
beneficiaries. Thus, any infringement of the constraints is solely the concern of the
default beneficiaries: they can claim their interests have been prejudiced if the con-
straints are infringed. The objects of the power never had any interest in the fund,
nor any claim on the holder of the power; so any misbehaviour of the holder is of
no legal significance to them, whatever their practical disappointment or concern.
So while the rights of an object of a fiduciary dispositive power warrant his
standing to sue to remedy a breach of trust, as noted above, the objects of a mere
power, by contrast, have no such rights and correspondingly no foundation for
any complaint. The beneficiary principle gives standing to enforce a trust to those
who have some claims on or in respect of the trust property, but not others.

VI. Claims for Breach of Trust: Claims by Protectors

Any general statements about protectors are necessarily tentative. Protectors are all
creatures of the specific terms of their appointment. Their powers are various both
in form and function. Each such power may or may not be fiduciary in nature.
As Ribeiro PJ noted in Kan v Poon:
The position is explained in an article by Matthew Conaglen and Elizabeth Weaver enti-
tled ‘Protectors as fiduciaries: theory and practice’. As the learned authors point out, the
term ‘protector’ is not a term of art and generally ‘signifies little more than that a person
who is not the (or a) trustee has been granted a power affecting the operation of the
trust’. One cannot assume that such a power is held in a fiduciary capacity requiring it to
be exercised only in the interests of others to the exclusion of the donee of the power.72

70 See Law of Property Act 1925, s 155 and Re Wills’ Trust Deeds (n 69) 227 (Buckley J).
71 eg Aleyn v Belchier (1758) 1 Eden 132, 28 ER 634; Lady Wellesley v Earl of Mornington (1855)
2 K & J 143, 69 ER 728; Redwood Master Fund Ltd v TD Bank Europe Ltd [2002] EWHC 2703 (Ch),
[2006] 1 BCLC 149; Citibank NA v MBIA Assurance SA [2006] EWHC 3215 (Ch), [2007] EWCA Civ
11; Assénagon Asset Management SA v Irish Bank Resolution Corporation Ltd (formerly Anglo Irish Bank
Corporation Ltd) [2012] EWHC 2090 (Ch), [2013] 1 All ER 495.
72 Kan (n 15) [67], citing M Conaglen and Weaver (n 15).
170 Richard Nolan

Consequently, general statements about someone in the position of a protector

must be made and read with caution.
It is undoubtedly true, however, that a protector who holds fiduciary powers is
subject to the inherent jurisdiction of the court to administer a trust and reform
its maladministration. For example, in Steele v Paz Ltd,73 a Manx appellate court
held that the position of protector in the settlement at issue was a fiduciary posi-
tion, and that the court could accordingly appoint a new protector to fill a gap
in tenure of the office, in the same way that it could appoint a trustee in order to
prevent a trust from failing for want of a trustee. In Re Freiburg Trust,74 the Jersey
Royal Court held that the protector of the trust, whose consent was required for
the exercise by the trustees of a number of their powers, including payments of
income or capital, was in the position of a fiduciary. The Court, accordingly, could
remove him pursuant to its inherent jurisdiction, and did so, because he had been
convicted of offences of fraud in Belgium (including misappropriation of monies
from the Freiburg Trust itself). In the Jersey case of In the Matter of the A and B
Trusts,75 the court again ordered removal of a protector in exercise of its inherent
jurisdiction. Much of the factual background of the case was not reported pub-
licly for reasons of confidentiality. Briefly, relations had broken down completely
between the protector and the adult beneficiaries of two Jersey settlements and
the protector of the settlements, who misconceived his role as ensuring that the
wishes of the settlors were carried out, rather than upholding the interests of the
beneficiaries at all times. The court made it clear that its jurisdiction could be exer-
cised well beyond the extreme circumstances of a case such as Re Freiburg Trust:
the protector’s mistaken view of his role, the breakdown in relations with so many
beneficiaries, and the prejudice that caused to the administration of the trust, war-
ranted his removal from office.
In the cases outlined above, the application was made by beneficiaries and the
subject matter of the application was the protector or his office. But there are
other cases indicating that a protector himself may make applications to court
in connection with the exercise of his powers, for example, an application for a
declaration as to the validity of his own action,76 or an application to invoke (what
was then) the Hastings–Bass jurisdiction to set aside an exercise of his powers.77
A protector may bring an application to determine the legitimacy of action by the
trustees where the trustees’ action is (at least alleged to be) an infringement of the
protector’s powers.78

73 Steele v Paz Ltd [1993–95] Manx LR 426.

74 Re Freiburg Trust [2004] JRC 56.
75 In the Matter of the A and B Trusts [2012] JRC 169A.
76 See, eg, Re Omar Family Trust [2000] WTLR 713 (Cayman); Virani v Guernsey International

­Trustees (No 1) [2004] WTLR 1007 (Guernsey); Re Papadimitriou [2004] WTLR 1141 (Isle of Man);
Alhamrani v Russa Management [2010] WTLR 443 (Jersey).
77 Re L [2011] JLR 085.
78 Re the Hare Trust (2001) 4 ITELR 288 (Jersey).
 The Enforcement of Modern Trust Structures 171

However, none of these cases goes so far as to suggest that a protector, even a
protector holding fiduciary powers (and a fortiori a protector who holds personal
powers), can sue to restore the trust fund, assuming of course that the protector
is not a beneficiary of the trust in question. And the rationale of the beneficiary
principle, noted above,79 that standing to ask a court to compel reconstitution
of a trust fund is given to those who have some claim under the trust on, or in
respect of, the fund, would strongly suggest that protectors have no such standing
by ­virtue of their office or powers.
This conclusion is strongly supported by the recent decision of Henderson J in
Davidson v Selig.80 In that case, the judge noted that two joint protectors had:
[F]our principal functions to perform in relation to the administration of the trusts.
First, they have power to give or withhold consent to any exercise by the Trustees of
their beneficial powers of appointment, or revocation of earlier appointments, from time
to time. Secondly, they have power to remove any trustee from office, with or without
cause, provided that there will still remain a minimum number of trustees. Thirdly, they
have a contingent power to appoint new trustees which will be exercisable only after the
death or incapacity of both Settlors. Finally, the protectors may together appoint new
protectors. These powers are fiduciary, and they must be exercised in the interests of
the beneficiaries. The protectors do not, however, have a general power or duty to supervise
the administration of the Settlements, and they may only apply to the court for relief which
relates to the proper exercise of their own powers.
I would provisionally accept these submissions, which appear to me firmly based on
general principles of trust law and to reflect the limited nature of the powers conferred
on the Protector by the 2003 Deeds.81
Henderson J went on to deny the relief sought by one of the two joint protec-
tors.82 His judgment was framed in narrower terms than the dicta cited above. In
the context of two claims, protectors as such had no standing under the relevant
statutory provisions,83 let alone a single protector acting on his own who should
have acted, if at all, jointly with his co-protector. In the third claim, for informa-
tion about the trust, Henderson J declined to make any order while the claimant
protector’s own status was under challenge. In the other claim, the judge held that
the claimant protector could not, in the circumstances, seek replacement of his co-
protector. Strictly, therefore, Henderson J’s comments on the general powers and
duties of protectors to procure the due administration of a trust were obiter; but
they are quite clear and, with respect, entirely consistent with principle.

79 See text to n 66.

80 Davidson v Selig [2016] EWHC 549 (Ch).
81 ibid [55]–[56] (emphasis added).
82 ibid [57]–[64].
83 One claim was for the appointment of new trustees by the court (Trustee Act 1925, ss 41, 58), and

the other for an order to authorise dealings with trust property (Trustee Act 1925, s 57).
172 Richard Nolan

Of course, where the law concerning the enforcement of trusts has been changed
by statute, a different result may obtain. So, for example, a protector might well
be considered a person sufficiently interested in a Bermudian purpose trust as to
be able to enforce the trust under section 12B(1)(d) of the Trusts (Special Provi-
sions) Act 1989 (Bermuda). Equally, a protector might well be the sort of person
a Cayman court might appoint to enforce a special trust under section 100 of the
Cayman Trusts Law (2011 revision). But these possibilities are purely a function of
local legislation: they have no wider significance.
Still, a protector might still be of use where the trustees have committed a breach
of trust that necessitates the reinstatement of the trust fund. If the beneficiaries are
in no position practically to take the necessary action themselves, the court might
allow the protector, as a suitably interested person, to take the proceedings on
behalf of the beneficiaries. The court has such a jurisdiction to depart from the
proper plaintiff rule—the rule that prima facie the correct person to bring pro-
ceedings is the person whose interests are at issue which, for present purposes, is
prima facie a beneficiary affected by the breach of trust in question.
This equitable jurisdiction is the origin of the ‘fraud on the minority’ excep-
tion to the rule in Foss v Harbottle,84 that is, the exception where a member of a
corporation may sue to remedy a wrong done to the separate legal person of the
corporation.85 However, the equitable learning concerning a fraud on a minority
has now been replaced, with regard to companies registered under the Companies
Acts, by Part 11 of the Companies Act 2006.
Courts of equity have also departed from the proper plaintiff rule in allowing
a trustee to sue on behalf of beneficiaries in respect of a breach of trust.86 While
it is true that a trustee has a duty to protect and where necessary take action to
restore the trust fund,87 and these duties clearly have bearing on the readiness of
the courts to give the trustee standing to sue to remedy a breach of trust, cases
of this nature do illustrate the ability of the court to allow departure from the
proper plaintiff rule in an appropriate case—and, for present purposes, an appro-
priate case of breach of trust. A protector might be an appropriate person for the
court to appoint as nominal claimant in an action for breach of trust, whether

84 Foss v Harbottle (1843) 2 Hare 461, (1843) 67 ER 189.

85 See eg, Foss (n 84) 490–92, 202–03 (Wigram VC), citing the general principle stated in Wallworth
v Holt (1840) 4 My & C 619, 635–36; 41 ER 238, 244–45 (Lord Cottenham LC); Atwool v Merryweather
(1867) LR 5 Eq 464; Russell v Wakefield Waterworks (1875) LR 20 Eq 474, 480–81 (Jessel MR), again
citing W
­ allworth; Burland v Earle [1902] AC 83, 93–94 (Lord Davey).
86 This is a well-established jurisdiction, fully and usefully discussed in Young v Murphy [1996]

1 VR 279 (see especially the judgment of Brooking J). Note also the result, but rather sparse reasons,
in Montrose Investment Ltd v Orion Nominees Ltd (No 2) [2004] EWCA Civ 1032, [2004] WTLR 1133
[23]–[26]. There is further discussion in Nicholson Street Pty Ltd (Receivers & Managers Appointed)
(in Liquidation) v Letten [2015] VSC 583.
87 Re Brogden (1888) 38 Ch D 546; Young (n 86) and the cases discussed there.
 The Enforcement of Modern Trust Structures 173

under its equitable jurisdiction considered above, or under its statutory rules of
procedure.88
But in any such case, whether arising under the court’s equitable jurisdiction
or its rules of procedure, the position of a protector as claimant in an action for
breach of trust would be a representative position, enforcing beneficiaries’ rights
on behalf of those beneficiaries who, for whatever reason, are not practically able
to vindicate their own rights. Protectors still would not have standing to sue in
their own right to put a trust fund back into its proper state.

VII. Practical Implications

Those who create settlements that make significant use of dispositive fiduciary
powers should be reassured: these structures are enforceable. This accords with
a trend in trust law that sees the courts generally try to accommodate new devel-
opments devised by legal practitioners in response to the requirements of their
clients. The widespread use of such settlements, and the main reasons for that,
are examined above. A series of cases, most of them in the 1960s and 1970s, estab-
lished the boundaries within which such powers are valid; and those boundaries
are very widely drawn, as has been seen. While logically the courts could have
conceded the validity of such powers, but left enforcement of the trustees’ duties
under such a settlement to beneficiaries with some more doctrinally substantial
entitlement, that would fly in the face of the courts’ generally pragmatic approach
to the law of trusts. If such powers are valid and widely used, it is surely much
more natural for a pragmatically inclined judiciary to develop the law so that the
trustees’ duties are enforceable by those who may—and in many cases, very likely
will—take benefit under the powers.
This can still leave some practical problems. Allowing the object of a fiduciary
power standing to enforce duties of trustees does not, and cannot, ensure that
any such object has the motivation or incentive to hold the trustees to account.
At first sight, it might therefore seem that settlements which make much use of
dispositive fiduciary powers will be largely unenforced in practical terms, even if
enforceable in doctrinal terms. But again, this may be too simplistic. The object of
a power who is (very) likely to benefit under the power—one of the ‘true intended
beneficiaries’—may well have the motivation to see the trust fund from which he
stands to benefit restored to its rightful condition, especially when proceedings
against the trustees to procure restoration of the trust fund are combined with
an application for the removal of the miscreant trustees (if still in office) and the
appointment of new trustees whose attitudes to a discretion vested in them will

88 eg Civil Procedure Rules, r 19.7.

174 Richard Nolan

not be tainted by any hostility the miscreant trustees might harbour towards some
object of that discretion who has had the temerity to sue them.
Also, any person with standing to sue the trustees may do so whatever others
with similar standing may think of the action, unless the terms of the trust limit
those rights, for example, to circumstances where a majority of the beneficiaries
concur. Trust law does not have the problem of default majority rule which makes
it difficult for individual shareholders to take action in respect of a wrong done
to the company.89 If there is an analogy in corporate law, the better analogy is
with claims under section 994 of the Companies Act 2006 (remedying of unfair
prejudice to a member’s interests): proceedings founded on breach of a fiduci-
ary’s duties are often brought under the Act by those with a minority stake in a
company who have the necessary standing under the section, irrespective of their
status as a minority, as long as they have sufficient personal motivation to bring
the proceedings.
A practical implication which concerns protectors is that they are not func-
tionally equivalent to the non-beneficiary ‘enforcers’ of trustees’ duties which exist
under the legislation of many offshore jurisdictions, for example, section 12B(1)
of the Trusts (Special Provisions) Act 1989 (Bermuda) or section 84A of the Trus-
tee Act 1961 (British Virgin Islands) or Part VIII of the Trusts Law (Cayman, 2011
revision). Nor does there seem any doctrinal basis upon which to develop the office
of protector into such a role. Developments of that sort require a direct reformula-
tion of the beneficiary principle, whether by statute or, possibly, judicial decision.

VIII. Theoretical Implications

The most important theoretical implications from the law surveyed above are
the nature of the parties’ rights and the court’s role in the enforcement of trusts.
Another key theme is the continuing importance of practitioners in the develop-
ment of trusts, and the courts’ response to the practitioners’ efforts.
The invocation and utilisation of the administrative jurisdiction of the court is
and remains fundamental to the enforcement of trusts: the ability to invoke the
administrative jurisdiction is the key to the enforcement of a trust. This means
that litigation to enforce trustees’ duties to restore the trust fund is not, at root,
a simple matter of remedying the infringement of the claimant’s own interest.
The claimant is seeking to do something else, to restore a fund in which he has
an interest but not necessarily the only interest. The claimant is seeking a remedy
for the benefit of himself and all others interested in the fund. While in form his
action is an action in his own right, in substance it is neither purely personal nor
purely representative. The aim of his action is not to repair harm done to him, in

89 See Companies Act 2006, s 263(2)(c), (3)(c) and (d).

 The Enforcement of Modern Trust Structures 175

the manner of an action for damages at common law, but to restore the proper
functioning—the due administration—of an organisation from which he may or
will see benefit. Harm done to a person, even from the functioning of an organisa-
tion, can be remedied by an award of money to that person alone. By contrast, due
administration of a trust necessarily benefits all those interested in the trust: due
administration by definition involves administration of the trust for all those to
benefit from it.
The primacy of securing the due administration of the trust as the aim of reme-
dies for breach of trust has consequences in the scope of those remedies, which are
not limited to reversing harm done to the trust fund but allow remedies, including
money remedies, equivalent to performance rather than loss. This phenomenon
has been described as the ‘good man theory of trusts’, where a trustee in breach of
duty must do his duty or pay the money equivalent of performance, as opposed
to the to the ‘bad man theory of contract’, where a contract-breaker can breach
contract, pay damages for harm done to the other party, but then take advantage
of his breach.90 (Restitutionary damages for breach of contract are exceptional,91
even in jurisdictions such as England where they are available.)
But as well as informing the scope of remedies for breach of trust, the primacy
of securing due administration of the trust informs the identification of those who
may sue to remedy a breach of trust: those to whom the trustees owe obligations in
respect of their application of the trust fund, rather than those who can show their
property or chances have been devalued or lost. To focus on those who have lost
property is too narrow: this category does not include those to whom the trustees
owe obligations in respect of their dispositive discretions. To focus on those who
lose chances by the trustees’ actions is too wide: that category could include those
to whom the trustees owe no obligations, such as objects of a non-fiduciary power
of appointment, whose chances of benefit from the trust are nevertheless f­ actually
diminished by a breach of trust. Trust law is a matter, inter alia, of obligations
in respect of the application of the trust fund: correspondingly, those to whom
such obligations are owed are the people who should be eligible to procure due
administration of the trust.
Of course, as noted before, standing does not guarantee the court will entertain
the allegations made, even if they are factually justified: an object of a wide fiduci-
ary power who is far from one of the ‘true intended beneficiaries’ might techni-
cally have standing to sue to remedy a breach of trust; but the court, in exercise
of its discretion in its administrative jurisdiction may decline to hear the case,
for example, because in substance it amounts to officious meddling. And this is
entirely acceptable in terms of the rule of law. The court, in such a case, is not
capriciously refusing to remedy a wrong—harm—done to that claimant, in a way

90 See DJ Hayton, ‘The Development of Equity and the “Good Person” Philosophy in Common Law

Systems’ [2012] Conveyancer and Property Lawyer 263.

91 Attorney General v Blake [2001] 1 AC 268.
176 Richard Nolan

that might raise concern about equal protection under the law. It is refusing to
allow someone to become embroiled in the affairs of an institution when he has no
significant interest in the management of the institution and has himself ­suffered
no loss.
The law surveyed also shows the importance of the interaction of the legal
profession and the judiciary in developing the law. As seen above, practitioners
pioneered the widespread use of fiduciary dispositive powers in response to their
clients’ needs. Once the judges had accepted the validity of such powers; once they
had clothed their tenure with obligations; once they had realised that the objects
of such powers were more important to the settlor than the beneficiaries who took
in default of any exercise of those powers, it was hardly surprising that the judges
should accord standing to those objects. The judges, after all, are former practi-
tioners: judges such as Lord Wilberforce, Lord Templeman and Lord Walker had
careers at the Bar involved in the creation of settlements which made great use
of such powers, and they brought that perspective to the bench. The practitioner
perspective is important: it is clearly recognised by the judiciary, and so it needs to
be recognised in the theoretical perspective, not just in a socio-legal perspective.
Finally, as noted earlier, the process of securing due administration of a trust
through taking accounts can be short-circuited by an application for an award of
equitable compensation. However, focusing on compensation alone, and a failure
to examine thoroughly the process of accounting, can be the cause of considerable
confusion, as witness two cases of high authority in the last 20 years, Target Hold-
ings Ltd v Redferns,92 and AIB Group (UK) plc v Mark Redler & Co Solicitors.93 Yet
both cases can be accommodated and explained perfectly well within the frame-
work of the inherent jurisdiction to hold trustees to account.
Lord Millett first provided an elegant solution to the problems of Target.94 In
that case, the defendant solicitors’ unauthorised disbursement of the £1.49 ­million
was a clear breach of the trusts on which they held those (client) monies: the mon-
ies had been released without obtaining a mortgage in exchange. So that action
could be falsified in the trust accounts, leaving the solicitors liable, at that time,
to pay £1.49 million to reconstitute the trust fund. But by the time of action, the
solicitors had received the relevant mortgage charges, and when they did so, their
authority to execute the trust by paying out the trust funds on receipt of the mort-
gage still subsisted. So the receipt of the mortgage had to be taken into the account
as a credit entry, balancing the disbursement of the £1.49 million. So the trust
accounts as they should appear would thus match the actual state of the trust fund,
and therefore no compensation was payable.

92 Target Holdings Ltd (n 17).

93 AIB Group (UK) Plc v Mark Redler & Co Solicitors [2014] UKSC 58, [2015] AC 1503.
94 PJ Millett, ‘Equity’s Place in the Law of Commerce’ (1998) 114 LQR 214; see also M Conaglen,

‘Explaining Target Holdings v Redferns’ (2010) 4 Journal of Equity 288.

 The Enforcement of Modern Trust Structures 177

There is much more debate about whether the second of two cases, AIB v Redler,
can be equally elegantly explained by remembering and applying the principles of
trust accounting. Professor Conaglen has suggested not.95 However, accounting
can perfectly well explain the result in that case.
AIB agreed to lend £3.3 million against the security of a property valued at £4.5
million, but the lender insisted on securing its loan by a first charge. The existing
mortgages on the property had to be redeemed so that could happen. The loan
funds were advanced to solicitors, who released them without obtaining a first
charge over the property. As a result of negligence, £1.2 million was paid to the
prior mortgagee to redeem its mortgage, but this was too little by £0.3 million.
So the prior mortgage continued on foot, albeit to secure just £0.3 m ­ illion. The
£0.3 million was instead paid to the borrower. In subsequent attempts to rectify
the situation, it proved impossible for AIB to obtain a first mortgage. So the breach
was never rectified, in contrast to Target. The borrower defaulted, the property was
sold and the first £0.3 million of the realisation was paid to the prior mortgagee,
as was proper. But that meant AIB only received approximately £0.87 million. The
solicitors admitted negligence, but the claim in contract was limited to the £0.3
­million which AIB had lost as a result of not having had a first charge. AIB therefore
sued for breach of trust, arguing that the entire £3.3 million had been disbursed
in breach of trust, as no valid first charge had been received, and thus needed to
be replaced. It failed: its claim was limited to the £0.3 million extra that it would
have received had it been the first mortgagee. The reasoning of the Supreme Court
was couched in terms of equitable compensation. This has led some to question
the result, as it is seen to be inconsistent with the process accounting. However,
it is suggested that the result is in fact perfectly consistent with accounting as the
primary remedy for breach of trust.
In brief, the process of accounting would begin with falsifying the disbursement
of the £3.3 million. The acquisition of a second mortgage did not cure the breach
of trust, and so would not be taken into account. But what must be taken into
account are the solicitors’ duties. It is true that, on taking an account, the defend-
ant trustee is not allowed to speculate that he would have used his powers in a
certain way and thereby mitigated to the breach of trust. This rule is justified on
the basis that the trustee should not be allowed to give self-serving, and very likely
untrue, evidence in his defence. But what was at issue in AIB was not the trustee’s
powers, but its duties. Once in possession of the £3.3 million, it was the trustee’s
duty to acquire a first mortgage, and so what should show in the account is the
first mortgage, not £3.3 million. It was clearly the duty of the trustee to acquire
that mortgage, not merely its power: the trustee could hardly be heard to say that
it might or might not choose to expend the monies on the mortgage; it had to
do so. This duty was originally revocable, of course. AIB could have called off the
whole transaction at least until it took the benefit of the second mortgage, though

95 Conaglen, ‘Equitable Compensation for Breach of Trust: Off Target’ (n 21).

178 Richard Nolan

it is hard to see how AIB could resile once it had voluntarily taken benefit (the
second mortgage) from the acquisition of the property: taking such a benefit and
yet denying authority for the very transactions which generated that benefit would
be inconsistent. So, on the assumption that AIB did not countermand acquisition
of the mortgage, this mortgage is what should show in the accounts, not a sum of
cash. On that basis, when the borrower defaulted, the trust fund would contain a
second mortgage when it should contain a first mortgage; and the loss to the fund
would be the difference between realisation of a first mortgage and realisation of
the second mortgage, in other words, £0.3 million.
The trustee’s liability is a function of its duty; and there is no reason why the
trustee cannot point to its duty (rather than its powers) in order to establish the
scope of its liability. The trustee is not taking advantage of his own misconduct:
it is open to a defendant who is liable, even a trustee who is liable, nevertheless to
ask the court to pay attention to the basis and extent of its liability, that is, to pay
attention to the nature of its duties.
So in both Target and AIB, the courts intuitively reached a justifiable result. But
explaining the result in the correct terms is still useful in itself.

IX. Conclusion

The inherent jurisdiction is flexible, innovative and vitally important. It allows

for flexible and innovative trust structures and provides for their enforcement.
It provides answers to the questions of who may enforce a trustee’s duties and in
what circumstances. Modern trust structures which make great use of dispositive
fiduciary powers do not present significant legal risk and their enforcement. There
may be practical issues related to enforcement, but these go to the motivation,
rather than the availability, of a beneficiary with standing to enforce the trustees’
duties.
Enforcement of a trustee’s obligations by a beneficiary is in principle different
from a typical common law claim and remedy as between two parties, though
sometimes and, in some simple cases, it may bear some superficial similarity. The
court’s inherent jurisdiction provides the mechanism for one member of a group
of beneficiaries to secure enforcement of obligations owed to the entire group for
the benefit of the whole group. And it is this principle that underlies cases that
are litigated as claims for equitable compensation against a trustee. There is no
harm in such form of action as long as it is remembered that it is a way of achiev-
ing more quickly what is provided by an account of the trustee’s stewardship of
the trust fund. The confusion surrounding some recent cases emphasises the
importance of this point. But what cannot be overemphasised is the importance
of understanding the flexible and innovative inherent jurisdiction of the court to
secure the due administration of a trust.
 8
Trusts, Objectivity and Rectification

SIMON DOUGLAS*

I. Introduction

In order to establish the existence of an express trust a basic requirement is that

the settlor’s intention to create a trust on particular terms be certain.1 It is com-
monly said that a court must adopt an ‘objective’ enquiry when it approaches this
question. Perhaps the strongest statement to this effect comes from the recent
­Australian case of Byrnes v Kendle2 where French CJ said: ‘The relevant intention
in such a case is that manifested by the declaration of trust. Such a case does not
require any further inquiry into the subjective or “real” intention of the settler’.3 In
this respect, as the High Court noted, there is no difference between how the court
ascertains the relevant intention of the parties to a contract and how it ascertains
a settlor’s intention to create a trust: in both cases the subjective intention of the
parties is irrelevant.4
The High Court also noted in the case that there are some exceptions to the
objective approach.5 One apparent exception, which is considered in this chapter,
is that of rectification. Rectification is generally said to be available in cases where a
document, such as a contract6 or a trust deed,7 has been executed but there has been
some error in the recording of the parties’ intentions.8 The remedy of rectification,

* I am very grateful to Paul Davies, James Penner, Joshua Getzler, Rob Stevens and Peter Watts QC

for their comments on an earlier draft of this chapter.

1 Knight v Knight (1840) 49 ER 58.
2 Byrnes v Kendle [2011] HCA 26, 243 CLR 253.
3 ibid [17].
4 ibid [59]–[65] (Gummow and Hayne JJ).
5 ibid [100]–[101] (Heydon and Crennan JJ).
6 There has been much academic interest of late in rectification owing, in part, to the controversial

speech of Lord Hoffmann in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC
1101, which held that rectification, in the context of contract law at least, involves an objective enquiry
into the intention of the parties.
7 The case of Walker v Armstrong (1856) 8 De GM & G 531, 44 ER 495 provides an early example of

the jurisdiction of the Chancery Court to reform a trust deed.

8 See generally D Hodge, Rectification: The Modern Law and Practice Governing Claims for Rectifica-

tion for Mistake, 2nd edn (London, Sweet & Maxwell, 2016) ch 1.
180 Simon Douglas

as Mummery LJ notes, ‘involves bringing the trust document into line with the
true intentions of the settlor as held by him at the date when he executed the
document’.9 When a court is asked to rectify a trust deed it is commonly said that
the enquiry becomes a subjective one, with a court rectifying a document if it does
not reflect what the settlor ‘meant to say’. For instance, in the recent case of Day
v Day Etherton LJ said:
What is relevant in such a case is the subjective intention of the settlor. It is not a legal
requirement for the rectification of a voluntary settlement that there is any outward
expression or objective communication of the settlor’s intention.10
The notion that rectification provides an exceptional case, where the court should
eschew its normal objective approach, and enquire into the ‘true’ or ‘actual’ inten-
tion of the settlor, is problematic. If a settlor can obtain rectification if, subject to
certain conditions,11 his subjective intention is at odds with the objective meaning
of his words then, arguably, rectification, far from being a mere exception to the
objective approach, wholly undermines it.
This purpose of this chapter is to examine this apparent contradiction in the
law of trusts. In the first section of the chapter it will be asked whether courts
do, in fact, assess a settlor’s intention objectively. It is often remarked that the
rules governing the assessment of a settlor’s intention to declare a trust are largely
under-theorised.12 The English13 law of trusts does not appear to have any author-
itative leading cases, such as those found in contract law,14 where objective princi-
ples are put on a clear footing. One must carefully review the English authorities
in order to reach a firm conclusion on this issue. The second section of the chap-
ter asks whether rectification of trust instruments is, as suggested in the above
quote, a subjective process, and whether this undermines the objective approach
to interpretation.

II. Objectivity in Trusts

The rules governing the objective interpretation of contracts are well known and
the subject of much scholarly attention. The corresponding rules in trusts law, by
contrast, have attracted little by way of comment and analysis. Most textbooks will,
as a matter of course, say that the rules governing the interpretation of trusts are,
like their contractual counterparts, objective. Yet there are important differences

9 Allnutt v Wilding [2007] EWCA Civ 412 [11].

10 Day v Day [2013] EWCA Civ 280, [2014] Ch 114 [22]; noted F Dawson (2014) 130 LQR 356.
11 Specifically, that none of the bars to rectification apply. The principal bars are laches, acquies-

cence and the impact on a third party. See Hodge (n 8) chs 6 and 7.
12 Byrnes (n 2) [59] (Gummow and Hayne JJ).
13 As opposed to the Australian law of trusts, where Byrnes (n 2) is the leading case.
14 eg Smith v Hughes (1871) LR 6 QB 597.
 Trusts, Objectivity and Rectification 181

between contracts and trusts, in particular the voluntary nature of most trusts. So,
what evidence is there of an objective approach? In order to answer this question
it may be helpful to begin by considering the meaning of ‘objectivity’.

A. What is Objectivity?

Most attempts to define objectivity draw some distinction between the mean-
ing attached to a statement by the speaker, and the meaning conveyed to the
addressee, or a reasonable person in the addressee’s position. For instance, Spen-
cer, in explaining the objective approach to contractual interpretation said: ‘Words
are to be interpreted as they are reasonably understood by the man to whom they
were spoken, not as they were understood by the man who spoke them’.15 When
a speaker encodes his thoughts in words, he may mean one thing by them, but
the addressee may understand those words to mean something quite different.
In such cases, the objective and subjective enquiries point in different directions.
The distinction between speaker meaning and addressee meaning can be applied
outside the contractual context. For instance, in Norton on Deeds, in a quote cited
with approval in Byrnes v Kendle,16 we see support for an objective approach to the
interpretation of deeds:
The word ‘intention’ may be understood in two senses, as descriptive either (1) of that
which the parties intended to do, or (2) of the meaning of the words that they have
employed; here it is used in the latter sense … In other words, the question to be answered
always is, ‘What is the meaning of what the parties have said?’, not, ‘What did the parties
mean to say?’.17
The facts of Byrnes v Kendle provide a neat illustration of the difference. The
defendant in the case, using both his own and his then wife’s savings, had acquired
freehold title to a house. He then executed a trust deed, which stated, amongst
other things, that he held the title ‘on trust’ for the benefit of himself and his then
wife. Following his separation from his wife, and her assigning her interest to her
son (the claimant), a dispute arose as to the payment of rent, as the defendant had
permitted his own son to live at the premises rent free. If there was a trust of the
freehold, with the claimant holding a beneficial interest, then it was clear that he
was entitled to the receipt of rent. The defendant attempted to introduce evidence
that he believed, in executing the deed, that he was merely undertaking to share
the sale value of the land should he ever sell it in the future, and hence no trust

15 JR Spencer, ‘Signature, Consent and the Rule in L’Estrange v Graucob’ (1973) 32 CLJ 104, 106.

For discussion of the extent of the objective theory on contract law, and whether there is any room for
a subjective enquiry, see D McLauchlan, ‘Objectivity in Contract’ (2005) 24 University of Queensland
Law Journal 479, 484 and D McLauchlan, ‘The Contract that Neither Party Intends’ (2012) 29 Journal
of Contract Law 26.
16 Byrnes (n 2) [53].
17 R Morrison and H Goodman (eds), Norton on Deeds, 2nd edn (London, Sweet & Maxwell, 1928)

50.
182 Simon Douglas

was ever created. The dispute in the case, therefore, was whether the ‘certainty of
intention’ requirement for the establishment of a trust had been satisfied.
In most cases it does not matter whether a court adopts an objective or a sub-
jective approach to the certainty of intention requirement, as both enquiries will
yield the same result. Parties preparing legal documents, who have had time to
consider their choice of words, are usually good at encoding their thoughts in
language, so that their meaning is successfully conveyed to the addressee. Yet this
is not always true, Mr Kendle providing a case in point. A subjective approach—
what did Mr Kendle mean by his words ‘on trust’?—would result in there being
no trust as Mr Kendle meant no more than a promise to split the proceeds of
sale in the future. An objective approach—what would the reasonable addressee
understand the words ‘on trust’ to mean?—would result in a trust, those words
clearly conveying an intention to settle the title in this way. It is important to deter-
mine, therefore, which question the courts ask when they deal with the certainty of
intention requirement. In Byrnes v Kendle the court was of the view that an objec-
tive enquiry was appropriate, with Heydon and Crennan JJ holding that
the ‘intention’ referred to is an intention to be extracted from the words used, not a
subjective intention which may have existed but which cannot be extracted from those
words. This is as true of unilateral declarations of alleged trust as it is of bilateral cov-
enants to create an alleged trust.18
Whilst this makes the position in Australian law clear, we must ask whether it
reflects the approach of the English courts to the certainty of intention requirement.

B. Is Intention Assessed Objectively in the Law of Trusts?

The High Court of Australia’s adoption of an objective approach in the context

of trusts was influenced, in part, by the corresponding contractual rules of inter-
pretation. These rules, as noted by Gummow and Hayne JJ, were in ‘command
of the field’19 and provide an obvious starting point in any analysis of a trusts
dispute. Further, as Heydon and Crennan JJ noted, contracts provide a common
base for the establishment of some trusts, and the fact that the two enquiries are
similar is ‘not surprising’.20 Yet, some may be reluctant to push the analogy with
contract too far. Trusts, it must be noted, are often unilateral in the sense that their
creation depends entirely on the settlor’s exercise of his power to create a trust.

18 Byrnes (n 2) [114].
19 Byrnes (n 2) [59], citing Mason ACJ, Murphy and Deane JJ in Taylor v Johnson (1983) 151 CLR
422, 429.
20 ibid. The notion that ‘what goes for contract goes for trusts’ is further supported by the line of

cases where a declaration of trust has been inferred from the terms of a contract. The leading example
is that of Re Sigma Finance Corporation [2009] UKHL 2, [2010] 1 All ER 571. Dyson Heydon expressed
some concerns over the contractualisation of trusts principles: JD Heydon, ‘Implications of Chartbrook
Ltd v Persimmon Homes Ltd for the Law of Trusts’ (paper at the STEP Annual Trusts Symposium,
Adelaide, 18 February 2011).
 Trusts, Objectivity and Rectification 183

The resulting focus on the settlor’s intention, to the exclusion of any other party
such as the trustee or beneficiary, may lead some to favour a subjective approach.
This tendency may be particularly strong where the settlor is acting gratuitously: if
Mr Kendle, for instance, was under no obligation to divest himself of the value of
his title, then why should he be bound by a construction that he never intended?
There is an obvious temptation to favour a subjective approach in the context of
trusts law. This is perhaps encouraged, as Heydon and Crennan JJ note, by the
‘constant repetition of the need to search for an “intention to create a trust”’.21
There is some evidence of a subjective approach to interpretation in trusts law.
The best example is the problematic Australian case of Commissioner of Stamp
Duties (QD) v Jolliffe.22 Under a statute, it was illegal for an account holder to hold
a second account at a bank, except where the second account is held on trust for
another. The defendant, already holding an account, deposited money in a second
account and made a declaration to the bank that he held it on trust for his sisters.
The defendant subsequently denied the existence of a trust. His argument suc-
ceeded as the court permitted him to introduce evidence that, notwithstanding
his declaration of trust, his real intention was to retain title to the fund and earn
interest on it. As this intention was never disclosed (until the legal proceedings), it
could only be ascertained by conducting a subjective enquiry into the defendant’s
mental state; an objective enquiry—what meaning did the defendant convey to a
reasonable person?—would yield nothing other than an intention to create a trust
as that is all that was communicated.
The question has often been raised of whether Jolliffe, which has now been
overruled in Australia by Byrnes v Kendle, ever represented the legal position in
­England. Citations of the case in successive editions of Lewin on Trusts23 posed
this question, and one can certainly find some support for it in the old case law.
In the nineteenth-century case of Field v Lonsdale,24 which involved facts almost
identical to those found in Jolliffe, the Master of the Rolls, Lord Langdale, refused
to give effect to the obvious (objective) meaning of the defendant’s declaration of
trust over the second bank account: ‘the only intention was to evade the provisions
of the Act of Parliament [prohibiting a second account], and not to create a trust.
The declaration is, therefore, ineffectual, and the claim must be dismissed’.25
Yet Jolliffe, and similar cases like Field v Lonsdale despite never being expressly
rejected in the English courts, are clearly inconsistent with principles developed
in relation to the certainty of intention requirement. Specifically, the cases do not
square with the traditional exclusion of evidence of an undisclosed or secret inten-
tion. It is not mental states per se which constitute trusts, but the communication

21 Byrnes (n 2) [114].
22 Commissioner of Stamp Duties (QD) v Jolliffe (1920) 28 CLR 178.
23 WJ Mowbray (ed), Lewin on Trusts, 16th edn (London, Sweet & Maxwell, 1964).
24 Field v Lonsdale (1850) 13 Beavan 78, 51 ER 30.
25 ibid 81.
184 Simon Douglas

of them. Indeed, this was pointed out in Jolliffe in the strong dissenting judgment
of Isaacs J:
It is just as improper morally to permit a man who has openly undertaken such a trust
to escape his conscientious obligation by reason merely of a secret mental reservation
not to fulfil what he has openly undertaken. An open declaration of trust is therefore an
expression of intention that is final and beyond recall.26
The irrelevance of uncommunicated or secret intentions, which can only be dis-
covered by conducting a subjective enquiry, is evident from the need for a ‘dec-
laration’ in order to establish an express trust.27 To ‘declare’ a trust a settlor must
‘manifest’,28 or communicate, his intention to another. This was emphasised by
French CJ in Byrnes v Kendle where he said, ‘the relevant intention in such a case
is that manifested by a declaration of trust’.29 Secret intentions do not pass this
threshold, and hence are irrelevant to the question of whether or not a trust has
been constituted. As Megarry J said in Re Vandervell (No 2), ‘To yearn is not to
transfer’.30 One area of law in which this has been stressed in recent years is that of
‘sham trusts’ (of which Jolliffe could be said to belong), where a settlor ‘declares’ a
trust in order to take assets out of his estate (to avoid, for instance, the effects of
bankruptcy), but secretly intends to retain ownership of the assets. If the settlor
does not communicate his ‘shamming’ intention with the trustee, but keeps it to
himself, then he is precluded from denying the existence of a trust. An example is
Shalson v Russo31 where the defendant, who had defrauded the claimant of money,
settled much of the money on trusts for his family. In response to the allegation
that the defendant secretly intended to keep the money for himself, Rimer J said:
The settlor may well have an unspoken intention that the assets are in fact to be treated
as his own … But unless that intention is from the outset shared by the trustee … I fail
to see how the settlement can be regarded as a sham.32
What we have established so far is that a basic requirement for the creation of an
express trust is the communication of intention by the settlor. We may now ask

26 Jolliffe (n 22) 187.

27 The classic statement of the need for a declaration is found in Lord Nottingham’s judgment in
Cook v Fountain (1676) 3 Swan 585, 591, 36 ER 984, 987, where he said: ‘[E]xpress trusts are declared
either by word or writing; and these declarations appear either by direct or manifest proof, or violent
and necessary presumption’.
28 WJ Mowbray et al (eds), Lewin on Trusts, 18th edn (London, Sweet & Maxwell, 2008) para 4-01.

The need for a ‘declaration’ does not require the settlor to use, orally or in writing, the specific words ‘I
declare’. For instance, in Paul v Constance [1976] EWCA Civ 2, [1977] 1 WLR 527, the settlor was held
to have constituted a trust over a sum of money merely by saying that the money ‘is as much yours
as mine’. An interesting question is whether this can be done by conduct. See, for instance, Re Kayford
Ltd [1975] 1 WLR 279 where a company was held to have declared itself a trustee without it expressly
saying or writing anything.
29 Byrnes (n 2) [17].
30 Re Vandervell (No 2) [1974] Ch 269, 294.
31 See also Grant v Edwards [1986] 1 Ch 63; and Rowe v Prance [1999] 2 FLR 787.
32 Shalson v Russo [2003] EWHC 1637 (Ch), [2005] Ch 281, 342; see also In re Esteem Settlement

[2003] JLR 188.

 Trusts, Objectivity and Rectification 185

how these acts of communication are interpreted by the courts: do courts attempt
to ascertain what the settlor meant by his words, or do they ask what a reasonable
person would understand those words to mean? Whilst the law of trusts does not
have the same body of case law on this issue as that found in contract law, there is
more than enough evidence to show that the courts ask the latter question, ie, the
enquiry is an objective one.
Perhaps the leading case on this issue is the House of Lords’ decision in Commis-
sioners of Inland Revenue v Raphael.33 A testator had left money to his son on the
condition that the son settled it on a trust with specific terms. The son attempted
to follow his father’s instructions. However, the wording he used when settling the
trust was clearly incompatible with the conditions set out in the will and, conse-
quently, the gift failed. The son attempted to save the gift by arguing that the terms
of the trust that he had settled should be interpreted subjectively, so that the words
carried the meaning he had hoped for, namely a meaning consistent with the con-
ditions set out in the will. Rejecting the argument, Lord Wright said:
It must be remembered at the outset that the court, while it seeks to give effect to the
intention of the parties, must give effect to that as expressed, that is, it must ascertain the
meaning of the words actually used.34
What the son desired the words to mean, therefore, was wholly irrelevant. Similar
statements can be seen in the House of Lords’ decision in Twinsectra Ltd v Yardley35
where the claimant had transferred money to the defendant’s solicitor to finance
the defendant’s purchase of land. The terms of the loan provided, amongst other
things, that when the money was paid to the solicitor it was to be retained by the
solicitor until it was required for the acquisition of the property and that it could
not be used for any purpose other than the acquisition of property.36 The judge at
first instance held that these words did not constitute a transfer on trust37 because
the claimant had not meant by those words to create a trust, finding that he ‘set
no store’ by them.38 Overturning this finding, the House of Lords held that what
the claimant actually meant by those words was not important. Lord Millet said:
A settlor must, of course, possess the necessary intention to create a trust, but his sub-
jective intentions are irrelevant. If he enters into arrangements which have the effect of
creating a trust, it is not necessary that he should appreciate that they do so; it is sufficient
that he intends to enter into them.39
As such, it was not the claimant’s intention that was relevant, but what the reason-
able person would understand the claimant to have intended.
33 Commissioners of Inland Revenue v Raphael [1935] AC 96.
34 ibid 142.
35 Twinsectra Ltd v Yardley [2002] 2 AC 164.
36 ibid [9].
37 The allegation is that it constituted a form of Quistclose trust; see also Swiss Bank v Lloyd’s Bank

[1982] AC 584, 595–96 and Cooper v PRG Powerhouse Ltd (in liq) [2008] EWHC 498 (Ch), BCC 588
[71].
38 Twinsectra (n 35) [2002] UKHL 12, [2002] 2 AC 164, [14].
39 ibid [71].
186 Simon Douglas

Aside from these general statements from the House of Lords, the objective
approach can be found in various pockets of trusts law. One area is the interpreta-
tion of wills. It is well established that when a court construes a will it does not ask
what the settlor intended, but what a reasonable person would understand them
to have intended.40 This approach applies equally to trusts created by will. So in
Charles v Barzey,41 where a testatrix left a freehold to the claimant, but provided
that the defendant could ‘use the garage as long as he liked’, on the question of
whether this created a trust, Lord Hoffmann said:
The interpretation of a will is in principle no different from that of any other com-
munication. The question is what a reasonable person, possessed of all the background
knowledge which the testatrix might reasonably have been expected to have, would have
understood the testatrix to have meant by the words which she used.42
This objective approach can also be seen in the old line of cases where courts were
called upon to construe marriage settlements, typically where a spouse found that the
terms of the settlement gave them less control over the fund than was desired by the
settlor.43 In one such case, Jessel MR said that although the terms of the settlement
had a meaning which ‘I cannot help thinking was never intended by the framer’, the
court still had to ‘consider the meaning of the words, [and] not what one may guess
to be the intention of the parties’.44 A more recent line of cases, where courts have
continued to approach the certainty of intention requirement objectively, is that of
constructive trusts in the family home. In these cases, one of the partners typically
has a freehold title and makes representations to the other partner which suggest that
they are to share the value of the land. In Gissing v Gissing, Lord Diplock said that in
asking whether an intention to create a trust is present in such cases,
the relevant intention of each party is the intention which was reasonably understood by
the other party to be manifested by that party’s words or conduct notwithstanding that
he did not consciously formulate that intention in his own mind or even acted with some
different intention which he did not communicate to the other party.45
The objective approach in the family homes context is particularly important in
cases where the party with freehold title gives an ‘excuse’ for not making their
partner a joint tenant of the legal estate.46 We may suspect that the freeholder in
such cases is being deceitful and has no desire to share the value of their home.
Yet, a secret intention to keep the freehold absolutely can only be disclosed by

40 Grey v Pearson (1857) 6 HLC 61, 10 ER 1216.

41 Charles v Barzey [2002] UKPC 68, [2003] 1 WLR 437.
42 ibid 439.
43 Constantinidi v Ralli [1935] 1 Ch D 427.
44 Smith v Lucas (1881) 18 Ch D 531, 542.
45 Gissing v Gissing [1971] AC 886, 906. This was cited with approval in Jones v Kernott [2011] UKSC

53, [2012] 1 AC 776 [51(3)]: ‘the relevant intention of each party is the intention which was reasonably
understood by the other party to be manifested by that party’s words and conduct notwithstanding
that he did not consciously formulate that intention in his own mind or even acted with some other
intention which he did not communicate to the other’.
46 Grant (n 31) and Rowe (n 31).
 Trusts, Objectivity and Rectification 187

an enquiry into the subjective intention of the freeholder and, as such, is of no

relevance.

C. What Type of Objectivity?

Before turning to the issue of rectification, we can take our analysis of objectivity
further, and ask what type of objective approach is being employed by the courts.
We have seen that an objective approach enquires into what meaning was reason-
ably conveyed by the settlor’s words. The difficulty in asking this question, how-
ever, is that a settlor’s words can reasonably convey different meanings to different
persons. Take the nineteenth-century charitable trust case of Shore v Wilson47
where a testatrix left a sum of money on trust for ‘poor and Godly preachers of
Christ’s holy gospel’. To a detached observer, who shares the testatrix’s language
but little else, the words can reasonably be understood to mean that any person
of the Christian faith is a potential beneficiary. However, to the persons to whom
the will was addressed (the trustees), who were aware that the testatrix was a strict
Calvinist, the words could reasonably be understood to refer to a much narrower
group of people, namely those belonging to the non-conformist group. Tindal
CJ, in a much cited speech, said that evidence could be introduced to show that
‘besides their general common meaning, [the words] have acquired, by custom or
otherwise, a well-known peculiar idiomatic meaning … in the particular society
of which [the testatrix was] a former member’.48
Declarations of trust are acts of communication. Let us say that a purported
settlor, alone in his living room, says ‘I declare myself trustee’. Aside from the dif-
ficulties of proving this, it is unlikely, as a matter of law, whether this can constitute
a trust.49 The settlor’s intention must, at some point, be communicated to the
relevant parties, namely the trustee and beneficiary. As declarations of trust are
acts of communication addressed to specific persons, then it logically follows that
the court, when interpreting the declaration, should ask what meaning is reason-
ably conveyed to the addressee (ie, the trustee or beneficiary). This is sometimes
referred to as ‘promisee objectivity’, or ‘addressee objectivity’.50 It simply means
that words are interpreted, as Spencer explains, ‘as they are reasonably understood
by the man to whom they were spoken’.51 It is sometimes contrasted with the ‘fly on
the wall’ or ‘detached objectivity’ approach which, as Howarth notes, requires the

47 Shore v Wilson (1842) 9 Cl & Finn 355, 8 ER 450.

48 ibid 567.
49 cf Middleton v Pollock (1876) 2 ChD 104 CA.
50 W Howarth, ‘The Meaning of Objectivity in Contract’ (1984) 100 LQR 265, 267.
51 Spencer (n 15) 106, emphasis added A possible example of promisee objectivity is Hartog v Colin

Shields [1939] 3 All ER 566 where the defendant was aware that the claimant had made a mistake in
offering the defendant a number of hare skins at a certain price ‘per lb’, when all of the preceding nego-
tiation had been been conducted in terms of price ‘per skin’. To a reasonable person in the position of
the purchaser, who is aware of previous communications and the market practice, it would be obvious
what the vendor intended.
188 Simon Douglas

reasonable man ‘to adopt a stance apart from that of either promisor or promisee,
a viewpoint which is independent of the perspectives of either of the parties or
even a reasonable person in their position’.52 The choice between these approaches
is essentially one of how much background context the court is willing to supply
to the putative reasonable man who hears the settlor’s communication: the pur-
ported addressee, of course, has a much better sense of the context of the state-
ment than the detached observer, as Shore v Wilson illustrates.53
The courts, when construing purported declarations of trust, must adopt the
stance of the person to whom the declaration was addressed, namely the trus-
tee (or beneficiary, in cases of self-declarations of trust).54 This becomes further
evident when we consider that in some cases a settlor will communicate certain
things to a purported trustee but conceal these communications from third par-
ties. An example is that of sham trusts. As noted above, the allegation of a sham
trust is often made in cases where the settlor has attempted to give the impression
that he has taken assets out of his estate by transferring them to a trustee on cer-
tain declared trusts.55 The specific allegation made in these cases is that although
the settlor has declared a trust (usually in writing), he has simultaneously told the
trustee (usually orally) that the declaration is designed to give a false impression,
and that he has no desire to divest himself of his assets. Where parties have suc-
cessfully proved this allegation of ‘sham’, the courts have held that the certainty of
intention requirement for a trust has not been satisfied.56
If the courts in these cases were to apply a ‘detached objectivity’ enquiry, then it
would be difficult to reach the conclusion that there was no trust in these cases. To
a detached observer standing apart from the parties (such as, for instance, a poten-
tial creditor or revenue authority) who sees only the formal ‘declaration of trust’,
the settlor’s words are reasonably to be understood as a straightforward declara-
tion of trust. However, to a person in the position of the trustee, to whom not only
is the ‘declaration of trust’ addressed, but other communications which inform
him of the settlor’s desire to retain his assets, a different view is formed: to such a
person the settlor is reasonably understood not to intend the creation of a trust.57

52 Howarth (n 50) 267. An example of the detached objectivity approach in contract law is often

said to be found in Lord Denning’s decision in Solle v Butcher [1950] 1 KB 671.

53 For other possible examples of ‘promissee objectivity’, see Doe d Cox v Roe (1803) 4 Esp 185 and

Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] 2 WLR 945. An example of a case
that may involve an application of ‘detached objectivity’ is re Goods of Peel (1870) LR 2 P & D 46.
54 Aside from Shore (n 47), which clearly illustrates this, we can see an express endorsement of this

approach in the case of Gissing (n 45) 906, where Lord Diplock said that ‘the relevant intention of each
party is the intention which was reasonably understood by the other party’ (emphasis added).
55 See Shalson (n 32); Re Esteem Settlement (n 32); Gaskell v Gaskell (1828) 2 Y & J 502.
56 eg Raftland Pty Ltd v Federal Commissioner of Taxation [2008] HCA 21.
57 A similar example is that of fully secret trusts, of the kind discussed in McCormick v Grogan

(1869) LR 4 HL 82, where a testator purports, in his will, to make an absolute gift to another; however,
the testator privately communicates to the donee that he wishes the donee to hold the gift on certain
trusts. A detached observer, who sees nothing but the public documents (ie the will) may interpret the
 Trusts, Objectivity and Rectification 189

It has been argued that sham trusts are an exception to the general objective
approach to the certainty of intention enquiry so that when a litigant makes an
allegation of sham the court will be permitted to inquire into the subjective inten-
tion of the settlor.58 Conaglen, in an influential article, argues that in sham cases
courts are faced with situations where the objective interpretation of the parties’ docu-
mentation or conduct is at variance with the substance of their agreement, and so the
courts look behind the objective appearance to get at the truth of the matter.59
However, just because the court is ‘looking behind’ the written declaration of
trust does not mean that it is adopting a subjective approach. As we have seen,
the objective approach employed in trusts law requires the court to ask what the
settlor’s words meant to a reasonable person in the position of the addressee. Such
a person in sham cases (usually the trustee) is privy not just to the ‘declaration
of trust’, but to other communications which inform the ‘trustee’ of the settlor’s
desire to keep hold of his assets.60 To ask—what would a reasonable person in the
position of the trustee have understood the settlor to mean?—therefore, naturally
forces the court to ‘look behind’ the declaration of trust as the trustee was privy to
other communications.
Indeed, far from being an exception to the general objective approach to the
certainty of intention requirement, the ‘sham trust’ line of cases have consistently
rejected a truly subjective approach. The reason for this is that it is well established
that if the settlor does not communicate his ‘shamming intent’ to the trustee, but
keeps it a secret, then the ‘sham’ allegation will fail.61 If the approach of the courts
in such cases was ‘subjective’ then this would make little sense, as an uncommuni-
cated secret intention can still be discovered by a subjective enquiry, as happened
in the case of Jolliffe.62 The need for communication to the trustee, therefore, only
makes sense if the courts are adopting an objective approach.63
To conclude this section, when asking the ‘certainty of intention’ question, the
court’s approach is an objective one. It asks what the settlor’s words mean to a
reasonable person in the position of the addressee, usually the trustee.

settlor’s intention as a desire to make a gift. Yet, a reasonable person standing in the position of the
donee, who has been privy to other communications, would reasonably understand it to be a transfer
on trust, not a gift.
58 M Conaglen, ‘Sham Trusts’ (2008) 67 CLJ 176.
59 ibid 183.
60 For the difficulty in applying this reasoning to self-declared trusts, see: Painter v Hutchison [2007]

EWHC 758 (Ch), [2007] All ER (D) 45.

61 Shalson (n 32); Re Esteem Settlement (n 32).
62 Jolliffe (n 22).
63 It may be argued that the ‘subjective approach’ is still present, but that it just has the proviso

that the subjective intention must be ‘common’ or ‘shared’ between the settlor and trustee. However,
a shamming intention will only ever be ‘common’ to the settlor and trustee if the former has commu-
nicated it to the latter, which leads us back into the objective enquiry. See S Douglas and B McFarlane,
‘Sham Trusts’ in R Hickey and H Conway (eds), Modern Studies in Property Law (forthcoming, 2017).
190 Simon Douglas

II. Rectification

When a settlor declares a trust, although there is no general legal requirement

for him to do so in writing,64 committing a declaration to writing is standard
practice.65 Yet when a settlor’s intentions are recorded in this way, errors are some-
times made. To give an example, take the case of Re Farepak Food and Gifts Ltd66
where a company, about to go bankrupt, told its solicitor that it desired to pro-
tect customers paying funds into their customer account by declaring a trust over
the account. However, when the trust deed was drafted by the solicitor the wrong
account number, which referred to an empty account, was recorded. This mistake
in the recording of the settlor’s intention needed to be remedied by rectifying the
document so as to make it reflect the settlor’s prior communication. As Mummery
LJ said in Allnutt v Wilding, ‘rectification involves bringing the trust document
into line with the true intentions of the settlor as held by him at the date when
he executed the document’.67 The remedy is available, he continued, when ‘owing
to a mistake in the drafting of the document, it fails to record the settlor’s true
intentions’.68
The jurisdiction to rectify clerical errors, slips and other mistakes may not seem
promising material for a discussion about basics concepts in trusts law. Yet the
remedy has attracted much academic and judicial interest of late. This is due to
the fact that some have argued that the purpose of rectification is to give effect to
the subjective intentions of the settlor. We will consider this ‘subjective model’ of
rectification, before looking at an alternative ‘objective model’ advocated in this
chapter. We will review the case law to see if support can be drawn for either model.

A. Two Models of Rectification

i. The Subjective Model

The objective approach to interpretation can result in a settlor being bound by a
declaration of trust even though he never desired or appreciated that his words
would have that effect. This was the case in Byrnes v Kendle where the defendant, in
declaring his freehold title on trust, argued that he meant no more than a promise
to share the proceeds of the sale of the land should he ever sell it. Given that the
transaction was purely voluntary, it may seem unfair to hold him to the effect of

64 Even trusts declared over land need not be put in writing to take effect; rather they must be ‘mani-

fested and proved’ by some writing: Law of Property Act 1925, s 53(1)(b).
65 Re Kayford (n 28) where Megarry J was able to infer a declaration of trust from the company’s

conduct, the judge lamented the lack of writing which would have made things much clearer.
66 Re Farepak Food and Gifts Ltd [2006] EWHC 3272, [2008] BCC 22.
67 Allnut (n 9) [11].
68 ibid.
 Trusts, Objectivity and Rectification 191

his words if he never desired that effect. Perhaps to mitigate the asperity of this
objective approach, it was suggested that a rectification claim could be brought to
bring the deed into line with Mr Kendle’s subjective intentions.69 A similar point
was made in Commissioners of Inland Revenue v Raphael.70 It will be recalled that
the court interpreted the defendant’s declaration of trust objectively which had
harsh results for the defendant as it caused a gift to him to fail. Yet, Lord Wright
suggested that this could be avoided by rectifying the trust deed: ‘If in some cases
hardship or injustice may be effected by this rule [of objective interpretation],
such hardship or injustice can generally be obviated by the power of equity to
reform the contract’.71 Again, this is a suggestion that rectification can be used to
make the trust deed consistent with the settlor’s subjective intentions. The clearest
endorsement of this approach comes from the recent case of Day v Day where, it
will be recalled, Etherton LJ said:
What is relevant in such a case is the subjective intention of the settlor. It is not a legal
requirement for rectification of a voluntary settlement that there be an outward expres-
sion or objective communication of the settlor’s intention.72
This view has also found favour amongst some academics. Although writing in
the context of contract law, Paul Davies provides a similar justification for the
(more limited) jurisdiction to rectify a contract: ‘It is entirely appropriate that
rectification should operate as a subjective “safety-valve” from the objectivity of
the common law rules of interpretation. This is how equity can complement the
common law’.73
This ‘safety-valve’ view of rectification is problematic for a number of reasons.
First, it should be noted that there is little need for rectification to fulfil this role:
protecting settlors from the unintended effects of their words is already done by
the remedy of rescission. Rescission permits the court to set aside a transaction if
the parties to the transaction were mistaken in some way. Although the remedy
can be difficult to obtain in the contractual context where the interests of two
parties must be considered, the remedy is available on a more liberal basis when it
comes to unilateral transactions, such as trusts.74 Courts have held that a transac-
tion can be set aside when there has been a mistake,75 which can include a mistake
as to the effect of the terms of a trust, ie, where a settlor believes that the words
mean something different from what they actually do. For instance, in Phillips
v Mullings76 the settlor mistakenly believed that the trust deed he executed pro-
vided a power of revocation; but on an objective reading of the document it was

69 Byrnes (n 2) [101].
70 Raphael (n 33).
71 ibid 143.
72 Day (n 10) [22].
73 P Davies, ‘Rectifying the Course of Rectification’ (2012) 75 MLR 412, 421.
74 For a discussion of the type of mistake required for rescission, see B Häcker, ‘Mistaken Gifts after

Pitt v Holt’ (2014) 67 Current Legal Problems 333.

75 The leading case is Pitt v Holt [2013] UKSC 26, [2013] 2 AC 108.
76 Phillips v Mullings (1871) LR 7 Ch App 244.
192 Simon Douglas

clear that no such power existed. This mistake, which was no more than a mis-
match between the subjective and objective meaning of the trust deed, was a suf-
ficient ground for rescission. It is clear, therefore, that there is some protection for
settlors when their ‘declarations’ have unintended effects. There is no necessity for
rectification to fill this gap.
A second problem is that it is doubtful whether the jurisdiction to rectify actu-
ally gives courts the power to give effect to the settlor’s subjective intention. This
is because the court’s power to rectify a trust deed is merely a power to correct a
mistake, not a power to make or improve a transaction. As the authors of Meagher,
Gummow and Lehane write:
It is of the utmost importance to appreciate that the court, by its decree, merely reforms
the instrument in which the parties have mistakenly expressed their intention. The basis
of the equitable jurisdiction is to rectify mistaken expressions to effectuate the relevant
intention, it is not to manufacture intention for someone who intends nothing.77
Another way of putting this is that the court must give effect to the trust that
would have been declared but for the error in the trust deed. As Turner LJ said in
Walker v Armstrong: ‘The very principle of this Court in correcting instruments
is that the parties are to be placed in the same situation as they would have stood
in if the error to be corrected had not been committed’.78 Importantly, but for the
mistake, the trust could not have taken effect according to the settlor’s subjective
intention because, as we have seen, the settlor’s subjective intention is irrelevant
when one applies the certainty of intention requirement. If a court, when rectify-
ing a document, cannot make or improve upon a transaction, then it can only
give effect to communications that would (but for the mistake) have satisfied the
substantive rules for the constitution of trusts. These rules ignore the settlor’s sub-
jective intentions.
Third, the subjective view of rectification cannot account for an important limi-
tation in the scope of the doctrine, namely that it is limited to written documents.
There is no jurisdiction to rectify an oral declaration of trust or contract. This is
difficult to explain. Take, for instance, Paul Davies’ recent defence of the subjective
model. The doctrine is best understood, he argues, as being based on unconscion-
able conduct:
The objective intentions of the parties do bind the parties together, and the courts must
decide whether the written document accurately reflects the parties’ bargain. If the writ-
ten instrument does not accord with both parties’ subjective intentions then the court
has a good reason to alter the document; it cannot simply stand by safe in the knowledge
that no performance can be demanded under the contract … Moreover, the principles
underpinning rectification do not need to rest upon the same basis as interpretation.
It has already been argued that too much objectivity in this area is simply unhelpful,

77 JD Heydon, MJ Leeming and PG Turner, Meagher, Gummow and Lehane’s Equity: Doctrine and

Remedies, 5th edn (Sydney, LexisNexis, 2016) para 27–15.

78 Walker (n 7).
 Trusts, Objectivity and Rectification 193

and the courts of equity have long recognised that rectification rests upon a different
rationale: unconscionable conduct.79
For Davies, whilst interpretation may be an objective matter, courts will rectify
a document in order to prevent a party unfairly holding someone to a bargain
that they did not subjectively intend. Whilst this may seem compelling in its own
terms, it is difficult to explain why it should not apply to oral contracts and decla-
rations of trust. Take the example of a settlor who orally declares a trust on terms
xyz, but subjectively believed that he was creating a trust on terms abc. As there is
no written declaration, there is no scope for the doctrine of rectification to apply.
This is difficult to explain for Davies: it should make no difference that the decla-
ration is oral rather than written as it is equally unfair for the settlor to be bound
by a trust that he did not subjectively intend. The limitation of rectification to
written instruments makes no sense on the subjective model. However, as we will
see below, it does make sense for the objective model of the doctrine where, as
argued, rectification is best seen as an exception to the parol evidence rule—a rule
which only applies to written instruments.
A final problem with the subjective view of rectification is that it would result
in a contradiction in the law. Let us say that a settlor executes a trust deed believ-
ing the words in the deed to mean abc, yet when construed objectively they mean
xyz. The rules of construction state that the trust should take effect on terms xyz.
However, if the settlor is able to reform the trust so that it takes effect on terms
abc, simply by adding a rectification claim to his pleadings, then it may be asked
what point is there in conducting an objective enquiry in the first place?80 This
conflict has been noted in the contractual context by Marcus Smith who explains
that given that ‘the subjective and objective tests for intention will, in many cases,
point in different directions’, it would be odd for the court to give primacy to the
objective approach except for when litigants tag a ‘rectification’ claim on to their
pleadings.81 The House of Lords was receptive to this argument in Chartbrook
Ltd v Persimmon Homes Ltd82 where Lord Hoffmann said that rectification, in the
context of contracts, still requires the parties’ intention to be ‘objectively deter-
mined’.83 There is no reason why a different rule should prevail in the context of
trusts.

79 P Davies, ‘Rectification Versus Interpretation: The Nature and Scope of the Equitable Jurisdiction’

(2016) 75 CLJ 62, 80.

80 The bars to rectification may prevent this contradiction arising in a small number of cases, but

they do not avoid the more general problem of the rules of interpretation coming into conflict with
the rules of rectification.
81 M Smith, ‘Rectification of Contracts for Common Mistake, Joscelyne v Nissen, and Subjective

States of Mind’ (2007) 123 LQR 116, 127.

82 Chartbrook (n 6).
83 ibid [59]. Some senior members of the judiciary have expressed some caution when applying

Lord Hoffmann’s approach to interpretation and rectification. See, in particular, Lord Neuberger’s
comments in Arnold v Britton [2015] UKSC 3, [2015] 2 WLR 1593. However, at least at the time of
writing, Chartbrook appears to remain good law.
194 Simon Douglas

ii. The Objective Model

Where there has been a mistake in the trust deed, an objective approach to rectifi-
cation is one that seeks to give effect to the settlor’s prior communication of inten-
tion. Let us say that a settlor communicates an intention to a trustee to settle a trust
on terms xyz, but subsequently executes a trust deed which contains terms abc. If
the court is satisfied that the expression of intention in the trust deed is a mistake,
then it can reform the trust so that it gives effect to the terms communicated ear-
lier, namely xyz. In so doing, the court does not need to give effect to the settlor’s
subjective state of mind; rather, it can give effect to the objective construction of
the settlor’s earlier communication. An example can be found in Re Farepak Food
and Gifts Ltd where, it will be recalled, the settlor communicated an intention to
declare a trust over its customer account in a conversation with its solicitor, but the
subsequent trust deed referred to a different account. In rectifying the trust deed,
the court was not giving effect to the company’s subjective intentions: there was no
enquiry into what was passing through the mind of the company’s officers, and no
reference was made to internal memos that may provide evidence of a subjective
intention. Rather, the court gave effect to a prior communication of intention, a
communication that still fell to be interpreted in the normal objective way.
This conception of rectification raises a difficult question. A reasonable person,
who is aware of Farepak’s oral communication with its solicitor, as well as the
terms of the subsequent trust deed, would clearly recognise that there had been a
mistake in the trust deed. The alternative, that Farepak, by the time it declared the
trust, had changed its mind and wanted the trust to take effect over a different (and
empty) account, is highly unlikely. A reasonable observer, aware that Farepak’s
purpose was to protect customers, would clearly see that Farepak’s intention was
to create a trust over the account containing the customers’ monies, meaning that
the written declaration was a mere mistake.84 This conclusion raises a difficulty.
If interpretation is the ascertainment of the meaning conveyed to the reasonable
person, then why not just interpret Farepak’s trust in this way, ie, a trust over its
current account? In other words, why is there a need to rectify the trust deed at
all? Indeed, the claimant in Farepak made this argument, suggesting that the trust
should simply take effect according to the prior statement of intention. The reason
why this argument failed, as Robert Stevens has recently demonstrated,85 is due to
the parol evidence rule which prevents us from taking into consideration earlier
communications by Farepak.
To explain Stevens’ argument we must first understand the significance of a
settlor committing his intention to create a trust to writing.86 Whilst there is no
legal requirement for a settlor to do this, should he decide to, then the normal
84 cf Davies, ‘Rectifying the Course of Rectification’ (n 73) 421: ‘the best evidence of what the parties

objectively intended can be found in the final written contract. Why should an objective prior accord
trump the later, more formal, agreement reached by the parties?’.
85 R Stevens, ‘Objectivity, Mistake and the Parol Evidence Rule’ in E Peel and A Burrows (eds), Con-

tract Terms (Oxford, OUP, 2007).

86 ibid.
 Trusts, Objectivity and Rectification 195

inference to be drawn is that the settlor has intended the trust to be constituted
according to the terms expressed in the writing. This is best illustrated by the lead-
ing case on parol evidence in the context of trusts, Rabin v Gerson,87 where the
claimant, after seeking an opinion from counsel, expressed the wish to advance
money to a Jewish educational association upon a charitable trust. However, the
trust deed subsequently drafted by counsel and executed by the claimant did not
properly reflect this, and the words used in the deed were held to mean that there
was an absolute transfer to the association. The claimant wished to introduce into
court the opinion that they had received from counsel in order to demonstrate
that their intention had been to transfer the money upon trust. Rejecting the argu-
ment, Fox LJ said: ‘Such evidence, I think, is simply parol evidence of the intention
of the grantor … The result, in my view, is that the opinions cannot be referred
to generally for the assistance that their contents may give’.88 It is worth pausing
to consider this. Given that the claimant, prior to the execution of the deed, may
well have expressed an intention to transfer funds on trust rather than absolutely,
and given that the counsel’s opinion may be evidence of this, why would the court
exclude it when it conducts the certainty of intention enquiry? The trust deed
was not a formal requirement, in that there was no need to execute it in order
to constitute the trust. Why then, in searching for the settlor’s intention, are we
not permitted to consider, in addition to the trust deed, prior communications
statements that shed light on the settlor’s intention? The answer to this is that the
claimant, in executing the trust deed, clearly intended the transfer to take effect on
the terms contained in the deed. This is what Fox LJ alluded to when he described
the opinion as ‘parol evidence’. Although a trust deed may not be a formal require-
ment in most cases, when a settlor executes one the normal inference is that the
settlor intends to be bound on the terms of the deed and, consequently, previous
expressions of intention are substituted by the written terms. We would not be
giving effect to the settlor’s intention, therefore, if we were to look behind the trust
deed to other communications.89 By contrast, where a settlor has not intended the
trust to take effect on the terms contained in the trust deed, then there is logically
no reason why extrinsic evidence of other communications cannot be admitted in
order to ascertain his intention.90 An example of this would be sham trusts, where
the essence of the allegation is precisely that the settlor did not intend to be bound
by the terms of the trust deed that he executed.91
This description of the parol evidence rule helps explain the role of rectifica-
tion. Let us say that a settlor orally states to a trustee that he wishes to create a
trust on terms xyz, and then executes a trust deed which contains terms abc. If the
settlor has intended the trust to take effect on the terms communicated in the trust

87 Rabin v Gerson [1986] 1 WLR 526.

88 ibid 531.
89 Stevens (n 85) 107.
90 Hawke v Edwards (1947) 48 SR (NSW) 21; Walker Property Investments v Walker (1947) 177

LT 204.
91 Antle v Canada [2010] FCA 280.
196 Simon Douglas

deed then we are prohibited, by the parol evidence rule, from considering his ear-
lier communication when ascertaining his intention. What rectification does, as
Stevens explains, is that it rescinds the settlor’s intention to be bound by the terms
contained in the document; the error in the recording of the settlor’s intention in
the document allows the court to ignore the settlor’s wish that the trust take effect
subject to those written terms only.92 The consequence of this is that, in our exam-
ple, when attempting to ascertain the settlor’s intention, the court is not confined
to examining the words contained in the deed (which point to terms abc), but
can also examine the earlier oral communication (which point to terms xyz). As
Stevens states, ‘The effect of rectification is to give rise to the contract there would
have been if it had not been agreed that the document was to constitute the par-
ties’ entire agreement’.93 So in Re Farepak the court, in rescinding the claimant’s
intention that the trust take effect only on the terms contained in the deed, was
then able to consider earlier communications made by the claimant which pointed
to a different intention.
The crucial point for present purposes is that it does not follow, from this
description of rectification, that the court must switch from an objective enquiry
to a subjective one. If rectification merely permits the court when conducting the
certainty of intention enquiry to look at communications of intention prior to
those contained in the trust deed, then there is no reason why it should not con-
strue those earlier communications in the normal objective way.

B. The Case Law

The majority of cases where rectification has been successfully pleaded are entirely
consistent with the objective model. Courts frequently rectify trust deeds to bring
them into line with prior communications of intention. Re Farepak is an example
of this, where the court reformed the trust deed so that it gave effect to a prior oral
communication. In the recent case of Industrial Acoustics Co Ltd v Crowhurst94
pension trustees published a resolution (which was communicated to members
of the pension fund) which stated that women were to be able to retire from age
65 (rather than 60). However, when the rules of the scheme were subsequently
updated the old reference to women being able to retire at 60 was maintained. In
rectifying the document, the court brought it into line with a prior expression of
intention. Indeed, Vos J specifically noted that he was not giving effect to the sub-
jective intention of the trustees:
It is not good enough for the parties simply inwardly to think something without giving
effect to it in a way that is discernable to the objective observer, knowing all of the facts
as they relate to the position of the parties.95
92 Stevens (n 85) 119.
93 ibid.
94 Industrial Acoustics Co Ltd v Crowhurst [2012] EWHC 1614 (Ch), [2012] Pens LR 371.
95 ibid [54].
 Trusts, Objectivity and Rectification 197

Of course, it has been suggested that the only reason why the law requires a prior
objective communication of intention is that such a communication is evidence
of the settlor’s subjective state of mind, leading us back to the subjective view.96 If
this were correct, then it should follow that any evidence of the settlor’s subjective
intention, not just his prior statements, should be admissible. This does not appear
to be the case. Consider the decision of Constantinidi v Ralli.97 Before getting mar-
ried, a widow had instructed her solicitor to draft a marriage settlement which
provided that, should her husband predecease her, she could deal with the assets
in the settlement ‘by will’. Importantly, the widow in giving instructions to her
solicitor had gone so far as to provide a suggested draft herself, so that the words
‘by will’ were included at her behest. When her husband died she discovered that
the words ‘by will’ did not, as she believed, mean that she had absolute discretion
to deal with the estate during her lifetime, but merely gave her testamentary free-
dom over it. The court held that this did not disclose a claim for rectification as
the terms of the settlement were not at variance with her prior communications.
Eve J said that there was nothing to show ‘that the settlement did not as it stood
carry out her intentions’.98 Of course, the words ‘by will’ did not mean what the
widow intended them to mean and as such she was able to show that the written
settlement did not give effect to her subjective intention. Yet the court considered
this to be irrelevant. The court was clearly of the view that a document could only
be reformed to bring it into line—a prior, objectively expressed, intent.
Can any cases be found that support the subjective approach? The obvious place
to start is the case commonly cited as clear evidence of the subjective approach,99
Re Butlin’s Settlement Trust.100 The settlor transferred funds on trust for the ben-
efit of family members. There were five trustees. When counsel was drafting the
trust deed, the settlor gave instructions that the trustees should be able to act by
a majority decision, writing in a letter, ‘Would it not be wise to give the trustees
power to decide matters … by a majority decision?’101 When the deed was drafted,
however, it provided that the trustees could only act by majority decision in the
case of a trustee being ill or abroad. In ordering rectification of the settlement,
Brightman J certainly made comments that could be interpreted as a search for the
settlor’s subjective intention. He said, ‘a settlor may seek rectification by proving
that the settlement does not express his true intention … [and] it is not essen-
tial for him to prove that the settlement fails to express the true intention of the
trustees’.102 Despite this, there is nothing in the case which suggests that the court
conducted a subjective enquiry into the settlor’s intention. It is important to stress
that the settlor’s intention that the trustees can act by a majority was objectively

96 For discussion of the status of the ‘common accord’ requirement, see Hodge (n 8) paras 4-31–4-48.
97 Constantinidi (n 43).
98 ibid 434.
99 See Smith (n 81) 129.
100 Re Butlin’s Settlement Trust [1976] 1 Ch 251.
101 ibid 259.
102 ibid 262.
198 Simon Douglas

expressed in his written instructions to counsel which, as we have seen, posed the
question of whether trustees should be able to act ‘by a majority decision’. At no
point did the court ask what the settlor meant by these words, but simply adopted
their ordinary objective meaning. Re Butlin’s Settlement Trust provides a standard
example of a rectification case, where an earlier objective expression of the settlor’s
intention replaces that found in the trust deed.
The next case to consider is that of Day v Day where, it will be recalled, Ether-
ton LJ expressly endorsed the subjective model of rectification.103 A mother, who
had a freehold title to land, instructed a solicitor to draft a deed that would make
her son, the defendant, a joint tenant of the legal estate. The solicitor, probably
acting under the influence of the defendant, went beyond these instructions and
also included a declaration of trust in the deed, with the son as a beneficiary. The
court rectified the deed with the reference to the trust in favour of the son being
expunged and being replaced with a trust for the benefit of the mother. The case
cannot support the objective model of rectification: prior to the execution of the
deed, the mother did not express an intention that the freehold title be held on
trust for her; as such the court cannot be said to be giving effect to a prior objec-
tive communication of intention. Yet, it is difficult to see how the case supports
the subjective model either. There is no suggestion in the case that the mother,
in instructing the solicitor to make her son a legal joint tenant, thought that the
effect of her words was to declare a trust over the land in her favour. The rectified
document, therefore, cannot be said to be giving effect to her subjective state of
mind. The case is a straightforward example of an agent, the solicitor, exceeding
his authority. The proper remedy was to have the conveyance rescinded and set
aside.
There are a number of cases that, like Day v Day, appear to offer support for the
subjective model, but are better understood as rescission cases. Take the recent case
of Ashcroft v Barnsdale104 where beneficiaries under a trust instructed their solici-
tor to draft a deed that would change the proportions of their respective shares, as
they believed that this would create inheritance tax savings. When changes did not
produce the desired tax savings, the beneficiaries sought to have the deed rectified.
Hodge QC permitted the claim, saying ‘the function of rectification is to enable
the court to put the record straight by correcting a mistake in the way in which the
parties have chosen to record their transactions’.105 The case does not support the
objective model as there was no disparity between the terms of the deed and prior
statements of intention, as the deed accurately reflected the instructions given to
the solicitor. Yet, neither does the case support the subjective view of rectification
as there is no suggestion that the deed did not mean exactly what the beneficiar-
ies intended it to mean. Their mistake was not as to the meaning of their words,

103 Day (n 10).

104 Ashcroft v Barnsdale [2010] EWHC 1948 (Ch).
105 ibid [15].
 Trusts, Objectivity and Rectification 199

but as to a background factor (the operation of inheritance tax rules). Rescission,

not rectification, is the appropriate remedy in such a case. As much was held in
the similar case of Allnutt v Wilding106 where a settlor, also desirous of reducing
inheritance tax, discussed with his solicitor the possibility of transferring his assets
on a discretionary trust for his children. A trust deed was drawn up which accu-
rately reflected these instructions. It was subsequently discovered that the settlor
(who had since died) needed to make the children’s interests in the trusts absolute,
rather than discretionary, to achieve the desired tax savings. Rejecting the chil-
dren’s claim for rectification, Mummery LJ said:
The settlement correctly records [the settlor’s] intention to benefit [the children] through
the medium of a trust rather than the alternative of making direct gifts in their favour.
I am unable to see any mistake by the settlor in the recording of his intentions in the
settlement.107
This conclusion is entirely correct. Neither the subjective nor objective model of
rectification could assist the children as the deed meant exactly what the settlor
intended it to mean. The mistake was not as to the terms of the trust, but the
effect of some background tax factor. Such cases are appropriate for rescission, not
rectification.
The only cases that the author can find which lend clear support to the subjec-
tive approach is a small number of first instance pension cases, of which MNOPF
v Watkins108 is representative. The case concerned an industry-wide pension
scheme for retired members of the merchant navy. It had two sections, one for
benefits accrued before 1978, and one for benefits accrued after that date. The
scheme had been run in the past in such a way that there was no guaranteed reval-
uation of benefits accrued pre-1978, but there was guaranteed revaluation for ben-
efits accrued after that date. However, in 1999, the trustees of the scheme executed
a new trust deed which stated that both sections of the scheme would be subject
to automatic revaluation. This substantially increased the costs of the scheme, and
the trustees applied to have it rectified. In allowing the claim, John Martin QC
took into consideration the minutes of the pension trustee meeting. This clearly
showed that when the draft deed was being discussed, the trustees believed that
it referred to post-1978 benefits only. The minutes of the trustee meeting are evi-
dence of subjective intention only; they record an internal discussion that is not
communicated to the members of the pension scheme or anyone else. To reform
the deed so that it gives effect to the intention found in these minutes, therefore, is
to give effect to the subjective intention of the trustees.Whilst MNOPF v Watkins
does provide support for the subjective approach, there are several pensions cases

106 Allnutt (n 9). See also Lady Hood of Avalon v Mackinnon [1909] 1 Ch 476; Phillips (n 76); Tucker

v Bennett (1887) 38 Ch D 1; Gibbon v Mitchell [1990] 1 WLR 1304; cf Ashcroft (n 104); Farmer v Sloan
[2004] EWHC 606 (Ch); AMP v Barker [2001] Pens LR 77.
107 Allnutt (n 9) [19].
108 MNOPF v Watkins [2013] EWHC 4741; see also Gallaher v Gallaher [2005] Pens LR 103 and

Lawie v Lawie [2012] EWHC 2940, [2013] WTLR 85.

200 Simon Douglas

that cohere with the objective approach. For instance, in AMP v Barker109 which
involved similar facts to MNOPF v Watkins (pension trustees had executed a deed
that was far more generous than had been intended), Lawrence Collins J stressed
the need for some prior ‘outward accord’ as a condition for rectification.110 A first
instance decision, which is inconsistent with well-established authority, is a weak
plank upon which to erect an argument for a subjective approach to rectification
in trusts law.

III. Conclusion

Although there is some slight evidence of a subjective approach in a small number

of rectification cases, most cases support the objective model advocated in this
chapter. Were this otherwise, the law surrounding the constitution of trusts would
be radically different. Take the High Court of Australia’s view in Byrnes v Kendle
that primacy ought to be given to the objective meaning of a settlor’s declaration.
If rectification were to involve a subjective enquiry then there would be nothing
to stop defendants from simply adding rectification to their pleadings and bring
their declarations into line with their actual mental states. The High Court’s unim-
peachable statement of principle would become largely meaningless. Another odd
result would be how we view sham trusts. As noted above, a settlor will be bound
by his declaration of trust even though he has a secret uncommunicated intention
to retain control of his assets. Again, if rectification were a subjective process, then
what would there be to stop such settlors having the trust deed rectified to bring
it into line with their uncommunicated intention? The objective principle that
underpins the certainty of intention enquiry in trust law would be largely under-
mined if rectification were to involve a subjective test. This is wrong in principle
and not supported by authority.

109 AMP (n 106).

110 ibid [66].
 9
The Arbitrability of Trust
Instruments: Why Not?

ELAINE CHEW

I. Introduction

Jurisdictions such as the Bahamas, Guernsey, Malta, Arizona and Florida, have
already legislated to expressly allow for the arbitration of trust disputes.1 However,
a question remains as to whether a settlor can put in place an enforceable arbi-
tration provision, governing trust disputes, even in a jurisdiction which has not
expressly allowed for such. To date, the few courts before which the question has
been placed have mostly answered in the negative, with the Texas Supreme Court
decision in Rachel v Reitz2 forming a notable exception. But why should that be so?
Consider this scenario—a settlor (S) creates a fixed trust over his property,
Blackacre, requiring the trustee (T) to apply the income from the property for
the benefit of one beneficiary (B1) for the duration of her life, and to pay over
the capital to a second beneficiary (B2) at the end of 10 years. All the protagonists
named are of legal age and sound mind. S expressly stipulates in the trust deed that
arbitration should be resorted to in respect of issues regarding:
(i) The reasonableness of the trustee’s fees.
(ii) The prudence of the investments entered into by the trustee.
(iii) The interpretation of the trust instrument.
(iv) The appointment and removal of the trustee in favour of an agreed
replacement.
(v) The dissolution of the trust.
(vi) Accounting disputes.
(vii) Variation of the terms of the trust.
(viii) The seeking of declaratory or advisory relief in general (clause 1).

1 See the Annex for a list of the relevant legislative provisions of the jurisdictions cited.
2 Rachel v Reitz No 11-0708, 3 May 2013, Supreme Court, Texas (LexisNexis).
202 Elaine Chew

S expressly provides that questions that are to be excluded from the scope of arbi-
tration include:
(i) Whether the trust is validly constituted.
(ii) Any matters that the court declares to be unarbitrable (clause 2).
S further provides that as a precondition to the appointment of T as trustee,
T must agree to arbitrate all disputes arising out of clause 1. T is additionally under
an obligation to ensure that all successive trustees similarly agree to arbitrate all
disputes arising out of clause 1 (clause 3). S also provides that the vesting of the
beneficial interest in B1 and B2 respectively is conditional upon their agreement
to arbitrate all disputes arising out of clause 1 (cl 4). S chooses Singapore as the
law of the trust and the seat of arbitration (clause 5). S designates that the rules of
the Singapore International Arbitration Centre shall apply (clause 6). In the event
of dispute, the Singapore courts are expressly empowered to rule on whether any
given matter should proceed to arbitration or be tried in court (clause 7). Before
any arbitration of the trust is to be commenced, notice has to be given to all parties
interested in the trust, namely, T, B1 and B2 (clause 8).3
Is there any reason why the settlor’s intention, that disputes arising out of the
trust be arbitrated, ought not to be given effect? In particular, is there any rea-
son why the settlor’s intentions ought not to be given effect under instruments
such as the New York Convention on the Recognition and Enforcement of For-
eign Arbitral Awards (New York Convention) or the UNCITRAL Model Law on

3 For other examples of arbitral clauses in trust disputes, see the ICC Model Clause in Trust Dis-

putes, discussed in CP Koch, ‘A Tale of Two Cities!—Arbitrating Trust Disputes and the ICC’s Arbitra-
tion Clause for Trust Disputes’ [2012] Yearbook of International Arbitration 179; and BW Boesch, ‘The
ICC Initiative’ (2012) 18 Trusts & Trustees 316, as well as the clause in the settlement deed in Rinehart
v Welker [2012] NSWCA 95. Another sample, kindly provided by Richard Nolan, as drawn from an
English law deed with US style drafting reads:
XVIII Dispute resolution: Any dispute of whatsoever nature between the trustee and any benefi-
ciary or person claiming through any beneficiary (as defined in Article IV above) regarding this
settlement generally and in particular the effect of this settlement or the exercise or purported [sic]
by the trustee of any of its powers or any act or omission of the trustee, or the exercise or purported
[sic] by the Protector of any of his powers or any act or omission of the Protector, may at the sole
and absolute discretion of the trustee be referred in the first instance to a mediator selected by the
trustee who shall be such independent person as the trustee may in its sole and absolute discretion
consider to be appropriate and if after reasonable efforts to resolve any such dispute by mediation
have failed (of which the trustee shall be the sole and undisputed judge) the dispute may at the sole
and absolute discretion of the trustee be referred to a single arbitrator agreed between the parties
for resolution by arbitration under the Rules of the London Court of International Arbitration
and the English Arbitration Act 1996 (both of which as for the time being in force being deemed to
be incorporated into this clause) such arbitrator to be a barrister of not less than 20 years standing
or a Queens Counsel qualified in either case to practice before the Courts of England and Wales
and nominated in the event of the parties’ inability to agree by the Chairman for the time being
of the Chancery Bar Association of London. I intend that this clause shall be binding on myself,
the trustee, all beneficiaries under this settlement and any other person including any beneficiary
deriving title through myself, the trustee, and any beneficiary.
 The Arbitrability of Trust Instruments 203

I­nternational Commercial Arbitration (Model Law)?4 Granted, certain disputes,

which are inherently going to entail the participation of non-parties to the trust,
such as questions as to validity, are not suitable for arbitration. Also, there may
be situations, for example, when the beneficiaries are minors, legally incompe-
tent, unborn or unascertained, where it may be strategically more viable to litigate
in order to obtain a result that is binding on all relevant parties. However, with
careful drafting, a settlor ought, in principle, to be able to create an enforceable
agreement to arbitrate the majority of disputes arising out of a trust, even in juris-
dictions which have not expressly legislated to allow for such.

II. Advantages of Arbitrating Trust Disputes

Attempts by settlors to provide for the alternative dispute resolution (ADR) of

trust disputes are not new. One of the most famous examples is that of George
Washington, who prior to his death in 1799, had provided in his will that
all disputes (if unhappily any should arise) shall be decided by three impartial and intel-
ligent men, known for their probity and good understanding; two to be chosen by the
disputants—each having the choice of one—and the third by those two. Which three
men thus chosen, shall, unfettered by Law, or legal constructions, declare their sense of
the Testator’s intention; and such decision is, to all intents and purposes, to be as binding
on the Parties as if it had been given in the Supreme Court of the United States.5
A more modest example is that of Re Tuck’s Settlement Trusts,6 where the settlor
had conferred on the Chief Rabbi the power to decide the single question of
whether the intended wife of a potential beneficiary of the trust was ‘an approved
wife’ of Jewish blood, which was a condition of the disposition. These attempts
to remove issues arising out of the trust from the ambit of the courts and into
the hands of alternative decision-makers point to the existence of ‘powerful com-
mercial or domestic reasons for parties to have disputes between a trustee and
beneficiary settled privately’.7

4 The New York Convention requires its more than 150 contracting states to recognise and enforce

arbitral awards made in other contracting states and is widely regarded as a foundational instrument
for the practice of international commercial arbitration. Both the 1985 and 2006 version of the Model
Law were designed by UNCITRAL to assist adopting states to reform and modernise their laws on
arbitration to create a uniform practice that takes into account the needs of international commercial
arbitration and its particular features.
5 George Washington’s Last Will and Testament, 9 July 1799: gwpapers.virginia.edu/documents/

george-washingtons-last-will-and-testament/.
6 Re Tuck’s Settlement Trusts [1977] EWCA Civ 11, [1978] Ch 49. Granted, Lord Russell and Eveleigh

LJ upheld the settlement on different bases from Lord Denning but the point remains that if Lord
Denning is correct, the settlor can effectively be seen as having removed the question of who was ‘an
approved wife’ from the ambit of the courts.
7 Rinehart (n 3) [175].
204 Elaine Chew

Given the wealth of literature that already exists on the advantages of arbitra-
tion, both generally, and specific to trust disputes,8 it is necessary to point briefly
to only the three most compelling in favour of the arbitration of trust disputes.
First, arbitration is a private process, unlike litigation, which is a matter of public
record unless the court directs otherwise. The confidentiality of arbitration pro-
ceedings may appeal to settlors who do not wish to have the extent of their wealth
or the dirty linen of their personal affairs aired in public. Second, unlike litigation,
which procedures are constrained by the specific rules of the jurisdiction in which
the matter is being heard, the procedures adopted in arbitration can be customised
by agreement to meet the needs of parties. If wielded effectively, this can translate
into both time efficiency and cost savings.9 Third, subject to very narrow excep-
tions, the New York Convention allows arbitral awards to be enforced in over a
hundred signatory states,10 through a process far less arduous and more certain
than the usual methods of enforcing court judgments. This can be particularly
helpful where a settlor anticipates that the assets of the trust and its beneficiaries
may be spread out over several jurisdictions.
Even taking a step back and considering the issue from the viewpoint of the
state, the arbitration of trust disputes may potentially be an attractive proposition
from an economic perspective, if overseas settlors can be attracted to create trusts
within the domestic regime. Further, given that there are already jurisdictions that
have legislated to allow for the arbitration of trusts, states may not have the indefi-
nite luxury of sitting on the fence on this issue. As the UK Trust Law Commit-
tee noted, there is a danger that overseas jurisdictions may eventually take over,
or seek to take over, trust work that would or could more appropriately be done
domestically. Such an outcome would be harmful to the development of domestic
trust law and potentially harmful to the economy, not to mention the legal profes-
sions and those other professions with an interest in trust.11

III. Arbitrability

The question of whether or not an arbitration clause in a trust instrument has any
effect ought to start with the basic question of arbitrability. The ‘non-arbitrability’

8 eg G von Segesser, ‘A Step Forward: Addressing Real and Perceived Obstacles to the Arbitration

of Trust Disputes’ (2014) 20 Trusts & Trustees 37, 38–41; A Holden, ‘The Arbitration of Trust Disputes:
Theoretical Problems and Practical Possibilities’ (2015) 21 Trusts & Trustees 546, 555–56; Trust Law
Committee, ‘Arbitration of Trust Disputes’ (2012) 18 Trusts & Trustees 296, 298–99; A Cremona, ‘Suc-
cessful Arbitration of Internal Trust Disputes the Maltese Way’ (2012) 18 Trusts & Trustees 363, 364–65.
9 There has been much ink split on whether arbitration is actually more cost and time efficient than

litigation, with no definitive landing either way. However, the growing number of arbitrations around
the world attest to client satisfaction that arbitration can have advantages over the litigation process.
10 See Arts III and V.
11 Trust Law Committee (n 8) 299.
 The Arbitrability of Trust Instruments 205

doctrine applies to subjects or disputes that are deemed by the domestic law to be
incapable of resolution by arbitration, even if the parties have otherwise validly
agreed to arbitrate such matters.12 Generally the law of the seat of the arbitration,
which will govern the procedural aspects of the process, governs the question of
arbitrability. However, as Article V(2)(a) of the New York Convention permits a
court to refuse enforcement of an arbitral award where the ‘subject matter … is not
capable of settlement by arbitration under the law of that country’,13 the law of the
states in which the award is likely to be enforced ought to be taken into account as
well.14 The matter is further complicated because, as Strong notes, although national
and international laws on arbitration contemplate the possibility that certain issues
are non-arbitrable, seldom are the parameters of arbitrability firmly and clearly
drawn.15 In this respect, most jurisdictions have not taken a clear position in their
legislation as to whether trust disputes are arbitrable, but seem content to leave the
matter to the discretion of the courts as and when such issues arise.
Arbitrability may be described as the ‘quality of the subject-matter in dispute’.16
This is distinct from the separate question of whether the dispute falls within the
ambit of the scope of arbitration agreed between parties. The former requires an
examination of whether arbitration of the subject matter in dispute would be at
odds with any mandatory rules or public policy of the relevant jurisdiction.17
Common examples of non-arbitrable disputes are those concerning criminal mat-
ters, bankruptcy or insolvency, trade sanctions, consumer claims and intellectual
property matters. While on balance, commentators that have considered the issue
at length have generally concluded that internal trust disputes, ie, those involving
only trustees and beneficiaries, are for the most part arbitrable,18 the usual objec-
tions by the doubting Thomas tend to be that:
(a) Arbitration would ‘effectively extinguish the trustee’s obligation to account to
the beneficiaries, which obligation is a necessary precondition for the exist-
ence of a valid trust’.19
(b) ‘[T]he trust concept is itself the creature of the courts (historically the courts
of equity) … so that the legal rights of beneficiaries and trustees can be val-
idly determined only by the courts’.20

12 G Born, International Commercial Arbitration, vol 1, 2nd edn (Amsterdam, Kluwer Law Interna-

tional, 2015) 944.

13 Similarly, Art 34 of the Model Law allows the award to be set aside if the subject matter of the

dispute was not arbitrable, or if the award conflicts with the public policy of the state.
14 Koch (n 3) 187.
15 SI Strong, ‘Arbitration of Trust Disputes: Two Bodies of Law Collide’ (2012) 45 Vanderbilt Journal

of Transnational Law 1157.

16 BGE 118 II 193 (28 April 1992), Swiss Federal Court BG.
17 Segesser (n 8) 45.
18 SI Strong, ‘Mandatory Arbitration of Internal Trust Disputes: Improving Arbitrability and

Enforceability through Proper Procedural Choices’ (2012) 28 Arbitration International 591, 612.
19 Holden (n 8) 547.
20 Trust Law Committee (n 8) 300.
206 Elaine Chew

(c) The arbitration of trust disputes would amount to an ouster of the court’s
inherent jurisdiction to supervise the trust.21
(d) The remedies required for the resolution of trust disputes are not available in
the arbitration context.22
None of the above points form a valid basis for coming to the conclusion that
trusts ought, in principle, to be non-arbitrable.23
The first objection traces back to a number of cases such as Re Raven,24 Rhodes
v Muswell Hill Land Company25 and Re Wynn,26 which, when read in context, are
scenarios where the trustees were empowered by the terms of the trust to make
determinations on disputes between themselves as to entitlements under the trust.
Obviously, in those instances, the offices of the trustee and the dispute resolution
decision-maker having been conflated, the interests of the beneficiaries would be
compromised27 and have been described as being repugnant to public policy.28
However, provided that the arbitrator and the trustee are separate persons, the
first objection ought not to form a basis for concern given that the trustee could
be called to account before the arbitrator, just as he would have to before a judge
in a state court.
The second and third objections can be taken together—they are invalid if one
accepts that there is simply no magic in having a court as opposed to an arbitral
tribunal decide the issue.29 Granted, there are numerous judicial pronouncements
that a cardinal principle of trust law is that the court has an inherent jurisdiction
to supervise the administration of the trust. Indeed, as the Privy Council noted
in Schmidt v Rosewood Trust Ltd, ‘[i]t is fundamental to the law of trusts that the
court has jurisdiction to supervise and if appropriate intervene in the administra-
tion of a trust’.30 However, it is worthwhile noting, as John Langbein and SI Strong
have, that the creation of the exclusive jurisdiction of the courts of equity was

21 Holden (n 8) 547.
22 Rinehart (n 3) [226]–[227] (Young JA).
23 It may also be apposite here to refer to the speech of the Lord Chief Justice of England and Wales,

Lord Thomas of Cwmgiedd, at the Bailii Lecture 2016, where at para 5, he pointed out that ‘far fewer
developments of the law are made in areas where the probability is that the case has had to begin in
arbitration’: www.judiciary.gov.uk/wp-content/uploads/2016/03/lcj-speech-bailli-lecture-20160309.pdf.
However, this ought not to constitute a reason for denying the arbitrability of trust disputes as
a matter of public policy, given that similar arguments in respect of contractual disputes have not
been accepted. In any event, some arbitral institutes do publish the awards made under their umbrella
and that may go some way towards ameliorating the effects arbitration might have on common law
development.
24 Re Raven [1915] 1 Ch 673.
25 Rhodes v Muswell Hill Land Company (1861) 29 Beav 560.
26 Re Wynn [1952] Ch 271.
27 But see the comments of Lord Denning MR in Re Tuck’s Settlement Trusts (n 6), in light of Dundee

General Hospital Board of Management v Walker [1952] 1 All ER 896.

28 M Conaglen, ‘The Enforceability of Arbitration Clauses in Trusts’ (2015) 74 CLJ 450, 466.
29 Holden (n 8) 547–48.
30 Schmidt v Rosewood Trust Ltd [2003] UKPC 26, [2003] 2 AC 709 [36].
 The Arbitrability of Trust Instruments 207

merely intended as an internal mechanism for allocating cases among domestic

courts and was never meant to protect the collective jurisdiction of the courts
against non-judicial forms of dispute resolution such as arbitration.31 It is unfor-
tunate that neither the courts, nor the UK Trust Law Committee which coined the
second objection, explained in detail why it is that a court, as opposed to any other
dispute resolution forum, might be better placed to supervise the administration
of the trust. However, what is telling is the repeated references in the literature
and case law to the need for supervision in aid of the beneficiaries. If the concern
is that beneficiaries have recourse to an unbiased and neutral forum for the vin-
dication of their rights, then it ought to be noted that at least in the context of
commercial disputes, it has been widely accepted that arbitration can perform the
requisite decision-making tasks and resolve disputes fairly and efficiently.32 In fact,
given parties’ freedom to appoint arbitrators, one might say that a better panel
of decision-makers drawn from trust specialists might potentially be fielded, as
opposed to a hearing before a non-specialist judge.33
One principle at the irreducible core of the trust appears to be that the trustee
must be accountable so that his status as the non-beneficial owner of the assets
vested in him is not a sham.34 If the beneficiaries have no rights enforceable against
the trustee, there is no trust.35 However, the recognition that beneficiaries must be
allowed to call trustees to account does not necessarily mean that the contest has
to be brought in the courts—logically, it only means that genuine contest by the
beneficiary of a trustee’s administration of the assets must be possible. Such a
contest can be equally brought in arbitration as in litigation, save that the arbitra-
tion is usually confidential, whereas the litigation will be a matter of public record.
In any event, even taking on board the view that there ‘is still a strong public
policy in ensuring the action of the trustees remains susceptible to oversight by
the courts’,36 there are at least three ways to manage the concern that beneficiaries
must be able to have recourse to the courts. First, the settlor could choose to des-
ignate the location of the trust as the seat of the arbitration. This would expressly
empower the court where the trust is located to supervise the procedural aspects
of the arbitration, and to set aside the award in exceptional circumstances where,
for example, it contravenes the public policy of the state vis-à-vis the trust. Second,
as was done in clause 7 above, the settlor could always expressly provide that the

31 Strong, ‘Mandatory Arbitration of Internal Trust Disputes’ (n 18) 617; Segesser (n 8) 45; and

JH Langbein, ‘The Contractarian Basis of the Law of Trusts’ (1995) 105 Yale Law Journal 625, 627 (fn 20).
32 Segesser (n 8) 45. While judges are public servants and arbitrators are privately appointed, it

ought to be pointed out that the neutrality of the arbitrator is relatively rarely impugned, and judges
are not without scandal either. The office alone does not confer a guarantee of neutrality or wisdom.
33 Admittedly, there are currently very few trust specialists on the panels of arbitrators in most

arbitration institutions.
34 Strong, ‘Mandatory Arbitration of Internal Trust Disputes’ (n 18) 619; T Molloy and T Graham,

‘Arbitration of Trust and Estate Disputes’ (2012) 184 Trusts & Trustees 279, 287.
35 Armitage v Nurse [1998] Ch 241, 253 (Millet LJ).
36 Molloy and Graham (n 34) 288.
208 Elaine Chew

courts retain discretion to veto any submissions to arbitration as it sees fit. This
would enable state courts to maintain oversight of the disputes that go to arbi-
tration. Third, depending on the rules of the arbitral institution chosen, and the
laws of the relevant jurisdictions, it may be possible for the settlor to provide that
parties to the arbitration have a right of appeal to the state courts. The last option,
however, is the least desirable, as only arbitral awards can benefit from the advan-
tages of the enforcement procedures under the New York Convention, and a court
order substituting or varying the award is unlikely to fall within that definition.37
Turning finally to the fourth objection, that an arbitral tribunal is ill-equipped
to serve the usual functions that a court supervising a trust does, one criticism
commonly levelled is that the arbitral tribunal cannot match the court’s ability to
grant the accounting and instructional reliefs often sought in respect of trust dis-
putes. For instance, in Rinehart v Welker,38 Young JA delivered a dissenting judg-
ment on a dispute regarding the removal of the trustee from a family trust. The
main thrust of his decision that such a dispute ought not to be arbitrated appeared
to be that the arbitrator lacked the power to make the requisite orders that a court
could grant to enforce its decision on the issue. If the court had decided to remove
the trustee, it could make orders authorising a registrar to sign transfers on behalf
of a former trustee and direct the registrar to register them; but an arbitrator could
not. Similarly, while a court could imprison a trustee who refused to give a proper
taking of accounts, that would not be available to an arbitrator.
It is acknowledged that the relief granted by an arbitral tribunal is most often in
the form of monetary damages. However, an arbitral tribunal, through granting
injunctive or declaratory relief, or through ordering a taking of accounts, should
also be capable in theory of fashioning suitable remedies in performing the advi-
sory function of a court supervising a trust.39 Moreover, it is open to the tribunal
to make the appropriate orders within its powers, following which, the parties can
then seek enforcement before the courts where the appropriate supporting orders
can be given.40 Furthermore, as has been noted by the UK judiciary,
the fact that an arbitrator cannot give all the remedies which a court could does not
afford any reason for treating an arbitration as of no effect … [it] is just an incident of
the agreement which the parties have made as to the method by which their disputes are
to be resolved.41
Finally, it is submitted that if this criticism is to be taken on board at all, it would at
best go towards the scope of trust disputes that are arbitrable. It cannot constitute
a basis for the wholesale rejection of the arbitrability of trust disputes.

37 New York Convention, Art III.

38 Rinehart (n 3).
39 Roehl v Ritchie 147 Cal App 4th 338; 54 Cal Rptr 3d 185 (2007).
40 Conaglen (n 28) 457.
41 Fulham Football Club (1987) Ltd v Richards [2011] EWCA Civ 855, [2012] 1 All ER 414 [103]. See

also Assaubayev v Michael Wilson and Partners Ltd [2014] EWCA Civ 1491 [68]–[69].
 The Arbitrability of Trust Instruments 209

Another criticism levelled under the fourth objection tends to be that the arbi-
tral tribunal cannot match the court’s ability to provide continuous supervision
where the ongoing examination of accounting issues or the administration of a
trust might so necessitate.42 As Segesser notes, domestic courts may have a slight
practical advantage to the extent that a trust dispute might require continuous
supervision because initiating new arbitral proceedings and establishing an arbi-
tral tribunal every time another dispute or disagreement arises may become bur-
densome. However, again, this criticism, if taken at its highest, only goes towards
the scope of trust disputes that are arbitrable and does not form a valid basis for
the wholesale rejection of the arbitrability of trusts. Moreover, it is not beyond the
realm of the settlor’s ability to provide for an ad hoc arbitration procedure that
adapts from the processes common to large construction projects, where full-scale
arbitration is only launched after parties fail to resolve their differences through an
abbreviated hearing before a dispute resolution board.

IV. Enforceability

It is trite that the cornerstone of arbitration is party autonomy, and for that ­reason,
without a valid agreement to arbitrate, the arbitral tribunal has no jurisdiction
over the dispute. As such, the majority of the objections to the arbitration of
trust disputes have focused on the difficulties inherent in enforcing the agree-
ment to arbitrate against the relevant trustees and beneficiaries. In particular, it
has been questioned whether the insertion of an arbitration clause can consti-
tute a valid ‘agreement in writing’ as required under Article II(1) of the New York
­Convention,43 and which has been defined in that provision to ‘include an arbitral
clause in a contract or an arbitration agreement, signed by the parties or contained
in an exchange of letters or telegrams’. In particular, the Swiss44 and American45
judiciary, as well as commentators such as Christopher Koch,46 have opined that
given that a trust is not a contract, an arbitration agreement placed within the
instrument in and of itself has no binding effect. Such views resonate with Lord
Oliver’s observation in Marley v Mutual Security Merchant Bank that ‘the court is
essentially engaged solely in determining what ought to be done in the best inter-
est of the trust estate and not in determining the rights of adversarial parties’.47

42 Segesser (n 8) 46.
43 ibid 42.
44 BJM 2007, 28 (Basel Court of Appeals).
45 Schonenberger v Oelze 96 P 3d 1078 (2004) 208 Ariz 591; Diaz v Bukey 2d Civil No B225548

(Super Ct No PR90337A) (San Luis Obispo County); In re Mary Calomiris, 2 March 2006, 894A 2d
408, District of Columbia Court of Appeals; William Lo v Aetna International Inc, 29 March 2000, 2000
LEXIS 22531, US Federal District Court.
46 Koch (n 3).
47 Marley v Mutual Security Merchant Bank [1991] 3 All ER 198, 201.
210 Elaine Chew

Even though the basic elements of an express trust and a contract are not dis-
similar insofar as their constitution is consensual and no individual can be com-
pelled to be a trustee, it is accepted that a trust is not a contract, having different
historical antecedents, and requiring different elements for valid constitution. To
that extent, it is agreed that the insertion of an arbitration clause into the trust
instrument alone is probably not sufficient to form a valid ‘agreement in writing’
or constitute ‘an arbitral clause in a contract’ for the purposes of Article II of the
New York Convention. It also ought to be pointed out that it would be odd for
the agreement to be perceived as being formed between the settlor, trustees and
beneficiaries, given that the settlor drops out of the picture and has no enforceable
rights under the trust once it is constituted.
However, it is submitted that there should be in principle no reason why a
settlor cannot make it a condition of his appointment of the trustee as trustee,
and a condition of his designating the beneficiary as the possessor of an interest
under the trust, that they be required to enter into an agreement to arbitrate with
each other (and not the settlor) on the terms stipulated in the arbitration clause
inserted into the trust instrument. After all, even if ‘beneficiaries’ interests derive
from equity fastening on the trustees’ conscience’,48 as Danckwerts J explained in
Re Wynn,
they take purely by the bounty of the [settlor], and it might be said that, as they are not
entitled to anything as of right apart from the provisions of the [trust], they must take
their benefits subject to the conditions which are contained.49
That is why Andrew Holden, who strenuously argued that a beneficiary is not a
party to the trust instrument or any arbitration agreement contained within it,
nonetheless appeared prepared to accept that if the terms of the arbitration clause
are crafted as a condition to the beneficiary’s entitlement to an interest under the
trust, that should be sufficient to bind beneficiaries who are of age and have legal
capacity to act.50 Similarly, the UK Trust Law Committee, though ultimately scep-
tical for other reasons that trust disputes could be arbitrated without the benefit
of enabling legislation, conceded that
it is feasible for any two or more persons of full capacity to enter into a valid standalone
arbitration agreement … this can apply to a dispute between beneficiaries, or between
beneficiaries and trustee, in regard to a trust in which they are interested.51
Viewed in this light, it is the trustees’ and beneficiaries’ respective acceptance of
the positions conferred on them through the trust that can generate the requisite
agreement to bind them to arbitration.52 In that respect, the arbitration clause

48 Molloy and Graham (n 34) 284.

49 Re Wynn (n 26) 276.
50 Holden (n 8) 547–48.
51 Trust Law Committee (n 8) 297.
52 In the instance where the settlor and trustee are one and the same, complications may arise gener-

ating the requisite acceptance by the trustee to arbitrate. However, it might still be said that that person,
 The Arbitrability of Trust Instruments 211

in the trust instrument would become the ‘agreement in writing’ between the
relevant trustees and beneficiaries provided they act to take up their respective
appointments, even though the trust is in itself not a contract. The settlor’s stipu-
lations in the trust instrument may facilitate the making of the agreement to arbi-
trate between the trustees and beneficiaries but he does not himself become privy
to that agreement.
In the relevant literature, there is a theory of ‘deemed acquiescence’ that has
gained some traction in recent times. It amounts to the view that by accepting
the settlor’s bounty, the beneficiary is deemed to have also accepted the condi-
tions under which the settlor is willing to have the beneficiaries profit from the
settlor’s bounty, which includes the agreement to arbitrate.53 However, in those
versions, the settlor continues to be seen as being privy to the agreement to arbi-
trate, although not having any enforceable rights under the trust itself. Critics
have doubted whether acceptance of the arbitration agreement in this manner
can constitute an ‘agreement in writing’ sufficient for the purposes of the New
York Convention, because the acquiescence generated under that theory is deemed
rather than actual.54 By contrast, what is being suggested here is that where the
settlor makes it an express condition of the appointment of the trustee and the
conferring of interests on the beneficiary that they enter into an agreement with
each other on the terms reflected in the arbitration clause in the trust instrument,
two possible results can follow. Either, the parties fail to reach an actual agree-
ment (whether because they were unaware of the condition or for some other
reason), the appointments are not valid, and so the trust fails from the outset such
that the parties have no standing to bring a trust claim before the courts. Or, the
parties positively agree to the arbitration agreement as a condition of accepting
the settlor’s appointments, thus constituting actual acquiescence and not deemed
acquiescence.
It is acknowledged that there is disagreement in the arbitration community55
over whether Article II(2) of the New York Convention, which requires an ‘agree-
ment in writing’ can be satisfied by the tacit acceptance of one party of a stand-
ard form arbitration clause in the other’s communications. Specifically, some
have interpreted the drafting history behind the provision’s requirement for an
‘exchange of letters or telegrams’ as an intention to exclude tacit acceptances.56

whether in his capacity as settlor or not, offered to confer benefits on the beneficiary conditional upon
the latter’s acceptance of an obligation to arbitrate with him in his capacity as trustee. And the benefi-
ciary, in seeking to enforce the terms of the trust, so accepted the condition.
53 Koch (n 3) 190; Segesser (n 8) 42.
54 eg M Hwang ‘Arbitration of Trust Disputes’ in Selected Essays on International Arbitration (SIAC
Academy Publishing, 2013) 745.
55 Countries such as Germany, France, Italy and Switzerland appear to have rejected the tacit accept-

ance doctrine, whereas England, the Netherlands, the United States, India and Canada have gone the
other way.
56 Born (n 12) 683.
212 Elaine Chew

However, it also ought to be noted that the references in Article II(2) to an ‘arbi-
tral clause in a contract’ and ‘an arbitration agreement, signed by the parties or
contained in an exchange of letters or telegrams’ are non-exhaustive examples of
what would constitute an ‘agreement in writing’ and UNCITRAL has published
recommendations emphasising that a strict literal application of the term ‘agree-
ment in writing’ is not desirable.57 Ultimately, the intent of the drafters of the New
York Convention was to ensure that parties’ consent to arbitration was obtained,
the terms of which are to be sufficiently reflected in the written form to prevent
uncertainty. Provided that the relevant trustees and beneficiaries were notified of
the conditions stipulated by the settlor that they agree to arbitrate, the arbitration
clause in the trust instrument ought to suffice as an ‘agreement in writing’ for the
purposes of Article II of the New York Convention. This would be analogous to the
existing cases interpreting the New York Convention, where it was held sufficient
that a party which does not sign the contract or return a written confirmation but
nonetheless performs its obligations may nonetheless be taken to have by conduct
accepted the arbitration agreement.58
This chapter so far has been written on the basis that all the trustees and ben-
eficiaries of the trust in dispute are readily ascertainable, of legal age, have legal
capacity and collectively participate in any given arbitration arising out of the
trust. However, that is obviously not the case in many trusts. But before moving
away to consider other variations, it is apposite to consider the two other meth-
ods by which commentators have sought to generate the relevant agreement of a
beneficiary to arbitrate. The theories have largely focused on the beneficiaries as
it is generally accepted that a settlor can bind a trustee to arbitrate, if not under
the terms of the appointment to the trust itself, then through a separate contract
for service in the case of a professional trusteeship. The first is the idea of the
‘conditional transfer’. It reasons that the binding effect of the arbitration agree-
ment in the trust instrument stems from the understanding that the beneficiary’s
rights are ‘wholly derivative’ from the settlor’s wishes.59 The settlor should be able
to determine how the trust he or she establishes, and hence the property gifted,
is to be administered.60 The ‘conditional transfer’ is problematic in at least two
respects: (i) it focuses on the intentions of the settlor in setting up the trust, rather
than searching for evidence of the beneficiary’s agreement to arbitrate as required
under the New York Convention and just about every other variation on
arbitration law; and (ii) like the ‘deemed acquiescence’ theory, it assumes that
the settlor is privy to the arbitration agreement. The second method is specific to

57 UNCITRAL, 2006: A/6/17, Recommendations Regarding the Interpretation of Article II, Para-

graph 2, and Article IV, Paragraph I, of the Convention on the Recognition and Enforcement of Foreign
Arbitral Awards.
58 For a list of cases, see the commentary on Art II of the New York Convention: newyorkconven-

tion1958.org/index.php?lvl=cmspage&pageid=11&provision=175#navig_art_181.
59 Segesser (n 8) 42.
60 ibid.
 The Arbitrability of Trust Instruments 213

j­urisdictions with the legislative equivalent of the UK’s section 82(2) of the Arbi-
tration Act 1966. That provision includes within the definition of a ‘party’ to arbi-
tration any person claiming under or through a party to the agreement.61 Based
on the assumption that the beneficiary’s interests have to derive from either the
trustee’s or settlor’s title, certain commentators have attempted to argue that the
beneficiary would be a person claiming ‘through’ a party to the agreement, namely
either the settlor or the trustee. Andrew Holden doubts this and reasons that while
it could be argued that a beneficiary’s equitable title itself flows ‘through’ the settlor
or trustee, in any event, beneficiaries are simply not parties to the trust instrument
or any arbitration contained within it.62 He also notes that section 82(2) of the
Arbitration Act 1966 has not been interpreted in a manner consonant with the
reading of a beneficiary as a person claiming ‘through’ a party to the arbitration
agreement. This author agrees on both counts.

A. Minors, Legally Incompetent, Unborn and Unascertained

It has been mentioned that for the large part, this chapter has proceeded on the
basis that the settlor, trustees and beneficiaries of the trust are of age and have
legal capacity to act, as was stipulated in the scenario proposed at the beginning
of the chapter. However, unlike most commercial arbitrations of contract mat-
ters, trust disputes often require the interests of minor or legally incompetent
beneficiaries to be represented. Other problematic categories include unborn or
unascertained beneficiaries. There has been criticism that the arbitration of trust
disputes is lacking because, unlike a court that has the inherent jurisdiction to
approve a compromise on behalf of minors or incapable beneficiaries, for exam-
ple, by appointing a representative to safeguard their interests, an arbitral tribunal
has no such power.63 This is a particular problem within the context of the Model
Law and the New York Convention as awards can be set aside on the basis that the
party to the arbitration agreement suffered from incapacity.
To begin, this concern about representing minors, legally incompetents, the
unborn and unascertained does not form a bar where the trust that a settlor wants
arbitrated does not include any of these problematic categories of beneficiary, as
would likely be the case where a commercial trust such as a Real Estate Investment
Trust (REIT) is in question. Second, where such categories of beneficiary are likely
to exist, it may be worthwhile for the settlor to insert a provision similar to clause
2 above, expressly acknowledging that the court can declare that the matter be
litigated rather than arbitrated. This is to prevent allegations that the settlor has
attempted to oust the supervisory jurisdiction of the court in respect of matters

61 L Cohen and J Poole, ‘Trust Arbitration—is it Desirable and does it Work?’ (2012) 18 Trusts &

Trustees 324.
62 Holden (n 8) 549–50.
63 Chapman v Chapman [1954] AC 429; see also Segesser (n 8) 43–44.
214 Elaine Chew

that are not arbitrable, or that a gift has been given to the beneficiary with one
hand and taken away with the other. Third, potentially, the settlor could make
the disposition to the beneficiary expressly contingent on there being a suitable
representative, such as a parent or guardian, being willing to participate in arbitra-
tion if such need arises, failing which the gift will not vest. Another possibility is
that the court’s aid can be sought to appoint a representative for these problematic
categories, who will then be empowered to act in the arbitration process. However,
that then runs into the problem of whether the arbitral award thus rendered can
be binding on these categories of person, given that arbitration is first and fore-
most a consensual process requiring the agreement of parties. Alternatively, the
settlor might find it worthwhile to conclude from the outset that disputes arising
out of such a trust would be better resolved through litigation, and do away with
the idea of arbitration entirely. Finally, where not expressly prohibited by the laws
of the relevant jurisdiction, it may be possible for the settlor to confer the power
on the tribunal or a third party to appoint a representative to act on behalf of
these problematic categories, and have the representation funded out of the trust
assets.64 However, given the sensitivities involved there remains a significant risk
that a court called upon to recognise the arbitration agreement would decline to
do so on the basis of public policy.
Matthew Conaglen has suggested that on the question of enforceability, there
may be scope for the court to intervene on the basis of its inherent jurisdiction,
to give effect to an arbitration clause, where it might otherwise fall outside the
ambit of the arbitration statutes of the jurisdiction.65 This might enable arbitra-
tion to occur where no formal agreement falling within the terms of the statutory
provision may be found. However, where enforcement is likely to be sought in a
foreign jurisdiction under the aegis of the New York Convention, problems may
arise. Courts may refuse aid on the basis that the arbitration, not being founded on
the consent of parties, was invalid. Similarly, complications may arise should the
courts of the seat (if different from the one which exercised its inherent jurisdic-
tion to compel arbitration) apply the rules of the Model Law.
In short, therefore, where minors, legally incompetent, unborn or unascer-
tained persons may have an interest in the arbitration proceedings, the matter
may be better off litigated rather than arbitrated. At the very least, it would be
worthwhile to seek a court’s declaration blessing the arbitration process and the
proposed representatives of these problematic categories of beneficiary before
embarking on what might ultimately prove to be a costly but fruitless expedi-
tion. Even then, where enforcement might be sought outside the jurisdiction that
blessed the arbitration process, complications may arise. However, where the trust
is constituted without the involvement of any such problematic beneficiaries, this
objection should not form a bar to the general arbitrability of trust disputes.

64 Holden (n 8) 551.
65 Conaglen (n 28) 472.
 The Arbitrability of Trust Instruments 215

B. Trustees, Beneficiaries and Third Parties Who Did Not

Participate in Prior Proceedings

Another aspect of enforceability in which the suitability of arbitration as a dispute

resolution process for trusts tends to be questioned is its ability, or lack thereof,
to bind non-parties to the award rendered by the arbitral tribunal.66 Unlike court
judgments that can have third-party effects, an arbitral award is ordinarily binding
only on those parties who had agreed to submit to the jurisdiction of the arbi-
tral tribunal rendering it. This means that trustees and beneficiaries who came
to the trust after the arbitral award has been rendered, as opposed to trustees or
beneficiaries who had notice of the arbitral process but chose not to participate,
could potentially bring up similar claims already resolved by one tribunal before
another. Similarly, third parties who, for example, claim that the constitution of
the trust was invalid, would also not be bound by any award rendered under an
arbitration agreement in the trust instrument.
The ability of the settlor to require trustees and beneficiaries to arbitrate trust
disputes, as explained above, stems from his making the agreement to arbitrate a
condition on which he appoints the trustee as trustee and confers beneficial inter-
ests on the beneficiaries. Such would not apply to a third party of the trust, such as
a forced heirship claimant seeking to have the trust declared invalid. Third parties
bringing claims that the trust is invalidly constituted, or what has been termed
‘rocket launcher disputes’, would not be compellable to arbitration, which is ulti-
mately a consensual process.67 In disputes of this nature, as opposed to disputes
wholly concerning the internal workings of the trust, the matter would be better
settled via litigation rather than arbitration, unless the express consent of the third
party to arbitrate can be obtained.
The situation is slightly different for a successor trustee who comes late to the
trust. For him, the arbitral award would not be binding per se, given he had neither
submitted to the jurisdiction of the tribunal nor had the opportunity to make rep-
resentations. However, his commitment to stand by awards rendered prior to his
assumption of office can nonetheless be secured if the settlor, in the trust instru-
ment, expressly makes it a condition that the successor trustee takes his appoint-
ment subject to the awards rendered by arbitral tribunals in relation to the trust. In
the same vein, for the beneficiary who comes late to the trust, for example, where
the trustee exercises a power of appointment in his favour, similar conditions can
be imposed via the trust instrument. However, as mentioned above, where trusts
involve unascertained beneficiaries, on balance, one might be better off litigat-
ing rather than arbitrating, given the potential risk that such arbitrations may be

66 Cohen and Poole (n 61) 327–28 and BC Janin, ‘The Validity of Arbitration Provisions in Trust

Instruments’ (1967) 55 California Law Review 521, 553.

67 Trust Law Committee (n 8) 300.
216 Elaine Chew

c­ onsidered contrary to public policy if the interests of the unascertained benefi-

ciaries are not adequately protected.
There is no question that settlors can attach conditions to their appointment of
trustees and to the dispositions of trust that they make. Generally, these conditions
are given effect by the courts save where they are contrary to public policy, such as
in the case of in terrorem clauses.68 It is submitted that both (i) the condition that
trustees and beneficiaries agree to arbitrate on the terms stipulated in the trust
instrument and (ii) the condition that trustees and beneficiaries agree to respect
awards handed down by arbitral tribunals even prior to their having come to the
trust, ought not to run afoul of public policy. This is because in both instances the
settlor has a legitimate reason for imposing these conditions, namely, ensuring
the efficient administration and dispute resolution of the trust.
One might argue that the first condition runs afoul of public policy insofar as
it forces parties to agree to a dispute resolution mechanism where they might not
otherwise consent, compromising party autonomy. In answer to this, it is worth
pointing out that parties are not deprived of their autonomy as they always have
the option of turning down the disposition or appointment that the settlor has
made in their favour. If they make the choice to accept the settlor’s appointments,
they have to take the good with the bad. Furthermore, in the cases brought before
the courts where a party has sought to enforce an arbitration agreement in a trust
instrument, the focus of the objections made has typically been on the practical
aspects of enforcing the agreement against the relevant parties, and securing the
remedies required to do justice under the trust. It does not appear to have been
within the contemplation of either the court or parties that party autonomy has
been compromised by the settlor’s attempts to have the trust disputes arbitrated
rather than litigated.
One might also argue that the second condition runs afoul of public policy
insofar as it deprives parties of their right to bring a contest in court where they
would otherwise be entitled to do so, obstructing the access of the trustees and
beneficiaries to justice. Such an objection would be circular, given that these par-
ties would have had no rights to vindicate in court but for the fact that the settlor
had seen fit to appoint the trustee as trustee and to confer on the beneficiaries the
interests that they enjoy. In that sense, the condition that the trustees and benefi-
ciaries, who come late to the trust, need to abide by earlier arbitral awards even
though they were not represented at those proceedings is not repugnant to public
policy provided the arbitral tribunal had given sufficient consideration to their
interests prior to rendering the arbitral award.

68 eg AN v Barclays Private Bank & Trust (Cayman) Limited [2007] WTLR 565.
 The Arbitrability of Trust Instruments 217

V. Arbitration in a Jurisdiction with Existing Legislation

The argument has already been made that an arbitration clause inserted in a trust
instrument ought to be enforceable provided (i) the settlor makes it a condition of
participation in the trust that each trustee and beneficiary agrees to arbitrate with
the other parties to the trust; (ii) that the scope of the arbitration agreement is lim-
ited to disputes arising out of the internal workings of the trust; and (iii) that all
the parties to the trust are of age, of legal capacity and ascertainable at the date the
arbitration is commenced, or alternatively, that a suitable mechanism is adopted
to ensure the proper representation of minor, legally incompetent unborn and
unascertained beneficiaries. Nonetheless, it is acknowledged that given the rela-
tive novelty of trust arbitration, the risk cannot be eliminated that an award on a
trust dispute still runs the risk of set aside or refusal of enforcement by a state that
exercises its prerogative to declare that the award is repugnant to its public policy.
Yet, given the number of potential advantages that can be reaped from arbitrating
rather than litigating trust matters, for a settlor the avenue remains one well worth
considering.
It might be argued that given the number of difficulties in the way of a settlor
who wishes to arbitrate a trust dispute in a jurisdiction that has not explicitly taken
a stand, it might be easier all round for the settlor to choose to have the trust arbi-
trated in a jurisdiction which has enabling legislation. Given that the focus of this
chapter is on whether arbitration is possible in a jurisdiction which does not have
enabling legislation, an extensive discussion of the pros and cons of the legislation
in each jurisdiction that has provided for such is simply not possible. However, it
is argued, based on the limitations of what has been provided for in the respective
legislations, as set out below, that none of the regimes provide a foolproof solution
in any event to the questions plaguing the viability of arbitrating trust disputes.

Table 1: Main Limitations of Existing Legislation

Main limitations
Florida —— Does not set out any method for appointing representatives for
minors, legally incapable, unborn and unascertainable beneficiaries.
—— Excludes the question of validity of the trust from the scope of what
is arbitrable.
Arizona —— Does not set out any method for appointing representatives for
minors, legally incapable, unborn and unascertainable beneficiaries.
—— Limits the procedures that can be provided for to those which are
‘reasonable’ without explanation as to its meaning.
—— Does not make clear whether the reference to the binding effect on
‘interested persons’ extends to third parties to the trust who might
seek to contest the trust’s validity.
(continued)
218 Elaine Chew

Table 1: (Continued)

Uniform —— Does not make clear which parties would qualify as ‘interested per-
Trust Code sons’ who may enter into arbitration on trust disputes, and specifi-
cally, whether third parties to the trust might be included within that
definition.
—— Does not specify how parties may enter into agreements to resolve
disputes other than by litigation, and specifically, whether an arbitra-
tion clause placed in the trust instrument can have effect.
Malta —— Does not set out any method for appointing representatives for
minor, legally incapable, unborn and unascertainable beneficiaries.
—— Notwithstanding any clause in the trust instrument, the court retains
discretion not to stay proceedings in favour of arbitration, creat-
ing uncertainty as to the proper forum in which claims should be
brought.
Guernsey —— Does not specify method for appointing representatives for minors,
legally incapable, unborn and unascertainable beneficiaries, although
it is implied that the court could make the appointment.
—— Appears to limit the scope of what is arbitrable only to claims against
trustees founded on breach of trust, and so excludes matters such as
the variation of trust terms, or disputes on the reasonability of the
trustee’s fees.
Bahamas —— Despite the provisions laid out for appointing representatives to rep-
resent minors, legally incapable, unborn and unascertainable benefi-
ciaries, the award may nonetheless risk being refused enforcement in
New York Convention jurisdictions on the basis that the consent of
these persons had not been obtained.
—— It appears to allow for the arbitration of questions as to the validity
of the trust but does not set out how non-parties to the trust can be
bound by the award rendered.

VI. Conclusion

Given the relative novelty of the subject area, it would be overreaching to say
that the arbitration of trust disputes comes without risks, particularly when it is
brought or an arbitral award is being sought to be enforced in a jurisdiction that
has not expressly legislated in its favour. It is also not possible to say that all trust
disputes can be conveniently arbitrated, particularly where the matter involves
parties who are not able to represent themselves or for which there are interested
parties who are not amenable and not compellable to arbitration. On the other
side of the coin, however, given that there are various internal trust disputes that
are suitable for arbitration, and it is in theory not impossible to see how the con-
sent of the trustees, protectors and beneficiaries may be secured through the terms
 The Arbitrability of Trust Instruments 219

of the trust, as a whole arbitration provisions should not be regarded as unen-

forceable. To the contrary, the importance of the settlor’s intentions to construing
the ambit of the trust, and the potential advantages to be reaped from arbitration
as a dispute resolution method for trust matters, provide every impetus for prima
facie recognising the enforceability of arbitration provisions in trust instruments,
save where specific circumstances render the opposite conclusion necessary. The
matter turns ultimately on whether the settlor may transfer in part or in whole
the supervisory jurisdiction of the courts to an extrajudicial body, and whether
the settlor may impose conditions of arbitration on his appointments and gifts.
And in both regards, it is submitted, as set out above, that the matter ought to be
answered in the affirmative.
220 Elaine Chew

Annex
Relevant provision
Florida (1) A provision in a will or trust requiring the arbitration of Probate
disputes, other than disputes of the validity of all or a part Code,
of a will or trust, between or among the beneficiaries and s 731.401
a fiduciary under the will or trust, or any combination of
such persons or entities is enforceable.
(2) Unless otherwise specified in the will or trust, a will or
trust provision requiring arbitration shall be presumed to
require binding arbitration under s 44.104.
Arizona A trust instrument may provide mandatory, exclusive and Trust Code,
reasonable procedures to resolve issues between the trustee §14-10205
and interested persons or among interested persons with
regard to the administration or distribution of the trust.
Uniform (a) For purposes of this section, ‘interested persons’ means Section 111
Trust persons whose consent would be required in order to
Code achieve a binding settlement were the settlement to be
approved by the court.
(b) Except as otherwise provided in subsection (c), interested
persons may enter into a binding nonjudicial settlement
agreement with respect to any matter involving a trust.
(c) A nonjudicial settlement agreement is valid only to the
extent it does not violate a material purpose of the trust
and includes terms and conditions that could be properly
approved by the court under this [Code] or other applica-
ble law.
(d) Matters that may be resolved by a nonjudicial settlement
agreement include:
(1) the interpretation or construction of the terms of
the trust;
(2) the approval of a trustee’s report or accounting;
(3) direction to a trustee to refrain from performing a
particular act or the grant to a trustee of any neces-
sary or desirable power;
(4) the resignation or appointment of a trustee and the
determination of a trustee’s compensation;
(5) transfer of a trust’s principal place of administra-
tion; and
(6) liability of a trustee for an action relating to the
trust.
(e) Any interested person may request the court to approve a
nonjudicial settlement agreement, to determine whether
the representation as provided in [Article] 3 was adequate,
and to determine whether the agreement contains terms
and conditions the court could have properly approved.
(continued)
 The Arbitrability of Trust Instruments 221

Malta (1) It shall be lawful for a testator to insert an arbitration Arbitration

clause in a will. In such event such clause shall be binding Act, Art 15A
on all persons claiming under such will in relation to all
disputes relating to the interpretation of such will, includ-
ing any claim that such will is not valid.
(2) It shall be lawful for a settlor of a trust to insert an arbitration
clause in a deed of trust and such clause shall be binding on
all trustees, protectors and any beneficiaries under the trust
in relation to matters arising under or in relation to the trust.
(3) In the cases referred to in the preceding subarticles, the
right of a party to seek directions of the Court of volun-
tary jurisdiction in terms of the jurisdiction in terms of
the Trusts and Trustees Act shall not be limited by any such
clause and notwithstanding the provisions of this Act, the
said Court shall not be bound to stay proceedings in terms
of article 15(5) or otherwise, but shall enjoy a discretion to
do so until such time as it determines that the matter is of a
contentious nature, in which case it shall stay the proceed-
ings and shall refer the parties to arbitration.
(continued)
222 Elaine Chew

Guernsey (1) Where— Trusts

(a) the terms of a trust direct or authorise, or the Court (Guernsey)
so orders, that any claim against a trustee founded on Law 2007,
breach of trust may be referred to alternative dispute s 63
resolution (‘ADR’),
(b) such a claim arises and, in accordance with the terms
of the trust or the Court’s order, is referred to ADR,
and
(c) the ADR results in a settlement of the claim which is
recorded in a document signed by or on behalf of all
parties, the settlement is binding on all beneficiaries
of the trust, whether or not yet ascertained or in exist-
ence, and whether or not minors or persons under
legal disability.
(2) Subsection (1) applies in respect of a beneficiary only if—
(a) he was represented in the ADR proceedings (whether
personally, or by his guardian, or as the member of a
class, or otherwise), or
(b) if not so represented, he had notice of the ADR pro-
ceedings and a reasonable opportunity of being heard,
and only if, in the case of a beneficiary who is not yet
ascertained or in existence, or who is a minor or per-
son under legal disability, the person conducting the
ADR proceedings certifies that he was independently
represented by a person appointed for the purpose by
a court of law.
(3) A person who represents a beneficiary in the ADR pro-
ceedings for the purpose of subsection (2)(a) is under a
duty of care to the beneficiary.
(4) For the avoidance of doubt, the ADR proceedings need not
be conducted in Guernsey or in accordance with the pro-
cedural law of Guernsey.
(5) In this section—
‘ADR’ includes conciliation, mediation, early neutral
evaluation, adjudication, expert determination and
arbitration, and ‘proceedings’ includes oral and written
proceedings.
(continued)
 The Arbitrability of Trust Instruments 223

Relevant provision
Bahamas 91A. Arbitration of trust disputes. Trustee Act,
ss 91A, 91B,
(1) The object of this section is to enable any dispute or
91C
administration question in relation to a trust to be deter-
mined by arbitration in accordance with the provisions of
the trust instrument.
(2) Where a written trust instrument provides that any dis-
pute or administration question arising between any of the
parties in relation to the trust shall be submitted to arbi-
tration (‘a trust arbitration’), that provision shall, for all
purposes under the Arbitration Act, have effect as between
those parties as if it were an arbitration agreement and as
if those parties were parties to that agreement.
(3) The Arbitration Act shall apply to a trust arbitration in accord-
ance with the provisions of the Second Schedule to this Act.
(4) The Minister may by order amend the Second Schedule.
91B. Powers of the arbitral tribunal.
(1) This section shall apply except to the extent otherwise pro-
vided in the trust instrument.
(2) The arbitral tribunal (hereinafter referred to as ‘the tribu-
nal’) may, in addition to all other powers of the tribunal,
at any stage in a trust arbitration, exercise all the powers of
the Court (whether arising by statute (including this Act),
under the inherent jurisdiction of the Court or otherwise)
in relation to the administration, execution or variation of
a trust or the exercise of any power arising under a trust.
(3) Without prejudice to subsection (2), and to any provisions
made pursuant to subsection (4), the tribunal has the same
powers to appoint one or more persons to represent the
interests of any person (including a person unborn or
unascertained) or class in a trust arbitration as the court
has under Order 15 rule 14 of the Rules of the Supreme
Court in relation to proceedings before the Court.
(4) The terms of a trust may provide for the appointment of
one or more persons to represent the interests of any per-
son (including a person unborn or unascertained) or class
in a trust arbitration.
(5) Where an appointment is made under subsection (3) or
(4)—
(a) the approval of the tribunal is required in relation to
a settlement affecting the person or class represented;
(b) the tribunal may approve a settlement where it is sat-
isfied that the settlement is for the benefit of the per-
son or class represented;
(c) any award given in the trust arbitration shall be bind-
ing on the person or class represented by the person
or persons appointed.
(continued)
224 Elaine Chew

(6) A person under a disability may not—

(a) bring or make a claim in trust arbitration except by
his next friend;
(b) defend, make a counterclaim or intervene in a trust
arbitration except by his guardian ad litem; or
(c) take any step in a trust arbitration except by his
next friend or guardian ad litem, unless otherwise
ordered by the tribunal.
(7) The terms of a trust may provide for the appointment of
a next friend or guardian ad litem, for the cessation of an
appointment and for the service of documents upon a
person under a disability.
(8) Subject to subsection (7), the tribunal may appoint a
suitable person to be a next friend or guardian ad litem,
may terminate an appointment, and may give directions
for the service of documents upon a person under a
disability.
(9) Where a next friend or guardian ad litem has been
appointed under subsection (7) or subsection (8), no
settlement affecting the person under a disability shall be
valid, without the approval of the tribunal.
(10) Notwithstanding subsection (1), subsection (5), (6) and
(9) shall apply irrespective of any provision in the trust
instrument.
(11) The Minister may make regulations to extend or clarify
the powers of the tribunal in relation to trust arbitrations.
91C. Interpretation for sections 91A, 91B and the Second
Schedule.
For the purposes of sections 91A, 91B and the Second
Schedule—
‘administration question’ means any relief or question in
respect of which an action, application or other reference to
the court could, subject to section 91A and the Arbitration
Act, be brought or made under Order 74 of the Rules of the
Supreme Court under this Act or under the Purpose Trusts
Act;
‘beneficiary’ includes an object of a power, whether or not
ascertained or in existence and a charity;
‘dispute’ includes a difference;
‘power holder’ means any person holding a power in relation
to a trust (including any power of appointment, consent,
direction, revocation, or variation, and any power to appoint
or remove trustees or power holders) and includes a person in
the position of a protector;
‘the parties in relation to the trust’ means any trustee,
beneficiary or power holder of or under the trust, in their
capacity as such.
 10
Bribery

PAUL S DAVIES*

I. Introduction

Bribery is an important and difficult topic. In FHR European Ventures LLP

v Mankarious (FHR), Lord Neuberger PSC said:
As Lord Templeman said giving the decision of the Privy Council in Attorney General
for Hong Kong v Reid [1994] 1 AC 324, 330H, ‘bribery is an evil practice which threatens
the foundations of any civilised society’. Secret commissions are also objectionable as
they inevitably tend to undermine trust in the commercial world. That has always been
true, but concern about bribery and corruption generally has never been greater than it
is now: see for instance, internationally, the OECD Convention on Combating Bribery
of Foreign Public Officials in International Business Transactions 1999 and the United
Nations Convention against Corruption 2003, and, nationally, the Bribery Acts 2010 and
2012.1
It is obviously right that concerns about bribery are not new; in Novoship (UK) Ltd
v Mikhaylyuk, Longmore LJ pointed out that problems of bribery are present as far
back as Homer’s The Odyssey.2 Yet it is equally clear that in the modern world the
law must operate effectively to combat bribery.
This chapter considers the role of equity in providing suitable remedies where
bribery has occurred. Much has been written about the nature of the remedy
available against a fiduciary who receives a bribe in breach of fiduciary duty, but
this issue has been decisively resolved by the Supreme Court in FHR: the bribe is

* I am particularly grateful to Simon Douglas, Nick McBride, James Penner and Peter Watts for their

comments on earlier versions of this chapter.

1 FHR European Ventures LLP v Mankarious [2014] UKSC 45, [2015] AC 250 [42].
2 Novoship (UK) Ltd v Mikhaylyuk [2014] EWCA Civ 908, [2015] QB 499 [2]: ‘When Odysseus pen-

etrated the underworld, he encountered, among many other ghosts, that of Eriphyle whom Homer (Od
11.326) calls “hateful” because she had been bribed by Polyneices with Aphrodite’s golden necklace to
reveal the whereabouts of her husband, so that he could be found and compelled to march on Thebes
where he foresaw he would be killed. This may or may not be the first recorded instance of a successful
bribe but, centuries later, bribery is still prevalent and pervasive however much legislators and judges
try to stamp it out’.
226 Paul S Davies

held on constructive trust. It is now necessary to think harder about other prob-
lems that arise. There are some unresolved questions about the remedies avail-
able against the wrongdoing fiduciary, which will be addressed first, but the focus
of this chapter is really upon the liability of the briber, a matter which has not
received as much attention.3 It is important to be clear both about the nature of
the claims and remedies available against the briber, and about how the briber’s
liability fits with the liability of the fiduciary. It will be argued that the principal
should be able to sue the briber either for the principal’s loss or the briber’s gain,
regardless of whether or not the principal has set aside the transaction between
it and the briber, and that such a claim can often succeed in addition to a claim
against the wrongdoing fiduciary.

II. The Nature of Bribery

The criminal offence of bribery is established where a party offers a financial

or other advantage to a person in order to induce the latter to perform his role
improperly or to reward the improper performance of that role.4 The recipient of
the bribe also commits an offence if he intends to perform that role improperly.5 A
similar approach can be adopted in private law. If a person receives or is promised
a benefit in order to act disloyally in the performance of his role, then he has been
bribed. And the person who makes the payment is the briber.
This means that not all instances of inducing a breach of contract or inducing
a breach of trust concern bribery. For example, Lumley v Gye6 is not a bribery
case. When Mr Gye offered Miss Wagner money to sing at his opera house, which
required Miss Wagner to breach her contract to sing for Mr Lumley, Mr Gye did
not bribe Miss Wagner. Miss Wagner did not perform her contract with Mr Lumley
improperly. She did not deceive Mr Lumley. She simply did not perform her
­contract at all. Such cases should not be characterised as instances of bribery as a
result.
It is undoubtedly true that in equity instances of bribery and secret commission
have not been clearly distinguished and tend to be analysed together. FHR itself
concerned a secret commission and not a bribe, but cases involving bribery were
considered by the Supreme Court to be relevant and clearly influenced the decision
reached. This is understandable. A fiduciary who takes a bribe or makes a secret
commission will have breached his duty of loyalty by infringing the ‘no-­conflict’
or ‘no-profit’ rule. And the briber or person who pays the secret commission
will have committed the equitable wrong of dishonest assistance if he satisfies the

3 In Daraydan Holdings Ltd v Solland International Ltd [2004] EWHC 622 (Ch), [2005] Ch 119 [1]

Lawrence Collins J made it clear that bribery ‘corrupts not only the recipient but the giver of the bribe’.
4 Bribery Act 2010, s 1.
5 ibid s 2.
6 Lumley v Gye (1853) 2 E & B 216.
 Bribery 227

test of ‘dishonesty’.7 As regards both the fiduciary and dishonest assister there is
little to be gained by trying to distinguish bribes and secret commissions. Cases on
dishonest assistance can therefore help to shed light on the appropriate remedies
available against the briber.
The focus of this chapter is upon the remedies available in equity. This reflects
the reality of the case law in this area: claimants generally prefer to bring a claim
in equity as a result of the more generous remedies available. The common law
is more restrictive; there is no recognised tort of bribery,8 and whilst gain-based
relief is very difficult to obtain for breach of contract9 or for the tort of deceit,10 it
is much more readily available in equity.11 It may of course be questioned whether
it is appropriate for the remedies at common law to be more confined that their
equitable counterparts, but that lies beyond the scope of this chapter.
For present purposes, it is sufficient to note that the courts have been very
flexible in finding a ‘fiduciary relationship’ in order to grant relief where a party
has breached an obligation of loyalty, which clearly is a core concern of bribery.
For example, in Reading v Attorney General,12 an army sergeant used to ride on a
lorry in full military uniform. The sergeant suspected that the lorries were used to
transport drugs, and that his presence was designed to facilitate this. The sergeant
accepted bribes to perform this role. It was held that the sergeant acted in breach
of fiduciary duty and had to account for the profits he made. In the House of
Lords, Lord Porter agreed13 with Asquith LJ’s observation in the Court of Appeal
that the words ‘fiduciary relationship’ in this setting are used in a wide and loose sense
and include, inter alia, a case where the servant gains from his employment a position of
authority which enables him to obtain the sum which he receives.14
This is indeed a loose sense of ‘fiduciary’, but has effectively been adopted in sub-
sequent cases.15 Although space precludes a detailed analysis of this issue, it is

7 See Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 (PC); see generally PS Davies, Accessory

Liability (Oxford, Hart Publishing, 2015) ch 4.

8 K Handley, ‘Civil Liability for Bribery (No 2)’ (2001) 117 LQR 536; cf C Mitchell, ‘Civil Liability

for Bribery’ (2001) 117 LQR 207. It is sometimes said that the fraud claim for loss suffered by a bribe is
sui generis: Petrograde Inc v Smith [2000] Lloyds Rep 486, 490 (Steel J).
9 Attorney-General v Blake [2000] UKHL 45, [2001] 1 AC 268. Moreover, the remoteness rules for

the recovery of loss caused by a breach of contract do not vary according to whether or not the breach
of contract was deliberate and the result of a bribe; cf T Weir, ‘The Staggering March of Negligence’ in
P Cane and J Stapleton (eds), The Law of Obligations: Essays in Celebration of John Fleming (Oxford,
Clarendon Press, 1998) 126.
10 See eg Halifax Building Society v Thomas [1996] Ch 217 (CA); Devenish Nutrition Ltd v Sanofi-

Aventis SA [2008] EWCA Civ 1086, [2009] Bus LR 858. See further text to nn 115–18.
11 It has been suggested that it would be preferable if ‘the whole analysis of bribes would move into

equity and abandon the common law claim of money had and received and the tort of deceit, with
which it does not neatly fit’: P McGrath, Commercial Fraud in Civil Practice, 2nd edn, (Oxford, OUP,
2014) para 10.54; see also P Watts and F Reynolds (eds), Bowstead and Reynolds on Agency, 20th edn
(London, Sweet & Maxwell, 2014) para 8-224.
12 Reading v Attorney General [1951] AC 507.
13 ibid 517.
14 [1949] 2 KB 232, 236 (Asquith LJ).
15 See also University of Nottingham v Fishel [2000] ICR 1462.
228 Paul S Davies

suggested that it is not necessary invariably to characterise the employee–employer

relationship as fiduciary for the range of equitable remedies to be available.16 The
key factor is that bribery necessarily entails a breach of a duty of loyalty—whether
that be characterised as fiduciary or not—and equity is prepared to intervene
because a person who has undertaken to serve another is not doing so faithfully.17
This is often described as a breach of fiduciary duty, but there is no need to be dis-
tracted by analysing whether the employee really is a ‘true’ fiduciary: it is impor-
tant to appreciate that equity will intervene because of a breach of a duty of loyalty.
In any event, the paradigm cases of bribery do involve a dishonest assister who
bribes a fiduciary, and that is the focus of this chapter.

III. Remedies Against the Recipient of the Bribe

A. Constructive Trust

In FHR, FHR European Ventures LLP purchased a long lease of the Monte Carlo
Grand Hotel in Monaco for €211.5 million. The sellers agreed to pay €10 million
to Cedar, an agent who was acting for the purchasers. This was a secret commis-
sion. The Supreme Court held that Cedar held the money on constructive trust
for the purchasers. Lord Neuberger emphasised that ‘[c]larity and simplicity are
highly desirable qualities in the law’;18 following FHR, it would seem that when-
ever a fiduciary makes a profit in breach of fiduciary duty he will hold those gains
on trust for his principal.
One reason for the outcome in FHR is the need to combat bribery effectively.19
For instance, if the fiduciary receives an Old Master painting as a bribe, then it is
now clear that the principal can choose to claim that particular painting rather
than simply the value of that painting. Of course, the principal might prefer to
pursue a personal claim, but it is important that the choice belongs to him, rather
than the wrongdoing fiduciary.20 The fiduciary is simply not able to say that he
should only have to give up the value of the bribe rather than the painting itself.
This might well be considered to be sensible: any choice between remedies should
be given to the innocent principal rather than the wrongdoing fiduciary.
The recognition of the constructive trust in FHR has a number of other sig-
nificant consequences. Two were thought to be particularly noteworthy by the

16 For discussion of this issue, compare R Flannigan, ‘Employee Fiduciary Accountability’ [2015]

Journal of Business Law 189 and A Frazer, ‘The Employee’s Contractual Duty of Fidelity’ (2015) 131
LQR 53.
17 PD Finn, Fiduciary Obligations (Sydney, Law Book Company, 1977) 266–69.
18 FHR (n 1) [35].
19 ibid [42].
20 ibid [7].
 Bribery 229

Supreme Court.21 First, the availability of a proprietary claim under a constructive

trust effectively gives the principal priority in insolvency over the fiduciary’s other
unsecured creditors.22 Second, the principal’s interest under a constructive trust
gives him a proprietary base which allows him to trace into substitute assets.23
It is worth pointing out that there are two other potentially important ramifi-
cations of the constructive trust analysis in FHR. The first concerns limitation. It
has been suggested that claims for personal remedies for breach of fiduciary duty
are subject to a limitation period of six years, by applying the limitation period in
tort by analogy to the equitable claim.24 But no limitation period applies where a
beneficiary seeks to recover from the trustee trust property or the proceeds of trust
property.25 Given that the bribe received should be considered to be trust property,
principals might have longer to bring a proprietary claim than a personal claim,
which could well prove to be useful. However, it is suggested that it is not entirely
clear whether a limitation period can really apply by analogy to claims of breach
of fiduciary duty. Claims for breach of the fiduciary obligation of loyalty, as illus-
trated in particular by the no-conflict and no-profit rules, are not analogous to
any claim at common law, so no statutory limitation period should apply, even by
analogy.26 Whether the claim is for personal or proprietary relief, claims should be
barred due to lapse of time only if laches is established.
Second, the prevalence of the constructive trust might create a tension between
competing claims of the beneficiary and the state to the bribe, since the state might
be able to confiscate the bribe. This issue arises where the criminal offence of brib-
ery is established, and must now be considered more fully.27

i. Competing Claims under the Proceeds of Crime Act 2002

Section 2(2) of the Bribery Act 2010 provides that a criminal offence is committed
when a person ‘requests, agrees to receive or accepts a financial or other advan-
tage intending that, in consequence, a relevant function or activity should be per-
formed improperly’. Similarly, section 2(3) provides that an offence is committed
when a person requests, agrees to receive or accepts a financial or other advan-
tage, and the request, agreement or acceptance itself constitutes the improper

21 ibid [1].
22 And perhaps over secured creditors as well if they only took an equitable interest over the prop-
erty, since equitable interests rank in order of time: see P Watts, ‘Bribes and Constructive Trusts’ (1994)
110 LQR 178.
23 eg Attorney General for Hong Kong v Reid [1994] 1 AC 324 (PC).
24 Cia de Seguros Imperio v Heath (REBX) Ltd [2000] EWCA Civ 219, [2001] 1 WLR 112.
25 Limitation Act 1980, s 21(1)(b).
26 Tito v Waddell (No 2) [1977] Ch 106, 248–50 (Megarry VC); A-G v Cocke [1988] Ch 414, 421

(Harman J).
27 This issue is under-analysed; one leading book on remedies for fraud has said that the Bribery Act

2010 ‘is unlikely to have any significant bearing on the English civil law approach to liability for, and
remedies arising from, bribery and so will not be considered in this book’: McGrath (n 11) para 10.09.
230 Paul S Davies

performance by that person of a relevant function or activity. Relevant functions

or activities are defined in section 3, and include any activity connected with a
business,28 or performed in the course of a business,29 or performed by or on
behalf of a body of persons,30 and the ‘person performing the function or activity
is in a position of trust by virtue of performing it’.31 This suggests that in many
situations where a fiduciary receives a bribe, he will be committing a criminal
offence.32 Indeed, continuing to have possession of a bribe which is criminal prop-
erty is also an offence.33
Where a criminal offence has been established, then it is possible for the state to
bring a claim to confiscate the bribe.34 An enforcement authority—generally the
National Crime Agency35—is able to recover in civil proceedings property which
is, or represents, property obtained through unlawful conduct.36 The general rule
is that ‘[i]f … the court is satisfied that any property is recoverable, the court must
make a recovery order’.37 This is mandatory: it follows that a confiscation order
must be made when the trustee has committed the criminal offence of bribery
under section 2 of the Bribery Act 2010. Prima facie, it therefore appears that the
claim of the National Crime Agency to the property received as a bribe should
trump that of the fiduciary’s principal. However, it should be observed that the
legislative scheme is somewhat messy and the drafters do not appear to have fully
thought through what the interrelationship between public law and private law
remedies should be.38
There are some exceptions to the strict approach under which the claims of the
state must succeed,39 but the most important for present purposes concerns sec-
tion 281 of the Proceeds of Crime Act 2002:
281 Victims of theft, etc.
(1) In proceedings for a recovery order, a person who claims that any property alleged
to be recoverable property, or any part of the property, belongs to him may apply
for a declaration under this section.
(2) If the applicant appears to the court to meet the following condition, the court may
make a declaration to that effect.
(3) The condition is that—

28 Bribery Act 2010, s 3(2)(b).

29 ibid s 3(2)(c).
30 ibid s 3(2)(d).
31 ibid s 3(5).
32 The briber is also likely to be committing an offence: see s 1.
33 Proceeds of Crime Act 2002, s 329(1)(c) (Proceeds of Crime Act).
34 ibid Part 5.
35 ibid s 316(1).
36 ibid s 240(1).
37 ibid s 266(1).
38 For instance, the legislation is somewhat awkward in that it seems to deprive private parties of

private rights without expressly saying so.

39 eg Proceeds of Crime Act, s 266(3)–(9) and ss 270–78.
 Bribery 231

(a) the person was deprived of the property he claims, or of property which it
represents, by unlawful conduct,
(b) the property he was deprived of was not recoverable property immediately
before he was deprived of it, and
(c) the property he claims belongs to him.
(4) Property to which a declaration under this section applies is not recoverable
property.
This provision grants the court discretion not to make a confiscation order in
favour of the enforcement authority. However, it is difficult to be sure whether the
principal in the fiduciary relationship will be able to avail himself of this protec-
tion.40 Of course, where the bribe itself comes from trust property then the ben-
eficiary will be able to make out all three conditions easily.41 But in most situations
the bribe comes from the briber’s property, and so it is difficult for the principal
to claim that the requirement in (a) is satisfied, since he would not be deprived of
property by unlawful conduct. For (a) to be satisfied, the principal would have to
argue that the key moment is immediately after the bribe is paid and the construc-
tive trust arises, but then requirement (b) poses a problem for the beneficiary,
since the property of which he would be deprived was recoverable property imme-
diately before he was deprived of it.
If the above analysis is correct, then there may still be a distinction between
cases where the bribe was paid with property from the trust (where the principal
takes the property) and cases where the bribe was paid with other property (where
a confiscation order must be made). Yet the Supreme Court deprecated such a
distinction in FHR, at least partly for the sake of clarity and simplicity.42 In this
context it might be argued that the distinction can be justified on the basis that
the clear language of the legislation must be applied, but it is far from obvious that
this sort of situation was envisaged by the legislators. Nevertheless, it is suggested
that the distinction between the two situations can be defended: whilst a principal
should not be deprived of his own property, in other circumstances it is arguable
that nobody should be able to benefit from the criminal payment of a bribe and
that confiscation should be ordered. In some situations there is no indication of
whether a claim for confiscation should trump the claim of a private party,43 but
here it is made clear that in principle a confiscation order must be made. This
seems acceptable, and it may even be the case that the principal will still have a
personal remedy against the wrongdoing fiduciary.44

40 See also L Tucker, N Le Poidevin and J Brightwell (eds), Lewin on Trusts, 18th edn (London, Sweet

& Maxwell, 2014) paras 20-062–20-064.

41 cf Daraydan (n 3) 119.
42 cf Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2011] EWCA Civ 347, [2011] 3

WLR 1153.
43 cf Borders (UK) Ltd v Commissioner of Police of the Metropolis [2005] EWCA Civ 197 [41].
44 Although this might well be viewed as controversial if confiscation by the state is already thought

to have achieved the purpose of deterrence, which is often thought to underpin gain-based relief.
232 Paul S Davies

It should also be noted that where the fiduciary has already paid the bribe to the
principal, then the principal might try to rely upon section 308(3) of the Proceeds
of Crime Act 2002 to resist a confiscation order:
(3) If—
(a) in pursuance of a judgment in civil proceedings (whether in the United King-
dom or elsewhere), the defendant makes a payment to the claimant or the
claimant otherwise obtains property from the defendant,
(b) the claimant’s claim is based on the defendant’s unlawful conduct, and
(c) apart from this subsection, the sum received, or the property obtained, by the
claimant would be recoverable property,
the property ceases to be recoverable.

This is perhaps wider than section 281 since there is no requirement that the prop-
erty is not recoverable property at the time of the payment. However, it is not at all
clear that this section will protect the beneficiary. As the authors of Lewin observe,
‘the court’s judgment can do no more than give effect to a constructive trust which
has already been constituted by the trustee’s receipt of the bribe’.45 Since the bribe
was only obtained by unlawful conduct, and it was this which gave rise to the
beneficiary’s right, it is not unlikely that the court will insist upon the beneficiary’s
establishing a defence under section 281 in order to prevent a confiscation order
being made.

B. Personal Remedies

The principal remains able to seek a personal remedy from the wrongdoing fidu-
ciary who accepts a bribe: he can elect between the proprietary and personal
­remedy.46 Although the principal cannot accumulate the personal remedy in addi-
tion to the proprietary remedy, it would appear that the principal’s personal claim
can be pursued on top of recovery proceedings instigated by the National Crime
Agency. Even though the fiduciary may be mulcted twice over, it would seem that
there is no inconsistency between the fiduciary having to give up the proceeds of
crime, and also having to compensate the principal for any loss suffered.
The principal should be able to sue the fiduciary either for the loss the princi-
pal has suffered, or for the gains made by the fiduciary. Both the loss-based and
gain-based claims are sometimes considered under the broad umbrella heading of
‘equitable compensation’,47 which is used in this sense simply to denote a personal
remedy. In some cases where the fiduciary has accepted a bribe, the principal’s
loss will be the same as the fiduciary’s gain.48 However, sometimes the value of the
45 Tucker, Le Poidevin and Brightwell (n 40) para 120–066. On the other hand, it might be argued

that if one had to go to judgment in order to get the payment then it is still paid ‘in pursuance of a
judgment’. This point is not entirely clear.
46 FHR (n 1) [7].
47 ibid [1].
48 As was the case in FHR itself.
 Bribery 233

bribe paid will be greater than the loss suffered (since the briber has a particular
need to enter into the transaction in order to make profits elsewhere or to defeat
competitors, for example) and sometimes the fiduciary will accept a bribe which
is less than the loss inflicted upon the principal.49 The question of whether the
principal can sue the fiduciary for both gain and loss is considered below.50
Is it possible to go beyond the profits made and award punitive damages against
the wrongdoing fiduciary? After all, bribery can be a crime and, particularly where
no criminal prosecution is brought and no confiscation order sought, the type
of wrongdoing committed by the fiduciary might be thought suitable for a puni-
tive remedy. However, equity has traditionally rejected any possibility of its being
a penal jurisdiction.51 This has been supported relatively recently by a majority
decision of the New South Wales Court of Appeal.52 Yet if punitive damages are
appropriate at common law, it is difficult to explain why they are not similarly
appropriate—in exceptional cases—where the defendant’s liability is equitable.53
Remedial coherence suggests that punitive damages should be available for equita-
ble wrongs,54 and if this step is taken then punitive awards may well be appropriate
to help to deter and punish bribery.

IV. Remedies Available Against the Briber

A. Rescission

Where the principal enters into a transaction as a result of its agent taking a bribe,
the principal is entitled to rescind the transaction ab initio or, if it is too late to
rescind, then to bring the contract to an end for the future.55 This was clearly
reiterated by Millett J in Logicrose Ltd v Southend United FC.56 In that case, the
agent of Southend United FC entered into an agreement with a third party that the

49 eg Mahesan S/O Thambiah Appellant v Malaysia Government Officers’ Co-Operative Housing Soci-

ety Ltd [1979] AC 374 (PC); considered at n 153.

50 See section V below.
51 eg Vyse v Foster (1872) LR 8 Ch App 309, 333 (James LJ).
52 Harris v Digital Pulse Pty Ltd (2003) NSWCA 10, (2003) 197 ALR 626.
53 See the judgment of Mason P (dissenting) in Digital Pulse, ibid. See also A Burrows, ‘Remedial

Coherence and Punitive Damages in Equity’ in J Edelman and S Degeling (eds) Equity in Commercial
Law (Sydney, Lawbook Co, 2005); Cook v Evatt (No 2) [1992] 1 NZLR 676.
54 As was favoured by the Law Commission: Law Commission, Aggravated, Exemplary and Restitu-

tionary Damages Report (Law Com No 247, 1997) paras 5.54–5.56.

55 Panama and South Pacific Telegraph Co v India Rubber, Gutta Percha, and Telegraph Works Co

(1875) LR 10 Ch App 515; Armagas Ltd v Mundogas SA [1986] AC 717, 742–43; UBS AG (London
Branch) v Kommunale Wasserwerke Leipzig GmbH [2014] EWHC 3615 (Comm). In some situations,
where the briber is the other party to the transaction and knows that the agent acts beyond his actual
authority, then the transaction may even be void ab initio at common law: Watts and Reynolds (n 11)
Art 73.
56 Logicrose Ltd v Southend United FC [1988] 1 WLR 1256 (Ch), 1260–1262 (Millett J)
234 Paul S Davies

latter would pay the agent a bribe in order to arrange a licence, for the benefit
of the briber, over land owned by Southend United FC. Millett J held that the
principal could clearly choose to rescind the licence: ‘[t]he principal, having been
deprived by the other party to the transaction of the disinterested advice of his
agent, is entitled to a further opportunity to consider whether it is in his interests
to affirm it’.57
It is important to note that if the third party was entirely innocent in paying
the money over that constituted the bribe—for instance, if the third party did not
appreciate that the fiduciary would keep the money for himself—then rescission
should not be granted. But this is a rare case. Usually, the briber will know that
the fiduciary is committing a breach of duty. In Logicrose, Millett J recognised that
there is ‘no direct authority on the degree of knowledge which he must possess of
the existence of the agent’s personal interest’, but thought that actual knowledge or
wilful blindness was necessary.58 This is sensible, and indeed justified by Millett J
partly because of ‘a close parallel with the cases on knowing assistance in a breach
of trust’.59 This approach is helpful. Indeed, the judge went on to say:
In my judgment, the difference between the two lines of authority (that is to say the ‘brib-
ery’ cases and the ‘knowing assistance’ cases) lies not in the factual background but in the
remedy sought; and the state of mind necessary to make the other party liable ought to
be the same whether the claim is for an account of the money which he helped the agent
to misappropriate or rescission of the transaction itself.60
This is a useful passage, which highlights that the liability of the briber, and the
ability of the principal to set aside a transaction entered into with a briber, turns
upon the knowledge of the briber.

B. Liability as a Dishonest Assister

It is important to recognise that the briber’s liability is accessorial: it arises

because of the briber’s participation in the fiduciary’s breach of duty. The lan-
guage of ‘knowing assistance’ was generally employed at the time of Logicrose, but
the phrase ‘dishonest assistance’ is now often preferred.61 For present purposes,
little depends upon the label attached to the mental element; it is clear that the
defendant must be at fault, and that the approach identified in Logicrose remains
apt: a briber should only be liable if he actually knew of the principal’s rights,
or deliberately turned a blind eye to facts he knew which would have led to that
conclusion.62 The focus here is upon the remedies available against the briber for
dishonest assistance.

57 ibid 1261.
58 ibid.
59 ibid.
60 ibid.
61 See Royal Brunei (n 7).
62 See generally Davies (n 7) ch 4.
 Bribery 235

i. Loss-Based Claims
In Royal Brunei Airlines Sdn Bhd v Tan, Lord Nicholls said that ‘[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’.63 That an accessory has
traditionally been said to be liable as a ‘constructive trustee’ has led to a general
acceptance that an accessory can be liable to compensate the claimant.64 In Cowper
v Stoneham,65 the court held that ‘[a]ll parties to a breach of trust are equally lia-
ble’, and more recently in Ultraframe (UK) Ltd v Fielding, Lewison J could ‘see that
it makes sense for a dishonest assistant to be jointly and severally liable for any loss
which the beneficiary suffers as a result of a breach of trust’.66
The language of ‘trustee’ in this context is clearly fictional and should be per-
manently jettisoned;67 it may have been invoked in order to comply with a tradi-
tional rule of trust law that beneficiaries can only sue their trustees.68 Nevertheless,
because of the parasitic—but not necessarily duplicative—nature of accessory
liability, the liability of the accessory and primary wrongdoer to compensate the
claimant is often the same.69 But this will not always be the case; since ‘breach of
trust and dishonest participation in a breach of trust are two species of equitable
wrongs’,70 it might be expected that the briber and fiduciary will not always be
liable to the same extent. The briber should only be liable for losses to which he has
contributed;71 the fiduciary may have contributed to even greater losses for which
the briber does not bear responsibility.
Given the dishonest nature of the briber’s wrong, the better view is that he
should incur liability for all losses directly caused by the breach of fiduciary duty
in which he participated. Arguing that the principal’s loss was not ‘reasonably
foreseeable’ is unlikely to avail a dishonest assister. However, the principles con-
cerned with gain-based relief are more difficult.

ii. Gain-Based Claims

Gain-based claims against the briber are also possible. But this is controversial.
Whereas a gain-based claim against the recipient of the bribe can readily be

63 Royal Brunei (n 7) 392.

64 eg Casio Computer Ltd v Sayo (No 3) [2001] EWCA Civ 661, [2001] All ER (D) 147.
65 Cowper v Stoneham (1893) 68 LT 18, 19.
66 Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638 (Ch), [2006] FSR 17 [1600]; see also Arab

Monetary Fund v Hashim (The Times, 11 October 1994) (Ch) (Chadwick J).
67 See Williams v Central Bank of Nigeria [2014] UKSC 10, [2014] AC 1189. Birks thought that the

language of ‘constructive trust’ was ‘surplusage’: P Birks, ‘Trusts in the Recovery of Misapplied Assets:
Tracing, Trusts and Restitution’ in E McKendrick (ed), Commercial Aspects of Trusts and Fiduciary
Obligations (Oxford, Clarendon Press, 1992) 149.
68 L Smith, ‘Constructive Trusts and Constructive Trustees’ (1999) 58 CLJ 294, 300.
69 At least towards the claimant: for consideration of issues of contribution, see text to nn 165–70.
70 Lord Nicholls, ‘Knowing Receipt: The Need for a New Landmark’ in WR Cornish, R Nolan,

J O’Sullivan and G Virgo (eds), Restitution: Past, Present and Future (Oxford, Hart Publishing, 1998) 244.
71 There is an irrebuttable presumption that the principal will have suffered loss at least equal to the

value of the bribe: Hovenden & Sons v Millhof (1900) 83 LT 41.

236 Paul S Davies

justified on the basis that he is in a fiduciary position and therefore is not entitled
to profit from his position,72 it is clear that the briber does not owe any fiduciary
obligations to the principal.73 Fiduciaries and dishonest assisters should therefore
be considered differently. It is suggested that it is right that a briber has to give up
his gains, but the justification for that is not the same as that which applies to the
wrongdoing fiduciary.
In Novoship (UK) Ltd v Nikitin,74 Mr Mikhaylyuk was the general manager,
commercial manager and later a director of the claimant, Novoship (UK) Ltd.
Mr Mikhaylyuk was responsible for negotiating the charters of vessels owned by
companies within the Novoship group. Mr Mikhaylyuk defrauded Novoship to
the advantage of himself and others. As part of his dishonest scheme, Mr Mikhay-
lyuk breached his fiduciary duty in directing a third party to pay bribes to himself
and Amon International Inc, a company owned and controlled by Mr Nikitin.
Mr Mikhaylyuk also used his position to arrange charters of vessels (‘the Henriot
charters’) to Henriot Finance Ltd, a British Virgin Islands company which was
owned and controlled by Mr Nikitin. It was held that Mr Mikhaylyuk acted in
breach of fiduciary duty due to the conflict between his personal interests and
duty to his principal; since Mr Nikitin knew of this and nonetheless continued
to participate in Mr Mikhaylyuk’s schemes, Mr Nikitin was liable for dishonest
assistance.75
The crux of the appeal in Novoship concerned the remedies available against a
dishonest assister. The Court of Appeal recognised that, in principle, a gain-based
measure of relief is available against the accessory. Longmore LJ, delivering the
judgment of the Court, cited with approval76 the following passage of Gibbs J in
Consul Development Pty Ltd v DPC Estates Pty Ltd:
If the maintenance of a very high standard of conduct on the part of fiduciaries is the
purpose of the rule it would seem equally necessary to deter other persons from know-
ingly assisting those in a fiduciary position to violate their duties. If, on the other hand,
the rule is to be explained simply because it would be contrary to equitable principles to
allow a person to retain a benefit that he had gained from a breach of his fiduciary duty,
it would appear equally inequitable that one who knowingly took part in the breach
should retain a benefit that resulted therefrom. I therefore conclude, on principle, that a
person who knowingly participates in a breach of fiduciary duty is liable to account to
the person to whom the duty was owed for any benefit he has received as a result of such
participation.77

72 eg Keech v Sandford (1726) Sel Cas Ch 61; Boardman v Phipps [1967] 2 AC 46; FHR (n 1). See

also L Smith, ‘Fiduciary Relationships: Ensuring the Loyal Exercise of Judgement on Behalf of Another’
(2014) 130 LQR 608.
73 Williams (n 67).
74 Novoship v Nikitin [2014] EWCA Civ 908, [2015] QB 499.
75 Significantly, the Court of Appeal insisted that there is no need for the breach of fiduciary duty to

relate to trust property for accessory liability to arise: ibid [93].

76 ibid [76].
77 Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373, 397.
 Bribery 237

In Novoship, Longmore LJ went on to say that,

[w]here, as here, the equitable wrong is itself linked with a breach of fiduciary duty we see
no reason why a court of equity should not be able to order the wrongdoer to disgorge
his profits in so far as they are derived from the wrongdoing.78
This decision is welcome. A party who is liable for dishonest assistance cannot
sensibly demand that he keep the profits he makes. This is especially significant
in the context of bribery: a briber has acted sufficiently badly that an account
of profits should, in principle, be an available remedy to the principal who is a
victim of the bribery.79 However, although the remedy of an account of profits is
potentially available, the Court of Appeal in Novoship held that such a remedy is
discretionary, and will not be awarded where it would be ‘disproportionate’ with
the wrongdoing.80 The meaning of ‘disproportionate’ in this context is somewhat
unclear, but it perhaps emphasises that, especially where the defendant is not a
fiduciary, an account of profits is not available as of right. Nevertheless, where the
defendant has dishonestly bribed a fiduciary it is difficult to imagine many cases
where an account of profits would be ‘disproportionate’.
In Novoship, the Court of Appeal also insisted that a causal link must be estab-
lished between the bribery and the profit. On the facts of that case, the focus was on
the gains made by Mr Nikitin. The key issue was the profit of almost $109 ­million
that Mr Nikitin made from the Henriot charters. At first instance, Mr Nikitin was
ordered to disgorge those profits to the claimant. The Court of Appeal allowed Mr
Nikitin’s appeal on this point since ‘there was an insufficient direct causal connec-
tion between entry into the Henriot charters and the resulting profits’.81 The Court
of Appeal emphasised that the Henriot charters were entered into at market rates
and were not disadvantageous to the claimant. The Court found that
what Mr Nikitin acquired as a result of his dishonest assistance (and also as a result of
Mr Mikhaylyuk’s breach of fiduciary duty) was the use of the vessels at the market rate.
That was merely the occasion for him to make a profit. The real or effective cause of the
profits was the unexpected change in the market. As the judge recognised … Mr Nikitin
made the profits ‘because he judged the market well.82
The distinction between a breach of duty which causes a loss and one which sim-
ply provides the occasion for the loss to be suffered is well established at common
law83 and sensible to apply in this context.
Some sort of ‘sufficiently direct’ causal link between the accessory’s participa-
tion in the primary wrong and resulting profits is required.84 This explains the

78 Novoship (n 74) [84].

79 See also Law Commission, Aggravated, Exemplary and Restitutionary Damages (n 54) Part III.
80 Novoship (n 74) [119]–[120].
81 ibid [115].
82 ibid [114].
83 Galoo Ltd v Bright Graham Murray [1994] 1 WLR 1360.
84 Novoship (n 74) [94]–[115] (Longmore LJ), citing J McGhee (ed), Snell’s Equity, 32nd edn

(London, Sweet & Maxwell, 2010) para 30-081.

238 Paul S Davies

result in Fyffes Group Ltd v Templeman.85 On the facts of that case, Toulson J ulti-
mately refused to order a defendant to account for the profits he made by bribing
the claimant’s agent: the claimant would have entered into the transaction with the
briber even if the agent had not been bribed, so the briber’s profit was not caused
by the bribery of the agent.86 This approach was criticised in Murad v Al-Saraj, but
only because the liability of accessories was assimilated with the liability of fidu-
ciaries. It is orthodox to conclude that if the conduct of the fiduciary falls within
the scope of his fiduciary duty of loyalty, then no further enquiry into whether or
not the profits would have been made anyway is appropriate.87 But accessories are
not fiduciaries. The comments of the Court of Appeal in Murad on this point were
obiter since the claim in that case was brought against a primary wrongdoer and
not an accessory; they were rightly disapproved by the Court of Appeal in Novo-
ship (UK) Ltd v Nikitin.88
In Novoship, the Court of Appeal rejected a simple ‘but for’ test of causation,
and instead demanded a ‘sufficiently direct’ causal connection. This latter concept
requires further elucidation. In the context of bribery, it seems to be presumed
that the briber will make a gain at least equal to the value of the bribe paid over,
so the claim for the bribe itself should be considered to be ‘sufficiently direct’. In
some instances, the transaction entered into as a result of the bribe will produce
further direct profits without the briber doing anything more. Such profits may
well exceed the value of the bribe paid, but should nevertheless be recoverable.
For example, a briber may pay £10,000 as a bribe to the claimant’s agent to accept
the briber’s bid to carry out building works. It will then be irrebuttably presumed
that the briber’s profit is at least the amount of the bribe.89 But the briber may
well make more than £10,000 profit from performing such works, and in principle
those profits might be disgorged to the claimant.90
In some situations, the briber might take profits made from the transaction
which was induced by the bribe, and invest that money in shares which double
in value. Should the principal be able to recover the uplift in value of the shares?
In Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd, Lord Neuberger
MR contemplated the possibility of ‘extending, or adjusting, the rules relating to
equitable compensation’,91 and such a flexible approach to ‘equitable compensa-
tion’ suggests that the answer should possibly be: ‘yes’. But on balance that seems
inappropriate.92 The profits made from the shares is not ‘sufficiently direct’, given

85 Fyffes Group Ltd v Templeman [2000] 2 Lloyd’s Rep 643.

86 The claim for damages was, however, successful. See also Mitchell (n 8).
87 Murad v Al-Saraj [2005] EWCA Civ 959, [2005] WTLR 1573 [69] (Arden LJ), [120] (Jonathan

Parker LJ).
88 Novoship (n 74).
89 Hovenden & Sons (n 71).
90 Fyffes Group Ltd (n 85) 672 (Toulson J), citing C Needham, ‘Recovering the Profits of Bribery’

(1979) 95 LQR 536, 548.

91 Sinclair (n 42) [90].
92 If the opposite were true, then the briber (who of course is not a fiduciary) might nonetheless be

entitled to an equitable allowance. Under the Proceeds of Crime Act, it may be possible to confiscate
 Bribery 239

the subsequent input of the briber to the profits, and the fact that it is further
removed from the wrong itself.93 The only way the principal should be able to
trace into the shares is if he has a proprietary interest in the bribe at the outset.
In Novoship, Mr Nikitin’s gain was the opportunity to enter into the Henriot
charters, but these were at market rates and not especially advantageous. The
profit of $109 million was caused by market fluctuations, which were too remote
from the breach of duty. The claimant would have had to establish a proprietary
claim in order to strip Mr Nikitin of the uplift in value of the charters, but this was
hopeless as the claimant had no proprietary interest in the charters.94
The decision in Novoship is helpful in making it clear that the remedies available
against the fiduciary and the dishonest assister are not the same.95 The case clearly
rejects the view that the liability of the accessory is secondary in the sense of dupli-
cative.96 This seems entirely appropriate, but the Canadian court in Canada Safe-
way Ltd v Thompson97 held that an accessory could be jointly and severally liable
for the unauthorised profit made by a wrongdoing fiduciary. This result has been
supported by Clapton, since ‘[e]ven if the assistant has not acquired a benefit from
the breach, the need to safeguard the relationship of trust and confidence justifies
this type of disgorgement award’.98 But this begins to look like a punitive measure,
since the accessory is made to disgorge profits he did not himself make. If such a
punitive remedy is available against a briber, there is no reason why it should be
assessed by reference to the gain made by the fiduciary. As Christopher Clarke J
pointed out at first instance in Novoship (UK) Ltd v Mikhaylyuk:
there is no equity to compel someone who has not made a profit from his breach, or
dishonest assistance in that of another, to account for a profit which he has not made and
which does not represent a loss which the principal has suffered.99
Similarly, the High Court of Australia in Michael Wilson & Partners Ltd v Nicholls
has found that ‘if an account of profits were to be sought against both the default-
ing fiduciary and a knowing assistant, the two accounts would very likely differ’.100

gains if they constitute ‘representative property’ of the proceeds of crime (eg s 146(3); s 305), but this
is because of wider concerns of public policy, and involves the transfer of gains from the wrongdoer to
the state, rather than from the wrongdoer to the principal.
93 This might be explained on the basis of remoteness of gain: G Virgo, ‘Restitutionary Remedies

for Wrongs: Causation and Remoteness’ in C Rickett (ed), Justifying Private Law Remedies (Oxford,
Hart Publishing, 2008).
94 Novoship (n 74) [66].
95 See also Williams (n 67).
96 cf SB Elliott and C Mitchell, ‘Remedies for Dishonest Assistance’ (2004) 67 MLR 16.
97 Canada Safeway Ltd v Thompson [1951] 3 DLR 295 (BCSC).
98 MS Clapton, ‘Gain-Based Remedies for Knowing Assistance: Ensuring Assistants do Not Profit

from their Wrongs’ (2008) 45 Alberta Law Review 989, 1010. See also Tucker, Le Poidevin and Bright-
well (n 40) para 20-092.
99 Novoship (n 74) [99] (this point was not expressly dealt with by the Court of Appeal, although

see [77]).
100 Michael Wilson & Partners Ltd v Nicholls [2011] HCA 48, (2011) 244 CLR 427 [106].
240 Paul S Davies

Nevertheless, the decision in Novoship has been criticised. For example, Devon-
shire has argued that gain-based relief should only be available against a defendant
who procures or induces a breach of fiduciary duty, rather than a defendant who
‘only’ assists the breach of fiduciary duty.101 Such a distinction is possible, and
was for some time crucial to establishing accessory liability: the primary wrong
of breach of trust needed to be dishonest for the third party to be liable as an
assister,102 but the third party could be liable as an inducer or procurer even if
the primary wrong was not dishonest.103 This distinction seems to continue to be
important in Australia.104
However, the distinction between inducement and assistance is incredibly dif-
ficult to draw and it does not seem worth the effort.105 Indeed, even in the context
of bribery it is suggested that the complexities that would arise in trying to distin-
guish inducement from assistance are not worth it. Does it really matter whether
the idea of the bribe originated with the fiduciary or with the briber? After all, even
if the conduct of the briber constitutes assistance rather than inducement it may
well be the case that there would not have been any breach of duty without that
assistance.106 It is suggested that Millett J was correct in Logicrose to insist that it
is ‘immaterial whether the initiative for the agent’s taking an interest of his own
came from the agent himself or from the other party to the transaction’.107
Devonshire argues that in instances of inducement or procurement an ‘equita-
ble wrong’ is committed which ‘engages the deterrent principle and lends weight
to accountability for consequential gains’.108 Yet it is not at all obvious why the
same cannot be said about assistance. Devonshire writes that ‘[b]y instigating the
breach, the third party is effectively a primary wrongdoer. In these circumstances,
it is not anomalous to impose a full gamut of remedies for his or her participation
in the substantive wrong’.109 But it would appear that a dishonest assister is also a
primary wrongdoer; the elements of the wrong are different from that of breach
of fiduciary duty, which leads to different remedies. It is not clear why dishonest
assisters should not similarly have to account for their profits.
One reason advanced by Devonshire is that an analogy should be made to the
common law tort of fraud or deceit: as a common law wrong, the claimant should
be limited to a claim for damages, and unable to disgorge the accessory’s gains.

101 P Devonshire, ‘Account of Profits for Dishonest Assistance’ (2015) 74 CLJ 222.
102 Barnes v Addy (1874) LR 9 Ch App 244 (CA).
103 eg Fyler v Fyler (1841) 3 Beav 550; Attorney-General v The Corporation of Leicester (1844) 7 Beav
176.
104 Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 222, (2007) 230 CLR 89.
105 P Sales, ‘The Tort of Conspiracy and Civil Secondary Liability’ (1990) 49 CLJ 491, 507–08;
C Harpum, ‘The Basis of Equitable Liability’ in P Birks (ed), The Frontiers of Liability, vol 1 (Oxford,
OUP, 1994); Davies (n 7) ch 4.
106 eg JD Wetherspoon plc v Van de Berg & Co Ltd [2009] EWHC 639 (Ch) [518] (Peter Smith J). See

also the facts of Mahesan, considered in text to n 153.

107 Logicrose (n 56) 1261.
108 Devonshire (n 101) 232.
109 ibid.
 Bribery 241

But this is unconvincing. Although it is true that dishonest assistance has been
described as an ‘equitable tort’,110 attempts to impose common law liability upon
a party who participates in an equitable wrong have consistently been rebuffed.111
And even if that divide between common law and equitable wrongs is consid-
ered to be an accident of history that could be corrected, it is far from obvious
that equity should adopt the approach of the common law rather than vice versa.
Although current orthodoxy appears to be that restitutionary damages are not
available for the tort of deceit,112 this might be criticised. After all, punitive dam-
ages might be awarded in tort,113 and why should a defendant who deliberately or
recklessly commits a wrong never be subject to a restitutionary award of damages?
Such an award would not be made automatically and in all instances, but seems to
be an appropriate weapon in the judicial arsenal. The Law Commission thought
that where the defendant’s conduct showed a ‘deliberate and outrageous disregard
of the plaintiff ’s rights’ restitutionary damages should be awarded’,114 which tends
to indicate that the equitable position is preferable to that at common law.
Indeed, even at common law the position concerning deceit is difficult. That
restitutionary damages are not available seems to be the result of Halifax Building
Society v Thomas.115 That case concerned a mortgage fraud by a borrower, which
led to the lender choosing to sell the security. There was a surplus after the sale,
which the lender claimed for itself. The Court of Appeal held that the claim should
fail, apparently on the basis that gain-based awards are not available in the tort of
deceit. But that was not necessary for the decision: the bank had actually affirmed
the mortgage and obtained full satisfaction, and so did not choose to avoid the
mortgage and rely upon the fraud. Interestingly, at first instance in Murad v Al-Saraj,
Etherton J was prepared to grant restitutionary damages in the tort of deceit, and
explicitly distinguished the Halifax case because there no loss was suffered and
the lender had affirmed the contract.116 This was branded a ‘novel step’ by Arden
LJ in the Court of Appeal,117 but in fact there was old authority in favour of such
approach118 and it does not seem inappropriate. At the very least, the position as
regards restitutionary damages in tort is somewhat unclear and in many respects
unsatisfactory,119 and a shaky foundation from which to develop the law of acces-
sory liability in equity.
From a very different angle, Gummow has argued that the result in Novoship
was too generous to the dishonest accessory, and that the trial judge was correct
110 Abou-Rahmah v Abacha [2006] EWCA Civ 1492, [2007] 1 Lloyd’s Rep 115 [2] (Rix LJ).
111 Metall und Rohstoff AG v Donaldson Lufkin & Jenrette Inc [1990] 1 QB 391 (CA), 481 (Slade LJ).
112 Devenish (n 10).
113 Kuddus v Chief Constable of Leicestershire Constabulary [2001] UKHL 29, [2002] 2 AC 122.
114 Law Commission, Aggravated, Exemplary and Restitutionary Damages (n 54) para 3.49.
115 Halifax (n 10) 229.
116 Murad v Al-Saraj [2004] EWHC 1235 (Ch), [345]–[347] (Etherton J).
117 Murad (n 87). The Court of Appeal did not need to decide on the common law claim.
118 Hill v Perrott (1810) 3 Taunt 274.
119 In particular, the Court of Appeal appears to restrict gain-based relief in tort to ‘proprietary

torts’: eg, Forsyth-Grant v Allen [2008] EWCA Civ 505, [2008] 2 EGLR 16; Devenish (n 10). See also
O Odudu and G Virgo, ‘Inadequacy of Compensatory Damages’ [2009] 17 Restitution Law Review 112.
242 Paul S Davies

to strip the defendant of his profits.120 This is because ‘the profit for which the
account was sought was derived “by reason of ” the dishonest assistance because
that dishonesty at least materially contributed to, even if not immediately causing,
the derivation of the profit on the Henriot charters’.121 This takes a much more
generous view (from the principal’s perspective) of causation. On balance, it is
suggested that such an approach is too harsh. In relying upon cases such as Board-
man v Phipps, Gummow closely links the liability of the fiduciary and accessory
in a way which threatens to blur the clear distinction that has recently been drawn
between the liability incurred by a party as a result of the fiduciary obligations he
owes, and the liability of another party who owes no fiduciary obligations at all.
Given that the accessory has not voluntarily undertaken to act loyally as a fiduci-
ary, a more stringent test of causation for gain-based remedies seems appropriate.
There is, however, a potential issue that arises when quantifying the profits
made by the briber. A briber might pay £1,000 as a bribe, and consequently make
profits of £4,000.122 If an account of profits is ordered, should the briber have
to pay £4,000 (the gross profits received by the briber) or £3,000 (the net profits
received, once the money paid as a bribe is taken into account)? There is a gen-
eral tendency only to order an account of the net profits made, and, since the
claim itself is for bribery, courts may understandably incline towards ordering an
account of £3,000 only. Without the bribe the claim does not get off the ground, so
it might be consistent to take the bribe into account. Yet it is conceivable that the
principal may contend that the briber should not be allowed to reduce the account
of profits below £4,000 as this would involve the briber’s relying upon his own
illegal conduct in paying the bribe.123 If such an argument were to succeed that
may be thought to have a punitive effect, which, as has been seen,124 is not gener-
ally favoured in equity. Given equity’s traditional refusal to recognise a jurisdiction
to punish, it seems unlikely that a punitive award would be made against a briber.
Admittedly, in this context as well a refusal to award punitive remedies may appear
unduly restrictive. Not all instances of bribery are the same, and so not all bribers
should be made to pay punitive damages, but in some situations the briber will
have deliberately set out to corrupt a beneficiary and cause harm to the principal.
In such cases, the briber will have acted dishonestly and outrageously, which is
surely when punitive damages are most appropriate. Indeed, a person who induces
a tort or a breach of contract might be subject to a punitive award,125 so it seems
somewhat odd that a punitive award might never be made against a person who
induces a breach of fiduciary duty.

120 W Gummow, ‘Dishonest Assistance and Account of Profits’ (2015) 74 CLJ 405.
121 ibid 409.
122 See also Mahesan, considered in text to n 153.
123 cf Tinsley v Milligan [1994] 1 AC 340; although see now Patel v Mirza [2016] UKSC 42, [2016] 3

WLR 399. In Logicrose, the principal was able to keep the bribe monies regardless of whether he elected
to rescind or to affirm the transaction.
124 See text to nn 51–54.
125 This appears to have been assumed in East England Schools CIC v Palmer [2013] EWHC 4138

(QB), [2014] IRLR 191 [133]–[136] (Richard Salter QC); see also HL Weiss Forwarding Ltd v Omnus
[1976] 1 SCR 776, (1976) 63 DLR (3d) 654 (SCC); Texaco Inc v Pennzoil 729 SW 2d 768 (Tex 1988).
 Bribery 243

Finally, it is appropriate to emphasise that the briber does not hold any of his
profits on constructive trust in English law. Such a trust would be a remedial con-
structive trust, which has been clearly rejected in England and Wales.126 The lan-
guage of ‘constructive trustee’ to encompass the liability of the accessory does now
seem to be fading away,127 but references to the accessory incurring liability as if
he were a trustee do sometimes linger on.128 Such references should not be inter-
preted to mean that profits are held on trust, but rather that both loss-based and
gain-based claims can be pursued against an accessory in the same way as is pos-
sible against a wrongdoing trustee.

V. Combining Remedies

Combining claims and remedies is a notoriously tricky topic. It is very difficult to

be clear about when remedies can be awarded cumulatively or only as alternatives.
This is hard when there is only one defendant; the problems multiply when addi-
tional defendants are factored in. Thus, where there is both a briber and bribee the
law is far from easy. It is helpful first to start with the more straightforward case
of only one defendant, before tackling the more complicated scenarios involving
two defendants.

A. Situations Involving One Defendant: Tang Man Sit v Capacious

Investments Ltd

Perhaps the leading decision on election between remedies in equity is now the
decision of the Privy Council in Tang Man Sit v Capacious Investments Ltd.129 This
has been accepted as accurately stating English law.130 Essentially, the case con-
cerned a defendant who held houses on trust for the claimant. The defendant
made profits from renting out the houses, and the claimant suffered losses from
not being able to use the properties, and also from their diminution in value due
to their wrongful use and occupation of the houses; the houses had badly deterio-
rated due to over-occupation by tenants. The Privy Council held that an account
of the profits the trustee received from letting the houses was not cumulative with

126 See Lord Neuberger in FHR (n 1) [47]. See also Lord Neuberger, ‘The Remedial Constructive

Trust—Fact or Fiction’ (New Zealand Banking Services and Finance Law Association Conference,
Queenstown, 10 August 2014): www.supremecourt.uk/docs/speech-140810.pdf.
127 See n 67.
128 eg Novoship (n 74) [75].
129 Tang Man Sit v Capacious Investments Ltd [1996] 1 AC 514. The thrust of this judgment is con-

sistent with the earlier decision of the House of Lords in United Australia Ltd v Barclays Bank Ltd
[1941] AC 1.
130 eg Ramzan v Brookwide Ltd [2011] EWCA Civ 985, [2012] 1 All ER 903.
244 Paul S Davies

but rather an alternative to damages for loss of use and occupation. The claim-
ant had to make an election between the gain-based and loss-based remedies.
However, that election was held not to be made simply because the claimant had
accepted from the defendant some of the rents which had been paid. The claim-
ant’s right to elect between two measures is only lost once the claimant has all the
information which enables him meaningfully to make an election; this may occur
only after the process of discovery has finished.131
In giving the advice of the board, Lord Nicholls said:
Sometimes the two remedies are alternative and inconsistent. The classic example,
indeed, is (1) an account of profits made by a defendant in breach of his fiduciary obliga-
tions and (2) damages for the loss suffered by the plaintiff by reason of the same breach.
The former is measured by the wrongdoer’s gain, the latter by the injured party’s loss.
[…] Faced with alternative and inconsistent remedies a plaintiff must choose, or elect,
between them. He cannot have both.132
It should nevertheless be observed that the two remedies will not inevitably be
inconsistent. A principal may sue for an account of profits even when he suffers
no loss. So if the principal has also suffered loss, it might seem logical for him to
be able to sue for that loss as well as the fiduciary’s gains, which would have been
available in any event.133 Claiming one should not necessarily preclude the other.
As the Law Commission concluded:
[U]ltimately the law is requiring an ‘election’ where it is not really necessary; the two
remedies are not inevitably inconsistent. The ‘principled’ approach would be to recog-
nize this, to remove any mandatory requirement of election, to allow a plaintiff to claim
compensation and restitution, and for the court to resolve the problem of double recov-
ery at the stage of assessing quantum.134
The question should therefore really be focused upon whether awarding both
remedies would lead to ‘excessive remedial cumulations’.135 It may be that the
deterrent function which would be fulfilled by a gain-based remedy, for example,
would be adequately satisfied by a loss-based remedy, thereby eliminating the need
for a gain-based award. But in principle the two are not inconsistent; it is simply
a matter of determining whether the claimant would recover more than what is
required in order to fulfil the goals to which the relevant remedies are directed.
Indeed, Tettenborn has argued that a principal should be able to recover both
his loss and the agent’s gain:
[R]ecovery of the amount of a bribe from a dishonest agent is a recovery of a completely
‘different kind’ from recovery of the loss caused by his corrupt conduct. The former is
131 See also Island Records Ltd v Tring International Plc [1996] 1 WLR 1256 (Lightman J).
132 Tang Man Sit (n 129) 521.
133 P Birks, ‘Inconsistency Between Compensation and Restitution’ (1996) 112 LQR 375. See also

Salford v Lever [1891] 1 QB 168 (CA), considered in text to n 145.

134 Law Commission, Aggravated, Exemplary and Restitutionary Damages (n 54) para 3.71; cf

M Tilbury, Civil Remedies: Volume 1 (Sydney, Butterworths, 1990) para 20–27.

135 S Watterson, ‘Alternative and Cumulative Remedies: What is the Difference?’ (2003) 11 Restitu-

tion Law Review 7.

 Bribery 245

basically penal (or at least deterrent), the latter compensatory; the measure of the former
calculated on the bribe received, that of the latter on the loss suffered; the former is not
dependent on wrongful or reprehensible conduct, the latter requires a wrongful act on
the part of the defendant. In short, the measure the purpose and the prerequisites of such
recovery are completely different.136
Moreover, the view that a claimant must elect between a compensatory and resti-
tutionary measure, because every penny of gain given up by the defendant reduces
the claimant’s loss by a penny, and that every penny paid by the defendant as com-
pensation reduces his gain by a penny, might be doubted. Personal gain-based
claims are for value received, not value retained, so it generally does not matter
if the defendant still has the gain or not. That the defendant has had to pay some
money as compensation might therefore be considered not to affect the gain-
based claim.137
On balance, though, since the gain and loss both flow from the same wrong, it
seems natural to link the two.138 This might help to justify why Tang Man Sit sug-
gests that, as against the fiduciary (or briber), the principal should elect between
pursuing a gain-based remedy or a loss-based remedy. This is a blunt approach to
the issue, but it is generally satisfactory where only one defendant is concerned.139
If the gain is greater than the loss, then the gain-based remedy will serve the dual
functions of ensuring that the principal suffers no loss and deterring the breach
of duty, since the fiduciary would not be left with any profits. Similarly, if the
compensation claim is worth more than a gain-based claim, then the compensa-
tory measure will still deter the breach of duty (since the fiduciary is left with no
profits) and also satisfy the need to compensate the principal.
However, it should be observed that whilst this works satisfactorily where only
one defendant and one wrong is at issue, it is not so clear whether this is appropriate

136 A Tettenborn, ‘Bribery, Corruption and Restitution: The Strange Case of Mr Mahesan’ (1979) 95

LQR 68, 75. See also Salford (n 133), considered in text to n 145. In Stevens v Premium Real Estate Ltd
[2009] NZSC 15, [2009] 2 NZLR 384 the Supreme Court of New Zealand allowed a principal to recover
both its loss and the commission paid to the agent, but there the commission came from the principal
and not a briber, and was recoverable on the basis of total failure of consideration: see also P Watts,
‘Commercial Decisions in the Supreme Court of New Zealand: The Prominence of Agency Law in the
First Ten Years’ in A Stockley and M Littlewood (eds), The New Zealand Supreme Court: The First Ten
Years (Auckland, LexisNexis, 2015) 195–97.
137 Birks, ‘Inconsistency Between Compensation and Restitution’ (n 133) 378; Tettenborn insisted

that there was no public policy reason against double recovery, and noted that ‘[i]n the field of per-
sonal injury, for instance, “collateral” payments made to the plaintiff are not deducted from damages
received, even though as a matter of fact it is hard to escape the conclusion that the plaintiff ’s loss is
reduced as a result of them’: ibid.
138 Watterson (n 135). Moreover, where the claim is brought against the briber rather than bribee,

then it seems less satisfactory to sue the briber for both restitutionary and compensatory damages,
since the briber never undertook to act loyally as a fiduciary; as the Court of Appeal emphasised in
Novoship (n 74), the remedy of an account of profits is discretionary.
139 D Hayton, P Matthews and C Mitchell, Underhill and Hayton: Law of Trusts and Trustees, 18th

edn (London, LexisNexis, 2010) para 87.72: ‘In respect of a particular breach of duty, it is not possible
to approbate and to reprobate, to adopt and to disavow, to blow hot and to blow cold. Suing for profits
adopts the trustee’s conduct whilst claiming compensation rejects such conduct’.
246 Paul S Davies

where there are multiple claims and multiple defendants. For instance, it may be
that the fiduciary accepts a bribe of £1,000, and this causes loss to the principal of
£3,000. In that situation, it would seem that the principal could not recover any
more than £3,000, since that would be excessive (unless a punitive award were
made). An easy way for the principal to recover £3,000 would be to say that he
elects to recover for his loss. But the £3,000 total might also be reached by asking
for the full gain-based amount (£1,000) plus partial compensation (£2,000). This
alternative might be particularly significant when seeking to combine the claim
against the fiduciary with a claim against the accessory, and this issue must now
be analysed.

B. Situations Involving Two Defendants

There are conflicting streams of authority surrounding the question of whether

the principal can combine a loss-based claim against one defendant with a gain-
based claim against another. The first suggests that the remedies available against
the briber can be claimed in addition to those available against the recipient of the
bribe. The second suggests that a claimant must choose to recover either his gain
or his loss, and that ‘double recovery’ is not possible. This is a difficult issue, but on
balance it is suggested that the first line of authority should be preferred.
It is important to note that the focus of present concern is upon whether a
loss-based claim against one defendant can be combined with a gain-based claim
against another. Once the claimant has recovered his loss from one defendant,
he cannot then ask to recover his loss from the other. Instead, the loss might be
apportioned between the two defendants in an action for contribution,140 but this
does not affect the claimant.141 Moreover, the claimant may seek two independ-
ent accounts of profits from the briber and bribee. As the High Court of Australia
observed in Michael Wilson & Partners Ltd v Nicholls, ‘if an account of profits were
to be sought against both the defaulting fiduciary and a knowing assistant, the
two accounts would very likely differ’.142 The remedy of an account of profits is
personal to a particular defendant, and so should be assessed solely by reference to
the gains made by that defendant. After all, on one view an account of profits gives
a claimant something of a windfall,143 and once this is accepted there seems little
reason to limit the claimant to one windfall from one defendant rather than two
windfalls from two defendants. In addition, it has been held that the principal can
sue his agent for the value of the bribe, regardless of whether or not he chose to
rescind the transaction entered into with the briber.144 More serious problems are
encountered when seeking to combine claims for both gain and loss.

140 Considered in text to nn 165–70.

141 eg J Beatson and F Reynolds, ‘Bribery of Agent’ (1978) 94 LQR 344, 346.
142 Michael Wilson (n 100).
143 eg Halifax (n 10) 229 (Glidewell LJ).
144 Logicrose (n 56).
 Bribery 247

i. Cumulating Remedies
In order to understand why it is possible to argue that the remedies against the
briber and recipient of the bribe can be cumulated it is important to appreciate
that two wrongs are at issue. The liability of the recipient is for breach of fiduci-
ary duty. The briber, on the other hand, commits no breach of fiduciary duty. The
briber commits the distinct wrong of dishonestly assisting (or inducing) a breach
of fiduciary duty. Of course, dishonest assistance is parasitic upon there being a
primary breach of fiduciary duty, and to that extent the two wrongs are linked, but
the liability of the accessory is for his own wrong, not the wrong committed by the
fiduciary. This creates the conceptual space for the remedies available against the
two defendants to differ. It also explains why remedies may be sought in addition
to one another, rather than in the alternative.
In The Mayor, Alderman, and Burgesses of the Borough of Salford v Lever,145 the
Court of Appeal took the view that the claimants could recover the amount of the
bribe received from their agent, and also sue the briber for losses sustained as a
result of the agent’s disloyalty. The claimants were proprietors of gasworks, and the
defendant was a coal merchant who submitted tenders for the supply of coal. The
defendant had previously agreed to pay to the claimants’ manager a bribe of 1s per
ton, and consequently increased the prices in his tenders by 1s per ton. The claim-
ants’ manager advised the claimant to accept the defendant’s tender. The claim-
ants later discovered that their manager had committed various corrupt acts of a
similar nature, entered into an agreement with their manager that he would assist
them in bringing claims against various contractors, including the defendant, and
that he would guarantee that at least 10,000l would be recovered by depositing at
a bank securities worth 10,000l. The claimants subsequently sued the defendant,
and the defendant argued that it was a joint wrongdoer with the manager, and
that as a result the agreement between the claimants and the manager—together
with the deposit of the securities—amounted to a discharge of the manager and
thereby also a discharge of the defendant.
The Court of Appeal rejected the defendant’s argument. The defendant and the
manager were not jointly liable for a single wrong. The payer of the bribe and
recipient of the bribe are liable for two distinct wrongs, even if the liability of the
briber is dependent upon the primary wrong committed by the bribee.146 As Lord
Esher MR remarked, the fraud of the agent was ‘separate and distinct’ from that of
the briber.147 This led his Lordship to conclude that the briber ‘was bound to pay
back the extra price which he had received, and he could not absolve himself or
diminish the damages by reason of the principal having recovered from the agent

145 Salford (n 133).

146 It is suggested that this is generally true in all instances of accessory liability: see Davies (n 7)
83–85, 284–85.
147 Salford (n 133) 176.
248 Paul S Davies

the bribe which he had received’.148 Lindley LJ was similarly forthright, expressing
the view that
it does not lie in the mouth of the defendant, who is a wrongdoer, to say that his liability
to account to the corporation for the money received by him is to be determined by
the circumstance whether they have already recovered from [the manager] Hunter the
money received by him.149
In taking this approach, the court in Salford v Lever followed the earlier decision of
the Court of Appeal in Bagnall v Carlton.150 In that case, the principal brought an
action against the briber for rescission of the transaction entered into as a result of
the bribery, and a separate action against the agent for recovery of the bribe. The
action against the briber was compromised, on the basis that the briber paid a sum
of money to the principal, and the contract remained on foot. The Court was clear
that this did not affect the principal’s cause of action against his agent. James LJ
said that this claim ‘was, in truth, a totally distinct and separate’ claim from that
against the briber.151 As far as the agent was concerned, the settlement with the
briber was res inter alios acta.
Salford v Lever and Bagnall v Carlton are consistent decisions that suggest that
the principal is able to sue his agent for a gain-based remedy, regardless of any
claims brought against the briber. The inverse proposition is also true: a gain-
based claim can be brought against the briber, regardless of any remedy obtained
from the agent. As the headnote to Salford v Lever observes, ‘the principal has two
distinct and cumulative remedies’.152
However, these decisions of the English Court of Appeal were both doubted by
the Privy Council in Mahesan S/O Thambiah Appellant v Malaysia Government
Officers’ Co-Operative Housing Society Ltd.153 The Board emphasised that in Salford
the only issue was a claim against the briber, and not any claim against the agent;
there was no issue of double recovery against the briber.154 Similarly, in Bagnall
there was no question of double recovery against the agent.155 The Privy Council
was very concerned not to allow the principal double recovery against the same
defendant. Indeed, that was the issue in that case. The agent of a housing society
dishonestly agreed with Mahesan that the latter would purchase land which was
for sale at a low price, and then sell it to the housing society for a profit. As part of
the agreement, Mahesan paid a bribe of $122,000, but went on to make a net profit
of $443,000. The Malaysian Federal Court held that the housing society could sue
the agent both for the amount of the bribes, and also damages for the whole of the

148 ibid 177.

149 ibid 180.
150 Bagnall v Carlton (1877) LR 6 Ch D 371.
151 ibid 399 (James LJ), 404 (Baggallay LJ).
152 This headnote was recognised as accurate by Lord Diplock in Mahesan (n 49) 381.
153 Mahesan (n 49).
154 ibid 379.
155 ibid 380.
 Bribery 249

loss suffered. The Privy Council overturned that decision: as against the agent, the
principal had to elect between the loss-based and gain-based remedy.
Mahesan has been approved by the Privy Council in Tang Man Sit,156 and is
sometimes thought to represent a decisive departure from Salford v Lever.157 But
as a strict matter of precedent in English law that seems unlikely to be true,158 and
it is important to appreciate that the focus of the advice in Mahesan was really
upon double recovery against a single defendant. The Privy Council was critical of
Lever to the extent that no regard was taken of the fact that the loss sustained by
the claimant was reduced by the amount of the bribe recovered from the agent.159
Mahesan might therefore support the view that a claimant must make a general
election between a compensatory and restitutionary measure that applies to all its
claims. This seems unsatisfactory; it would be preferable to allow the principal to
make a separate election as against each defendant for each wrong.160
Lever and Mahesan might be reconciled on the basis that, in Lever, distinct
claims were pursued against two separate defendants, whereas in Mahesan, claims
for two different remedies were brought against the same defendant.161 But Mahe-
san was clearly critical of the reasoning in Lever. If a choice is to be made between
the two decisions, it is suggested that Lever is to be preferred, at least where there
are two defendants for two different wrongs; the remedies sought against the
briber and bribee need not be the same and can feasibly be accumulated. As long
as the claimant is not recovering twice over for the same loss, then it does not seem
objectionable for him to recover his loss from one defendant and strip the gains
made by another.
This approach raises difficult questions concerning precisely what the claimant
is recovering. Take the example, given above, where the fiduciary accepts a bribe of
£1,000, and this causes loss to the principal of £3,000. And then further imagine
that the briber makes a profit of £5,000 from the transaction entered into as a
result of the bribe. If the principal first sues the briber, then it would be sensible to
seek a gain-based remedy (£5,000 is obviously greater than £3,000). On one view,
this might mean that the principal is unable to sue the agent for anything, since
by recovering £5,000 the principal’s loss is wiped out and his grievance satisfied.
However, it is suggested that such an outcome would be unsatisfactory: at the very
least, the agent should not be left with a profit of £1,000. It would therefore seem

156 Tang Man Sit (n 129) 524–25.

157 Tucker, Le Poidevin and Brightwell (n 40) para 20-069; Watts and Reynolds (eds) (n 11) para
8-222; H Beale et al, Chitty on Contracts, 32nd edn (London, Sweet & Maxwell) para 31-132.
158 Although the status of Privy Council decisions in English law seems to be changing: Willers

v Joyce [2016] UKSC 44; [2016] 3 WLR 534.

159 Mahesan (n 49) 381.
160 cf Spring Form Inc v Toy Brokers Ltd [2002] FSR 276 (Ch D); criticised by L Bentley and C Mitchell,

‘Combining Money Awards for Patent Infringement’ (2003) 11 Restitution Law Review 79.
161 In Novoship (UK) Ltd v Mikhaylyuk [2012] EWHC 3586 (Comm) [93], Christopher Clarke J at

first instance said that a principal can seek an account of profits from a dishonest assister ‘as an alterna-
tive to equitable compensation’; this is consistent with the judgment of the Court of Appeal (n 78). See
also Shell International Trading & Shipping Co Ltd v Tikhonov [2010] EWHC 1399 (QB) [29] (Jack J);
Otkritie International Investment Management Ltd v Urumov [2014] EWHC 191 (Comm) [71] (Eder J).
250 Paul S Davies

that the principal can obtain an account of profits from the fiduciary as well. But
it is more difficult to determine whether the principal could choose to sue the
agent for his loss of £3,000 rather than the £1,000 profit made by the agent, having
already sued the briber.
In principle, this result seems possible. After all, if the agent was the only party
sued, he could not complain about having to pay £3,000 as compensation. And if
the briber was the only party sued, he could not complain about having to give
up £5,000 profits. There is a strong argument that neither should be in a better
position because there is an extra wrongdoer involved, and because the principal
only elects to recover a compensatory remedy against one defendant (not both)
there is no double recovery. If correct, the principal could recover £8,000 in total.
However, although this might not constitute ‘double recovery’, it could possibly
be thought to represent ‘excessive recovery’. In order to reduce the recoverable
amount, it might be preferable to consider that when the £5,000 was recovered
from the briber, then £3,000 of that was compensation for loss, and £2,000 restitu-
tion of gain. That would mean that in a subsequent action against the agent, the
principal could only recover the £1,000 profit made by the agent, since his loss has
already been accounted for. On this approach, the briber might consequently be
able to seek contribution from the fiduciary for the compensatory element of the
monetary award made.162
This reasoning might further explain why the principal can cumulate remedies
against the briber and bribee: one party should not be absolved from all liability
just because a claim has already been brought or settled against another. Indeed,
the logic of this analysis should apply equally to situations where the agent is sued
first, rather than the briber; it should not matter which claim is brought first.163
The major restriction concerns recovering twice over for the same loss, but the
gains made by each defendant are personal to them and can be disgorged.
If it is correct in the above example that the £5,000 required to be paid by the
briber can be broken down and analysed as £3,000 compensation and £2,000 res-
titution then this might indicate that the compensatory remedy takes some sort
of priority. Indeed, it is said that the remedy of an account of profits is discretion-
ary,164 and in situations where there are claims for both gains and losses it may be
that the restitutionary award is only necessary to the extent that a compensatory
remedy would fail adequately to deter the defendant from committing the wrong.
However, deciding how to apportion the money between gain and loss is not at all
easy, and it is suggested that a ‘compensation first’ approach would be too simplis-
tic. For instance, if the briber only made a profit of £500 rather than £5,000, then
the principal would choose to recover £3,000 from the briber, since this is the value
of the principal’s loss. But even this award should perhaps be considered to be £500
restitution of gain and £2,500 compensation for loss, so that the principal can next

162 See text to nn 165–70.

163 See Salford (n 133) 176 (Lord Esher MR), 180 (Lindley LJ), 181–82 (Lopes LJ).
164 Novoship (n 74) [119]–[120].
 Bribery 251

sue the agent for £1,500: a gain of £1,000 and loss of £500. Although this may look
like the principal is suing the same defendant for gain and loss—something which
is contrary to Tang Man Sit and Mahesan—here that should be acceptable because
the total amount awarded is less than a full compensatory award. This also indi-
cates that where the gain exceeds the loss, the monetary award should represent
first the full total of the loss and then a gain-based element, whereas where the loss
exceeds the gain, the sum awarded should represent first the gain-based element
and then compensation. In this way the principal is not prejudiced by bringing his
claim against one defendant before the other.
It is important to be clear about the compensatory element of any monetary
award because that might be significant for the purposes of any claim in contribu-
tion. The briber may seek contribution from the bribee regarding any compensa-
tion that has to be paid, and vice versa, but contribution should not be available
for the personal gain-based claim, since the disgorgement of gains is personal to
a particular defendant.165 One potential difficulty with a claim in contribution
was raised by Lindley LJ in Salford v Lever, when he said that ‘the present action
is, in reality though not in form, an action by one thief against another to recover
part of the plunder’.166 Where both the briber and bribee have committed a crimi-
nal offence then it may be that no claim in contribution should lie. However, the
courts have generally been prepared to contemplate contribution in proceedings
linked to fraud,167 and the courts have shown themselves increasingly willing to
consider disputes between parties tainted by illegality.168 It is perhaps likely that in
most instances—absent the most serious of bribes and frauds—the court would
entertain a claim for contribution.169
Admittedly, it is not at all clear how the court would apportion the liability to
pay compensation between the parties. Given the wide range of factual scenarios
that may arise, it is impossible to provide concrete guidance. Indeed, section 2(1)
of the Civil Liability (Contribution) Act 1978 provides that ‘the amount of the
contribution recoverable from any person shall be such as may be found by the
court to be just and equitable having regard to the extent of that person’s respon-
sibility for the damage in question’, which clearly gives the court much room for
manoeuvre. Harpum has suggested that an inducer might bear greater responsi-
bility for loss than the party who was induced, but this is only one factor to con-
sider. In the context of bribery, the lack of clarity in this area might not cause too
much concern: both the briber and bribee have acted reprehensibly, and perhaps
some lack of clarity is a price to be paid for their conduct.

165 cf Charter plc v City Index Ltd [2007] EWCA Civ 1382, [2008] Ch 313.
166 Salford (n 133) 180; cf Taylor v Bhail [1996] CLC 377.
167 eg Dubai Aluminium Co Ltd v Salaam [2002] UKHL 48, [2003] 2 AC 366.
168 eg Saunders v Edwards [1987] 1 WLR 1116 (CA); Townsend v Persistence Holdings [2008]

UKPC 15.
169 This conclusion seems to be reinforced by the recent decision of the Supreme Court concerning

the defence of illegality: Patel v Mirza [2016] UKSC 42, [2016] 3 WLR 399.
252 Paul S Davies

Finally, it should be noted that if punitive awards are possible, these should be
considered to be personal to each particular defendant, so the imposition or not of
a punitive award against one defendant should not affect the question of whether
a punitive remedy should be awarded against another defendant. However, it has
been suggested that in cases where there are multiple, joint defendants, then puni-
tive damages should not exceed the lowest sum that any of the defendants ought
to pay.170 This seems inappropriate in its own terms: joint and several liability for
punitive damages should not be accepted. Any punitive award should be assessed
separately for each wrong and each wrongdoer, taking into account each indi-
vidual defendant’s conduct.171 This would be important in the context of bribery,
since the briber and bribee are liable for distinct wrongs.

VI. Conclusion

Equitable claims and remedies will undoubtedly remain significant in combating

bribery. Understanding the key issues regarding equitable liability addressed in
this chapter is therefore important. It is crucial to understand that the briber and
recipient of the bribe commit distinct wrongs. As a result, the remedy against each
may differ, but those remedies may also be combined. Recognition of the fact that
two separate wrongs are at issue—one by the briber, one by the bribee—should
help to lead to greater clarity when considering how the available remedies should
be assessed.

170 Cassell & Co Ltd v Broome [1972] AC 1027 (HL) 1063 (Lord Hailsham LC), 1090 (Lord Reid);

Francis v Brown (1997) 30 HLR 143 (CA); Rowlands v Chief Constable of Merseyside Police [2006]
EWCA Civ 1773, [2007] 1 WLR 1065 [38].
171 See Law Commission, Aggravated, Exemplary and Restitutionary Damages (n 54) paras

5.186–5.208.
 11
Accessory Disloyalty: Comparative
Perspectives on Substantial
Assistance to Fiduciary Breach

DEBORAH A DEMOTT*

I. Introduction

Culpable participation in another actor’s wrongful conduct is an independent

basis for liability, that of an accessory. Much about this contingent form of liability
is open to dispute, including the operative definition of participation and other
elements requisite to establishing liability, as well as whether criteria for liability
should operate uniformly regardless of the field of substantive law that defines
the primary wrong. Moreover, a primary wrongdoer’s liability may be grounded
in a type or degree of culpability that does not match the accessory’s, leading to
outcomes that may seem asymmetrical. To illuminate these questions and their
consequences, this chapter draws contrasts between the law in the United States
and the United Kingdom, focusing on accessory liability when the primary wrong
constitutes a breach of fiduciary duty.
In both jurisdictions, accessory liability is controversial but for reasons distinc-
tive to each. In the United States, well-established general doctrine defines the ele-
ments requisite to establishing accessory liability, whether stemming from breach
of fiduciary duty or another wrongful act.1 What prompts controversy is how the
doctrine applies to categories of actors, most recently investment bankers who
advise boards of target companies in merger-and-acquisition (M&A) transactions.
When the Delaware Supreme Court upheld a $75.8 million judgment against an

* For comments on earlier drafts, I thank Jo Braithwaite, as well as Paul Davies, Richard Nolan and

the other participants at the conference.

1 Tortious interference with a contract has long been treated separately and is outside the scope

of this chapter: see American Law Institute, Restatement (Second) of Torts (St Paul, MN, American
Law Institute Publishers, 1979) §§ 766–67 (improper interference with contract; impropriety assessed
through seven-factor test).
254 Deborah A DeMott

investment bank as an accessory to a board’s breach of fiduciary duty,2 accessory

liability drew new interest from M&A lawyers and their clients. Although much
attention focused on the bank’s evident conflicts of interest in acting as an adviser
to the target board, the Court’s analysis of the bank’s liability additionally stressed
the elements requisite to liability, which in the United States sounds in tort. In
contrast, in the United Kingdom, accessory liability in connection with breach of
trust or fiduciary duty is controversial because the law is less clear, in part as a con-
sequence of significant shifts in doctrinal basics within a relatively short period
of time. Additionally, private law in the United Kingdom particularises accessory
liability, defining its requisites differently depending on the nature of the primary
wrong.
The chapter’s central claim is that in both jurisdictions, how the law categorises a
wrong matters for the elements of accessory liability. That is, breaching a ­fiduciary
duty and culpably assisting a fiduciary’s breach are both instances of wrongful
conduct. Characterising both as tortious, as does US law, has consequences for
the elements of accessory liability. In contrast, within UK law, equity houses both
wrongs, while the requisites for accessory liability in connection with a tort are
very different. The contrast suggests that fundamental taxonomic choices about
doctrinal organisation can be consequential for doctrinal substance. Additionally,
understood more functionally, accessory liability for breaches of fiduciary duty
can operate interstitially to complement and supplement liability based on the
primary wrong. Difficult though it would be to establish empirically, situating
accessory liability in tort may facilitate its interstitial operation.
Section II introduces the doctrinal basics for the United States that specify
when an actor’s liability is contingent on another actor’s breach of fiduciary duty.
Section II also introduces the significance of factors distinct from private law that
can shape the conduct of primary actors and those who advise or assist them,
including formal regulation and extralegal constraints. Against this background,
Section III draws contrasts with UK law, surveying doctrinal legacies as well as
more recent shifts in doctrine. Section IV focuses on recent applications of acces-
sory liability to investment bankers in high-stakes M&A litigation in Delaware
courts. Section V concludes. An introductory word about terminology is war-
ranted. Throughout, the chapter uses terminology that is consistent with the
independent nature of accessory liability. This status is undercut when accessory
liability is termed ‘secondary’,3 ‘derivative’, or ‘parasitic’.4 Thus, although the chap-
ter uses the term ‘primary’ wrong, its overall terminology presupposes that an
accessory’s liability, albeit contingent, stems from the accessory’s own wrongful

2 RBC Capital Markets LLC v Jervis 129 A 3d 816 (Del 2015).

3 PS Davies, Accessory Liability (Oxford, Hart Publishing, 2015) 54: ‘the language of “secondary liabil-
ity” might … suggest that an accessory is secondarily liable for the same wrong as the primary wrong-
doer’; J Dietrich and P Ridge, Accessories in Private Law (Cambridge, CUP, 2015) 7–8: ‘secondary liability’
is misleading if understood to mean an accessory must be liable for same wrong as a primary wrongdoer
and subject to the same remedies.
4 Davies, Accessory Liability (n 3) 54: ‘the parasitic nature of accessory liability is crucial’.
 Accessory Disloyalty 255

conduct. Additionally, in no way is accessory liability an instance of vicarious

liability, through which the law charges one actor with the legal consequences of
another actor’s conduct on the basis of the relationship between them.5 Accessory
liability is not an offshoot of agency doctrine but an instance of wrongful conduct
that directly subjects an actor to liability.

II. United States: Basic Doctrine

A. Accessory Liability and Breach of Fiduciary Duty

In the United States, private law has long situated within tort the liabilities that
stem from breach of fiduciary duty as well as accessory liability for participating
in a fiduciary’s breach. As stated in the Restatement (Second) of Torts, an actor who
stands ‘in a fiduciary relation with another is subject to liability to the other for
harm resulting from a breach of duty imposed by the relation’.6 The ­commentary
to the Restatement recognises that a tort claim for breach of fiduciary duty may
supplement other remedies available to a plaintiff that do not require showing
harm.7 The section’s remedial focus anchors the availability of compensatory
damages for breach of fiduciary duty but does not define the circumstances under
which such a duty arises.8 For this task other law—agency, trusts, corporate law
and the like—supplies the substance. Indeed, an action in tort is often not a plain-
tiff ’s first resort in response to a breach of fiduciary duty. In some settings, non-
tort remedies are exclusive, as when a trustee breaches a duty to a trust beneficiary.
While the standard remedy—an equitable surcharge to restore trust assets—can
resemble the monetary outcome of a tort claim, the procedure that leads to the
exclusive remedy is equitable in character.9 This eliminates the prospect of jury
trial, which is a procedural backdrop to US tort litigation that arguably shapes tort
doctrine in various ways.10

5 The quintessential example is the vicarious liability of an employer or other principal for torts

committed by a servant or other agent: see American Law Institute, Restatement (Third) of Agency
(St Paul, MN, American Law Institute Publishers, 2006) § 7.03(2). When the principal’s own fault
subjects the principal to liability, the liability is direct, not vicarious: see cmt b.
6 Restatement (Second) of Torts (n 1) § 874. The original Restatement of Torts contained a verbatim

formulation: see American Law Institute, Restatement of Torts (St Paul, MN, American Law Institute
Publishers, 1939) § 874.
7 ibid cmt b.
8 For further discussion, see DA DeMott, ‘Breach of Fiduciary Duty: On Justifiable Expectations of

Loyalty and their Consequences’ (2006) 48 Arizona Law Review 925, 925–34.
9 American Law Institute, Restatement (Third) of Trusts (St Paul, MN, American Law Institute

Publishers, 2012) § 95.

10 On the tort claim in settings without specialised remedies, see Kann v Kann, 690 A 2d 509

(Md 1997); Bank One, NA v Borse, 812 NE 2d 1021 (Ill App 2004). On the civil jury’s significance for
tort doctrine, see MD Green, ‘The Impact of the Civil Jury on American Tort Law’ (2011) 38 Pepperdine
Law Review 337, 340–45.
256 Deborah A DeMott

Likewise, tort law has long encompassed accessory liability for participation in
a fiduciary’s breach of duty. As detailed further in section IV, this is so even in
Delaware. Although law and equity have not been merged in Delaware, and equity
jurisdiction resides in a separate court (the Court of Chancery, in which there
are no jury trials), tort doctrine shapes significant aspects of fiduciary litigation.
Moreover, across US jurisdictions, with the exception of tortious interference with
contract,11 the authoritative formulation of accessory liability is trans-­substantive,
that is, applicable across the board regardless of the nature of the primary wrong.12
Some courts quote all or part of the relevant formulation in the Restatement
(Second) of Torts § 87613 as if it constituted primary statutory authority, not just
persuasive secondary authority:
For harm resulting to a third person from the tortious conduct of another, one is subject
to liability if he
(a) does a tortious act in concert with the other or pursuant to a common design with
him, or
(b) knows that the other’s conduct constitutes a breach of duty and gives substantial
assistance or encouragement to the other so to conduct himself, or
(c) gives substantial assistance to the other in accomplishing a tortious result and
his own conduct, separately considered, constitutes a breach of duty to the third
person.
Although this section is entitled ‘Persons Acting in Concert’, only subsection
(a) addresses conduct pursuant to a common design or otherwise in concert.14 On
equal footing is subsection (b), applicable to conduct that ‘gives substantial assis-
tance or encouragement’ to another actor whose conduct is known to constitute a
breach of duty. One who gives such assistance or encouragement is often termed
an aider and abettor to the primary wrongdoer. Aiding-and-abetting liability is

11 Restatement (Second) of Torts (n 1).

12 In federal criminal law, the statutory formulation is also trans-substantive. A general statute
provides that all actors who knowingly provide aid to persons committing federal crimes, with the
intent of facilitating the crime, themselves commit a crime: see Act of Mar 4, 1909, ch 321, 35 Stat 1088,
1152, codified as 18 United States Code § 2.
13 Restatement (Second) of Torts (n 1) § 876. The first Restatement of Torts did not include tor-

tious action in concert or pursuant to a common design, as stated in the Restatement (Second) of Torts
§ 876(a). Instead, the first subsection subjected to liability an actor who ‘orders or induces such [tor-
tious] conduct, knowing that the conditions under which the act is done or intending the consequences
which ensue’: Restatement (Second) of Torts (n 1) § 876(a). More contemporary formulations relocate
many instances of ‘ordering’ another’s tortious act to agency law: see Restatement (Third) of Agency
(n 5) § 7.03(1)(a) (principal subject to direct liability when agent acts with actual authority and agent’s
conduct is tortious). Inducing another actor’s tortious conduct constitutes intentional action by the
inducer: see American Law Institute, Restatement (Third) of Torts: Liability for Physical and Emotional
Harm (St Paul, MN, American Law Institute Publishers, 2010) § 1.
14 See Heckmann v Ahmanson, 168 Cal App 3d 119, 214 Cal Rptr 177 (1985): accessory defend-

ants who purchased shares in target corporation agreed with directors to drop challenge to defen-
sive acquisition in exchange for corporation’s commitment to repurchase shares at above-market
price, enabling target’s directors to retain control; if directors breached fiduciary duty to corporation,
accessory defendants subject to liability on the basis of action pursuant to common plan or design to
commit a tort.
 Accessory Disloyalty 257

premised, not on an agreement with the primary wrongdoer, but on giving assis-
tance, knowing of the primary wrongdoer’s breach of duty.15
Claims based on aiding-and-abetting theories of liability are often asserted
when the primary wrongdoer is insolvent and is alleged to have engaged in tor-
tious conduct in a commercial setting.16 A large majority of jurisdictions in the
United States accept the premise of subsection (b) in some context, most typically
when the primary wrong alleged is fraud or breach of fiduciary duty.17 However,
in 1994, the Supreme Court held in Central Bank of Denver, NA v First I­ nterstate
Bank of Denver, NA18 that the general prohibition on fraud in the Securities
Exchange Act of 1934 did not create or support a private cause of action based on
aiding and abetting. Following Central Bank, the private law liability of actors who
facilitate federal securities fraud must be premised on violations of state securi-
ties statutes or common law principles of accessory liability. Those principles, as
stated above, operate generally, whether the primary wrong is fraud or breach of
fiduciary duty.19
And now to return to questions of terminology. Section I characterised acces-
sory liability as ‘contingent’. Within tort doctrine, accessory liability is not a unique
instance of contingent liability. For example, an actor who makes a material mis-
representation of fact, opinion, or law acts fraudulently when the maker knows
that the representation is false.20 But the maker is not subject to liability for the
common law tort of fraud unless the misstatement is made to induce another to
act or refrain from acting.21 Additionally, when the maker intends to mislead, the
maker is not subject to liability unless the person to whom the misrepresenta-
tion was made suffers economic loss caused by justifiable reliance on the mis-
statement.22 Thus, one who knowingly makes a material misrepresentation of fact
may meaningfully be said to act fraudulently,23 but whether the actor is subject to

15 RC Mason, ‘Civil Liability for Aiding and Abetting’ (2006) 61 Business Lawyer 1135, 1138;

cf Heckmann (n 14) 183–84 (characterising acting pursuant to common design with primary wrongdo-
ers as instance of aiding and abetting liability).
16 Mason (n 15) 1135.
17 ibid 1139–40. Accessory liability claims against lawyers may be subject to the assertion of privilege

so long as the lawyer’s action was on the client’s behalf and within the scope of the attorney—client
relationship. See HS Bryans, ‘Claims Against Lawyers by Bankruptcy Trustees—A First Course on the
In Pari Delicto Doctrine’ (2011) 66 Business Lawyer 587, 594.
18 Central Bank of Denver, NA v First Interstate Bank of Denver, NA, 511 US 164 (1994).
19 Although most aiding-and-abetting claims concern fraud, ‘breaches of fiduciary duty are close

behind’. Mason (n 15) 1159.

20 Restatement (Third) of Torts: Liability for Economic Harm § 10 (Tentative Draft No 2, 2014).
21 ibid §§ 9, 11.
22 ibid. On the significance of reliance as a distinct element, see Rosen v Spanierman, 894 F 2d 28

(2d Cir 1990); JCP Goldberg, AJ Sebok and BC Zipursky, ‘The Place of Reliance in Fraud’ (2006)
48 Arizona Law Review 1001. A plaintiff may premise a claim on third-party reliance when misrepre-
sentations are and are intended to be communicated to the plaintiff through a third party and thereby
relied upon to the plaintiff ’s detriment: see Mid Atlantic Framing, LLC v Varish Construction, Inc, 117
F Supp 3d 145, 153 (SDNY 2015) (applying New York law).
23 This is especially so when through the misrepresentation some other wrong is perpetrated: see

Goldberg, Sebok and Zipursky (n 22) 1003. Relatedly, an actor who drives a car at high speed on a city
258 Deborah A DeMott

liability for the tort of common law fraud is contingent on the presence of addi-
tional elements that define the tort.24 Accessory liability, likewise, is contingent
on the presence of several distinct elements defining the wrong. One, of course, is
the occurrence of a primary wrong. Thus, private law accessory liability, while not
inchoate,25 is nonetheless contingent.

B. Elements of Claim

Based on the reported cases, accessory liability claims in connection with breaches
of fiduciary duty fall into clusters defined by typical types of defendants. Lawyers,
directors and officers, and financial intermediaries of various sorts are frequent
defendants, as they are in cases in which fraud constitutes the alleged primary
wrong. An accessory claim requires that the plaintiff allege: (1) the existence of
a fiduciary relationship; (2) a breach of duty by the fiduciary; (3) the accessory
defendant’s knowing participation in the breach; and (4) damages to the plaintiff
as a result of the accessory defendant’s participation and the fiduciary’s breach.
Thus, an aiding-and-abetting claim necessarily fails when no fiduciary relation-
ship exists26 or when no one has breached a fiduciary duty.27
Some cases restrict the availability of aiding-and-abetting claims to defend-
ants who are not themselves fiduciaries.28 But if an aiding-and-abetting claim
fails against a defendant on this basis, the defendant’s conduct might well
have breached a fiduciary duty it owed to the plaintiff. In Calesa Associates, LP
v ­American ­Capital, Ltd,29 a recent Delaware case, minority shareholders alleged

street may meaningfully be said to act negligently, although no one (or thing) is hit. For the classic
statement, see Palsgraf v Long Island R Co, 248 NY 339, 349 (1928) (Andrews J dissenting): ‘Should we
drive down Broadway at a reckless speed, we are negligent whether we strike an approaching car or
miss it by an inch’. Under contemporary tort law, if the driver of the approaching car or her passenger
suffers severe emotional harm resulting from the perception of imminent bodily harm from what
appears to be an imminent collision, the harm may be compensable; see also, Restatement (Third) of
Torts: Liability for Physical and Emotional Harm (n 13) § 47(a), cmt e, Illus 2, elaborating on ‘zone of
danger’ principle.
24 One might say the presence of these elements completes the tort. Alternatively, for Professor

Goldberg and his co-authors, the fact that reliance is essential to the definition of common law fraud
underscores the tort’s relational quality: Goldberg, Sebok and Zipursky (n 22) 1026.
25 Davies, Accessory Liability (n 3) 32. In criminal law, in contrast, inchoate liability is distinct from

accomplice liability: MS Moore, Causation and Responsibility (Oxford, OUP, 2009) 284.
26 For a recent example, see Rocky Mountain Exploration, Inc v Davis Graham & Stubbs LLP, 2016

WL 908640 (Colo Ct App 2016): a law firm represented an entity in connection with its purchase of
oil and gas interests owned by the plaintiff. The purchasing entity acted as an unidentified principal
represented by an agent, also represented by the law firm. The Court held that the agreements between
the plaintiff and unidentified principal’s agent did not create a fiduciary relationship. Thus, the plain-
tiff ’s aiding-and-abetting claim against the law firm ‘necessarily fails’; see also text to n 7.
27 See text to n 25 for a discussion of inchoate liability.
28 See Metro Life Insurance Co v Tremont Group Holdings, Inc, 2012 WL 6632681 *18 (Del Ch Dec 20,

2012); the Delaware Supreme Court’s own statements of the elements of the claim do not include this
qualification: see Malpiede v Towson, 780 A 2d 1075, 1098 (Del 2001).
29 Calesa Associates, LP v American Capital, Ltd, 2016 WL 770251 (Del Ch Feb 29, 2016).
 Accessory Disloyalty 259

breaches of fiduciary duty in connection with the corporation’s dilutive issuance

of new equity. The plaintiffs alleged that a substantial shareholder, a private equity
firm, coerced members of the corporation’s board of directors into authorising the
issuance, which redounded to the private equity firm’s distinct benefit. The court
held that the minority shareholders’ aiding-and-abetting claim against the private
equity firm would fail were the court to find that the firm was a controlling stock-
holder at the time of the transaction because that status would, under Delaware
law, itself impose fiduciary duties on the private equity firm owed to the other
shareholders.30 But, in the alternative, as a non-fiduciary, if the private equity firm
aided and abetted breaches of fiduciary duty committed by the company’s direc-
tors, it would be subject to liability.31 More generally, the alternative claims elabo-
rated in Calesa underscore the independent nature of accessory liability for breach
of fiduciary duty. Albeit dependent on the commission of a primary wrong, the
accessory claim does not duplicate its elements.32
Consistent with Restatement (Second) section 876(b), an accessory’s liability
requires that the accessory knows of the fiduciary’s breach of duty. Most courts
define ‘knowledge’ to mean actual knowledge of the fiduciary relationship and the
breach,33 rejecting a standard of constructive knowledge that charges a defend-
ant with such knowledge as would have been obtained through the exercise of
reasonable care.34 Conscious avoidance—suspecting a fact, realising its probabil-
ity and refraining from confirming the fact—implies a culpable state of mind, as
opposed to the imputed state of mind that follows constructive knowledge on a
negligence theory.35 Regardless of the applicable standard, the analytic focus is the
accessory’s knowledge of the fiduciary relationship and its breach. Participation in
the fiduciary’s breach with knowledge of the fiduciary relationship and the breach
establishes the accessory’s culpability. These requisites have consequences for how
the tort is characterised for some purposes under US law, including claims for
contribution, discussed in section IV.
Conduct through which an actor participates in a primary wrong is susceptible
to further parsing. ‘Substantial assistance or encouragement’, as in the Restatement
formulation, may imply that accessory liability cannot stem from conduct that

30 The criterion is whether the shareholder owns a majority interest in the corporation or exercises

control over its business affairs: Kahn v Lynch Communications Systems, Inc, 638 A 2d 1110, 1113 (Del
1994). The Delaware corporation statute does not include oppression remedies. Delaware’s functional
alternative to a statutory oppression remedy to protect minority equity investors is the imposition of
fiduciary duties on controlling shareholders.
31 See also Carsonaro v Bloodhound Technologies, Inc, 65 A 3d 618, 658 (Del Ch 2013).
32 For a rare example to the contrary that characterises aiding-and-abetting liability as superfluous

and duplicative of elements of primary wrong, see Sompo Japan Insurance, Inc v Deloitte & Touche, LLP,
2005 WL 1412741 (NC Superior Ct June 10, 2005), discussed in Mason (n 15) 1163.
33 Mason (n 15) 1160.
34 Invest Almaz v Temple Inland Forest Products Corp, 243 F 3d 57, 83 (1st Cir 2001).
35 Fraternity Fund Ltd v Beacon Hill Asset Management, LLC, 479 F Supp 2d 349, 368 (SDNY 2007).

Some Delaware cases formulate the standard to encompass constructive knowledge as an alternative
to actual knowledge but also require that the aider and abettor have acted with scienter: see section IV.
260 Deborah A DeMott

induces or otherwise initiates another actor’s breach of duty. In Christopher Kutz’s

terminology, accessories are by definition never the exclusive authors of harm
to the plaintiff; instead accessories would always be inclusive authors of harm-
producing actions in which they culpably participate.36 But knowingly to induce
a breach of fiduciary duty is a significant basis for accessory liability, as is evident
in section IV; one might view inducement as a form of ‘encouragement’ of an
initiatory, not a tag-along sort, constituting both exclusive and inclusive author-
ship. However styled, an accessory’s participation in a fiduciary’s breach of duty
is not a basis for liability unless it is connected to harm suffered by the plaintiff.
The Restatement formulation requires that the assistance or encouragement be
‘substantial’, that is, ‘a substantial factor in causing the resulting tort’, which
excludes minimal or slight conduct.37
More generally, as prior scholarship recognises, conventional but-for tests of
causal connection do not work well when a series of multiple autonomous actors
each engages in distinct conduct that results in an indivisible injury to a third
party.38 Positing, as did HLA Hart and Tony Honoré, a special form of causality
for interpersonal situations, does not generate a causally-framed test for liability.39
An alternative, championed by Michael Moore, recognises that harms may have
co-causes and treats causation itself as a ‘primitive’, a ‘factor’ with a scalar quality
that does not operate in binary fashion.40 As Paul Davies proposes, it may be best
to focus on participatory linkages through which an actor made more than a mini-
mal contribution to the primary wrong.41 More descriptively, one might acknowl-
edge that situations in which multiple autonomous actors choose in various ways
to contribute to a primary wrong are not the prototypes assumed by conventional
formulations of causation.
Accessory liability requires culpable participation in the primary wrongdoer’s
breach of fiduciary duty. This requisite calls into question whether accessory
liability might be premised on failure to act when the accessory knows that the
primary culprit is engaged in wrongdoing but remains silent, resulting in loss for
the plaintiff. Framing accessory liability within tort law makes salient a bedrock
principle of common law tort: the absence of a duty to rescue when an actor has
not created or increased the risk of harm and is outside the ambit of relationships
in which such a duty is implied.42 Undoubtedly, typical illustrations of the bite of
the no-duty-to-rescue principle involve actors who know that they could easily
save others from physical harm at no jeopardy to themselves. But the principle

36 C Kutz, Complicity (Cambridge, CUP, 2000) 105–06.

37 Restatement (Second) of Torts (n 1) § 876, cmt d.
38 Davies, Accessory Liability (n 3) 33–40; Kutz (n 36) 169–70.
39 Kutz (n 36) 170; see also HLA Hart and T Honoré, Causation in the Law, 2nd edn (Oxford,

Clarendon Press, 1985) 388.

40 Moore (n 25) 300.
41 Restatement (Third) of Torts (n 13) § 26; Davies, Accessory Liability (n 3) 40.
42 Restatement (Third) of Torts: Liability for Physical and Emotional Harm (n 13) § 40, cmt f.
 Accessory Disloyalty 261

operates more generally as a justification for non-intervention, just as duty serves

as a central organising concept across tort law.43
Thus, banks and comparable institutions generally owe non-customers no
duty to protect them from fraud perpetrated by bank customers.44 However, once
a bank has ‘clear evidence’ that trust funds on deposit in a fiduciary account have
been misappropriated, the bank breaches its duty to safeguard the funds if it fails
to investigate.45 But a bank owes a duty to safeguard trust funds on deposit with
it. The bank breaches its implied duty to prevent diversion through a passive
failure to make reasonable enquiry once aware that improprieties may be occur-
ring. In contrast, when a bank owes no duty to a plaintiff, the bank is not subject
to liability when it fails to inform the plaintiff that a customer may be engaged
in fraud.46
One practical generalisation is that substantial assistance may be easier to estab-
lish when the primary wrong is breach of fiduciary duty than when it is fraud. This
may be due to ‘the higher level of duty owed by the fiduciary’, which may make
more apparent the connection between the accessory’s conduct and the harm to
the plaintiff.47 Alternatively, an accessory who knows that the primary wrongdoer
is tied to the plaintiff by a fiduciary relationship may seem more readily to join
in as a co-author of harm to the plaintiff than accessories who become aware of
another actor’s fraud.

C. Regulation and Environmental Circumstances

Private law doctrines do not operate in isolation as constraints against wrong-

ful conduct, including breaches of fiduciary duty and conduct that knowingly
assists such breaches. In some settings, the general law may operate to supplement
requirements imposed by statutes and regulation. For example, broker-dealer
firms that operate as clearing firms provide essential clearing services for accounts,
including trading, settlement and delivery of securities. Clearing firms typically
have no customer contact for accounts for which they perform these services. But
regulation requires that clearing firms monitor accounts for illegal activity, includ-
ing violations of trading and anti-money laundering rules.48 Regulation positions
such firms—which are few in number—as gatekeepers on behalf of investors and
market integrity more broadly, distinct from the firms’ relationships with their
direct clients. Likewise, when a firm operates as a prime broker and learns that

43 For the same principle, see Fitzalan-Howard v Hibbert [2009] EWHC 2855 [44].
44 MLSMK Investment Co v JP Morgan Chase & Co, 431 Fed Appx 17, 20 (2d Cir 2011); T Frankel,
The Ponzi Scheme Puzzle (New York, OUP, 2012) 180.
45 Lerner v Fleet Bank, NA, 459 F 3d 273, 295 (2d Cir 2006).
46 In re Sharp International Corp, 403 F 3d 43, 52 n 2 (2d Cir 2005).
47 Mason (n 15) 1163–64.
48 Re Goldman Sachs Execution & Clearing, LP f/k/a Spear, Leeds & Kellogg LP, Securities Exchange

Act Release No 55,465 (14 March 2007).

262 Deborah A DeMott

a hedge fund client has over-valued investment portfolios, the prime broker’s
regulatory responsibilities include reporting the situation to the Securities and
Exchange Commission (SEC).49 In contrast, investment banks that serve as M&A
advisers—the focus of section IV—are not positioned by regulation as gatekeep-
ers comparable to the financial institutions discussed above. Nor does industry
self-regulation define responsibilities for M&A advisers or sanction departures
from defined responsibilities,50 comparable to the ethical rules and professional
disciplinary systems applicable to lawyers.51 As a consequence, the significance
of general legal doctrine and its enforcement may be amplified when specialised
regulation does not constrain harmful conduct.52
Beyond the law and formal regulation as well as structured self-regulation,
wrongful conduct may be constrained by an actor’s concern to establish and main-
tain a good reputation. It is open to question whether reputational constraints
now operate more weakly than in the past in some environments, including those
populated by financial firms and professional services firms.53 However, intense
journalistic scrutiny may enhance what might otherwise seem weak incentives to
avoid problematic conduct, in this context conduct that enters or closely skirts the
boundaries of accessory liability. As section IV explores in greater detail, conflicted
investment banks that serve as M&A advisers are potentially subject to accessory
liability through conduct that places directors in jeopardy of breaching their fidu-
ciary duties. These widely reported risks triggered quantifiable changes in how
target boards choose their advisers. That many more targets now choose advisers
free of potentially conflicting lines of business suggests the power of accessory
liability to amplify the force of other constraints on conduct by inducing greater
care in selecting an adviser.54
The advice lawyers give their clients can also strengthen incentives to steer
away from legally problematic conduct. When legal doctrine is unclear or the
consequences of breach uncertain, counsel may be less resolute or categorical in

49 For an example, see Fraternity Fund Ltd, 479 F Supp 2d, 357 (prime broker precipitated collapse

of fraudulent investment scheme when it refused to provide additional financing and reported over-
valued investment portfolios to the SEC).
50 See generally AF Tuch, ‘The Self-Regulation of Investment Bankers’ (2014) 83 George Washington

Law Review 101.

51 On debates concerning the adequacy of constraints on lawyers’ conduct in financial transac-

tions, see D Howarth, Law as Engineering (Cheltenham, Edward Elgar, 2013) 97–140; D Kershaw and
R Moorhead, ‘Consequential Responsibility for Client Wrongs: Lehman Brothers and the Regulation of
the Legal Profession’ (2013) 76 MLR 26.
52 Admittedly, the interplay between courts and legislatures in this connection is complex, requiring

close attention to the prototypical actor assumed by general legal principles: see S Gardner, ‘Knowing
Assistance and Knowing Receipt: Taking Stock’ (1996) 112 LQR 56, 78–84 (distinguishing the situation
of ‘ordinary traders’ from professional agents).
53 See J Macey, The Death of Corporate Reputation (Upper Saddle River, NJ, FT Press, 2013).
54 L Hoffman, ‘Firms Ask: Are Our Bankers Conflicted’ Wall Street Journal (3 March 2016) (report-

ing rise to 19% of M&A advisory revenue earned in 2015 by ‘boutique’ advisory firms that specialise
in advisory services, up from 8% in 2008); for a broader account, see WW Bratton and ML Wachter,
‘Bankers and Chancellors’ (2014) 93 Texas Law Review 1.
 Accessory Disloyalty 263

a­ dvising clients. The reported reaction of English counsel is instructive. During a

period recounted in section III, accessory liability for breach of trust turned on
whether the accessory acted with a dishonest state of mind, not just on whether
the accessory was dishonest (or acted with knowledge of the trustee’s breach of
duty, as US law formulates the counterpart of this element of liability). The Law
Lord who dissented from this turn in doctrine explained extrajudicially:
As the majority left it, the law was incoherent. The profession recognized this, and many
members of the Bar whose opinions I respected told me that they were dismayed by the
decision which they considered made it difficult to make directors and other liable when
they behaved dishonestly.55
Later developments arguably shifted the law to conform to the dissenter’s view, as
discussed in section III. For present purposes, the point is that how lawyers under-
stand legal doctrine and how they advise their clients are crucial to mechanisms of
translation and transmission.56

III. The United Kingdom

A. Doctrinal Structure

To some readers, the generality of so much private law accessory doctrine in the
United States may come as a surprise. For in the United Kingdom, just as tort and
equity occupy distinct precincts in the overall taxonomy of private law, accessory
liability is not generalised, and the substantive requisites for accessory liability dif-
fer based on the nature of the primary wrong. It may seem counterintuitive that
generality and relative doctrinal certainty characterise the United States, a juris-
diction organised with multiple sovereign states that is also known for relatively
high levels of litigation between private parties and jury trials in civil cases.
Two institutional factors concerning the United States are necessary preludes
to further discussion of the United Kingdom. First, Delaware’s Court of Chancery
is the most prominent court in articulating and applying doctrines that define
accessory liability for breach of fiduciary duty, at least in high-profile disputes
grounded in corporate law. But as the Court’s name suggests, it is—distinctively
if not uniquely in the United States—a court of equity. As section IV elaborates,
Delaware situates accessory liability in tort; indeed the Court characterises breach

55 P Millett, As In Memory Long (London, Wildy, Simmonds & Hill Publishing, 2015) 176–77.
56 Such anecdotes suggest that formally structured dialogues between court and counsel do not
exhaust the possibilities for exchanges that may prove influential. On forms of judicial dialogue spe-
cific to the House of Lords and the UK Supreme Court, see A Paterson, Final Judgment (Oxford, Hart
Publishing, 2013).
264 Deborah A DeMott

of fiduciary duty as an ‘equitable tort’57 and readily accommodates accessory lia-

bility within a framework structured within tort doctrine. Second, although the
United States is a large and remarkably varied country in which basic areas of
private law are within the province of each state, centripetal or centralising forces
operate as well. Undoubtedly, unlike Canada, the United States has no national
level corporations legislation, but in practice many publicly held corporations are
incorporated in Delaware. De facto Delaware’s corporation statute, plus the Court
of Chancery and Supreme Court, all operate on a national plane. Additionally,
over the twentieth century, courts in some states influenced sister states’ courts,
while the Restatements served to make decisional law more uniform, albeit not
evenly so on all points within private law.58

B. Legacies and Evolution

i. Tort
As Paul Davies recounts the situation, accessory liability in tort, now subsumed
into ‘joint tortfeasance’, is somewhat obscure and dominated by concepts of
conspiracy.59 No doubt history beyond the scope of this chapter explains much.
In general, the conduct requisite to accessory liability consists of combination,
authorisation or procurement.60 Absent a common design, an actor who furnishes
substantial assistance to another actor’s tort is not subject to accessory liability.61
When fraud is the primary or underlying wrong, the reasoning in prominent
judgments excludes the possibility of imposing liability on an actor who assisted
the primary fraudfeasor but was not party to a common design.62
One potential justification for defining accessory liability so narrowly is fear lest
the requisite that assistance be ‘knowing’ be weakened by pressures to demand less

57 In re Rural/Metro Corp Stockholders Litigation, 88 A 3d 54, 98 (Del Ch 2014), affd sub nom RBC

Capital (n 2) (‘a breach of fiduciary duty is an equitable tort’) (Rural/Metro I). As the author of Rural/
Metro I wrote extrajudicially, ‘a breach of fiduciary duty is in fact a tort, although a unique species
historically called an “equitable tort”’): JT Laster and MD Morris, ‘Breaches of Fiduciary Duty and the
Delaware Uniform Contribution Act’ (2010) Delaware Law Review 71, 71; UK courts apply the term
‘equitable tort’ to characterise dishonest assistance (eg, bribery) to induce or assist a breach of fiduciary
duty: see P Davies, ‘Gain-Based Remedies for Dishonest Assistance’ (2015) 131 LQR 173, 176.
58 Likewise, the Uniform Commercial Code was a major force towards greater uniformity in

contract law, even for portions not encompassed by the Code. See EA Farnsworth, Contracts, 4th edn
(New York, Aspen, 2004) 40, 298–99, 596.
59 Davies, Accessory Liability (n 3) 178–79. The UK Supreme Court expressly adopted the

terminology of accessory liability in tort in Fish & Fish Ltd v Sea Shepherd [2015] AC 1229.
60 ibid 188, adopting formulation in H Carty, ‘Joint Tortfeasance and Assistance Liability’ (1999) 19

Legal Studies 489.

61 Davies, Accessory Liability (n 3) 195; see also PS Davies, ‘Accessory Liability in Tort’ (2016) 132

LQR 15. In general, accessory liability requires that an actor has assisted the commission of an act by
the primary wrongdoer, that the assistance be pursuant to a common design, and that the primary
wrongdoer’s act constitutes a tort as against the claimant; Fish & Fish (n 59) 1248.
62 Davies, Accessory Liability (n 3) 198, discussing the judgment in Credit Bank Lyonnais NV v Export

Credits Guarantee Department [2000] AC 486 (HL).

 Accessory Disloyalty 265

than actual knowledge of the primary wrong.63 The US experience suggests that
judicial vigilance is necessary but achievable. That civil juries significantly feature
in US tort cases (but not in the Delaware Court of Chancery) may help explain
this stringency. Additionally, if the policy justifications for a narrow definition of
accessory liability presuppose, as a prototypical tort, fraud or copyright infringe-
ment, the risk is that accessories to torts commonly viewed as working more fun-
damental harms—battery, for example—will be under-deterred and their victims
under-acknowledged and under-compensated outside the ambit of criminal law
and its administration.64

ii. Equity
A crucial starting point is the nature of duties characterised as ‘fiduciary’.
Famously, Millett LJ said in Bristol & West Building Society v Mothew that ‘[t]he
expression “fiduciary duty” is properly confined to those duties which are peculiar
to fiduciaries and the breach of which attracts legal consequences differing from
those consequent upon the breach of other duties’.65 As becomes evident in section
IV, US terminology is not as sparing in using the term ‘fiduciary’.66 In particular,
corporate directors who breach their duties of care, even in the absence of a con-
flicting interest, are viewed as having breached a fiduciary duty. But for present
purposes this may not matter much because had US law confined the label of
‘fiduciary’ breach to directors’ loyalty-related transgressions, directors’ breaches of
the duty of care would (one thinks) have been litigated as torts, and claims against
accessories would have proceeded within the generalised framework elaborated in
section II.67
Overall, in equity, accessory liability developed somewhat haltingly, from a
long-lived legacy of restrictive definition towards relatively greater clarity and
coherence.68 In particular, the definition of the primary wrong requisite for
accessory liability in connection with breach of fiduciary duty expanded. None-
theless, the constitutive elements of accessory culpability may retain an overhang
of precedent requiring not only that an accessory has acted dishonestly but that

63 ibid 220.
64 ibid 220 (criticising the implication that an expectation of loyalty from a fiduciary should rank
higher than ‘the right to bodily integrity and freedom’).
65 Bristol & West Building Society v Mothew [1998] Ch 1 (CA) 16, [1997] 2 WLR 436, 448.
66 But some bodies of doctrine do not characterise as ‘fiduciary’ all duties that an actor might owe.

Agency law, for example, differentiates an agent’s duties of performance from duties of loyalty. See
Restatement (Third) of Agency (n 5) Topic 1 (Agent’s Duties to Principal).
67 English law on the applicable framework is not clear. See Davies, Accessory Liability (n 3) 100.
68 Davies, Accessory Liability (n 3) 88. For a detailed account, see EP Ellinger, E Lomnicka and CVM

Hare, Ellinger’s Modern Banking Law, 5th edn (Oxford, OUP, 2011) ch 7, pt 5. See also 289, as applied
to banks; regulation may have substantially overtaken the potential risk of accessory liability under
English law: ‘a bank that has been used for the diversion of trust assets or as part of some other fraudu-
lent or criminal scheme may well have other more pressing concerns’.
266 Deborah A DeMott

the accessory has been self-aware of acting dishonestly, a requisite focused on a

defendant’s conscience that owes much to criminal law.69
One legacy of the nineteenth-century precedent, Barnes v Addy,70 was a
two-limbed specification of accessory conduct derived from a case in which the
accessory defendants acted as solicitors for an initial trustee and his (bankrupt)
successor, who misappropriated trust property. The initial trustee’s solicitor
advised him of the risk that the successor might misappropriate trust property,
but the initial trustee thought this unlikely. The successor trustee’s solicitor,
­acting on his client’s instructions, prepared the deeds requisite for the transfer.
As Lord Selborne formulated the bases for liability, non-trustees could be sub-
ject to l­iability stemming from a trustee’s breach when ‘they are found making
themselves ­trustees de son tort’, or ‘actually participating in any fraudulent conduct
of the trustee to the injury of the cestui que trust’.71 Separately, a non-trustee’s
receipt of trust property may subject the receiver to liability in restitution.72 More
­generally, wrote Lord Selborne,
strangers are not to be made constructive trustees merely because they act as the agents
of trustees in transactions within their legal powers, transactions, perhaps of which a
Court of Equity may disapprove … unless they assist with knowledge in a dishonest and
fraudulent design on the part of the trustees.73
Thus, unless the accessory received trust property through the trustee’s breach
of trust, this precedent limited accessory liability to instances of fraudulent and
dishonest misconduct by trustees in which the accessory ‘actually’ participated.
As Paul Davies suggests, the narrowness with which Barnes v Addy formulated
requisites for accessory liability may reflect its time, in which trustees’ liability
encompassed ‘innocent incompetence’.74 Anachronistic though the compari-
son might seem, ‘innocent incompetence’ characterises some breaches of direc-
tors’ duties under Delaware corporate law, as section IV explains. Additionally,
it is worth noting that the facts of Barnes v Addy are unpromising as a basis for
liability under US law, based on the Restatement formulation. The solicitors lacked
­anything approaching actual knowledge that the successor trustee planned to mis-
appropriate trust property. And how did the solicitors ‘encourage’ the successor
trustee’s breach? Certainly, the breach was preceded by advice to the initial trustee
from his solicitor and by drafting done by the successor trustee’s solicitor, but
these actions fall far short of culpability.

69 Davies, Accessory Liability (n 3) 119. Whether dishonesty for civil law purposes should be defined

differently from criminal law is open to dispute. See Starglade Properties Ltd v Nash [2010] EWCA Civ
1314 [42]–[44] (Lord Leveson).
70 Barnes v Addy (1874) LR 9 Ch App 244 (CA). On the longevity of the two-limbed doctrine and

the cases preceding Barnes v Addy, see W Gummow, ‘Knowing Assistance’ (2013) 87 Australian Law
Journal 311.
71 Barnes (n 70) 251–52.
72 Unless the recipient has a defence, such as change of position.
73 Barnes (n 70) 251–52.
74 Davies, Accessory Liability (n 3) 94.
 Accessory Disloyalty 267

Over one hundred years later (1995), the Privy Council broadened the scope of
accessory liability by rejecting the requirement that the primary wrong constitutes
(as it did in Barnes v Addy) dishonesty.75 In Royal Brunei Airlines Sdn Bhd v Tan,76
an insolvent travel company defaulted on its debt to an airline. The airline sued
the company’s principal director and shareholder. Delivered by Lord Nicholls,
the judgment jettisoned the requirement that the trustee’s breach was dishon-
est and fraudulent; what mattered was the accessory’s fault and its character, not
the character of the trustee’s fault. Indeed, explained Lord Nicholls, ‘the case for
liability of the dishonest [accessory] seems stronger when the trustee is innocent,
because in such a case the [accessory] alone was dishonest and that was the cause
of the subsequent misappropriation of trust property’.77 Put differently, were the
accessory honest, unless the accessory made an honest mistake, most likely the
breach of trust would not have occurred. To define ‘dishonesty’, Tan adopted an
objective standard that expected an individual ‘to attain the standard which would
be observed by an honest person placed in those circumstances’.78 An honest
­person—a legal construction, like the reasonable person in tort law79—has regard
to known circumstances, which may dictate what course of action to take, includ-
ing asking questions and possibly declining to become involved.80 Premised as it
is on the accessory’s knowledge, liability under Tan appears to follow consistently
with US doctrine, albeit in equity not tort.
Seven years later (2002), the force and clarity of Tan were undercut by the
House of Lords in Twinsectra Ltd v Yardley.81 Four of five judgments rejected Tan’s
objective standard grounded in the accessory defendant’s knowledge for a more
subjective and inward-looking test; as Lord Hutton wrote:
[I]it would be less than just for the law to permit a finding that a defendant had been
‘dishonest’ in assisting a breach of trust where he knew of the facts which created the
trust and its breach but had not been aware that what he was doing would be regarded by
honest men as being dishonest.82
The accessory defendant in Twinsectra was a solicitor acting for a property entre-
preneur. Acting on his client’s instructions, he paid over borrowed money to his
client knowing that it would not be used to acquire property although the s­ olicitor
knew that the money had been received from the lender with an undertaking

75 For Australia, the scope of accessory liability retains the formulation in Barnes v Addy: see Farah

Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22 [161].

76 Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378.
77 ibid 385.
78 ibid 390.
79 Of course, as legal standards, honesty and reasonableness make different demands on the actors

subject to them.
80 Royal Brunei (n 76) 390–91.
81 Twinsectra Ltd v Yardley [2002] 2 AC 164. And to some observers, Tan itself ‘left room for doubt

and uncertainly as to the precise test’ for dishonesty: Ellinger, Lomnicka and Hare (n 68) 282.
82 Twinsectra (n 81) 174 (Lord Hutton) (emphasis added).
268 Deborah A DeMott

that it would be retained until applied to acquire property.83 Cross-examined at

trial about his state of mind, the solicitor testified he ‘merely’ followed his client’s
instructions and had no reason to disbelieve his client’s statement that the money
would be used to buy property. But the client used the money for other purposes
and failed to repay the loan. In the assessment of Lord Millett, the dissenter, the
solicitor was unaware of no relevant fact. Although he was not wilfully blind to the
facts, he did close his eyes to their implications, ‘that is to say the impropriety of
putting the money at [his client’s] disposal’.84
As Lord Millett wrote extrajudicially, Twinsectra weakened the force of the
law and thus of the advice lawyers could give their clients, premised as accessory
­liability was on a defendant’s own subjective appreciation of wrongfulness.85 In
fairness to the majority, a standard of culpability geared solely to an ­accessory
defendant’s knowledge catapults the court into a fraught body of English law defin-
ing ­‘knowledge’, from which the majority sought to avert (as did Lord Nicholls
in Tan). But the Twinsectra majority did not explain why the relevant standard
should instead protect accessory defendants who—unlike the solicitor for the
successor trustee in Barnes v Addy—know all relevant facts, fail to appreciate their
consequences and act to facilitate breach of fiduciary duty.
Two years later (2004), the Privy Council appears to have agreed with Lord
Nicholls and Lord Millett. In Barlow Clowes International Ltd v Hamilton,86 the
principal directors of a company providing offshore financial services facilitated
the operation of a fraudulent investment scheme by transferring investors’ funds
as directed by the scheme’s organiser into transactions with no apparent com-
mercial purpose. And one director, fully aware of the nature of the organiser’s
business and how it sourced liquid funds, came to know enough to suspect misap-
propriation but nonetheless authorised transfers of investors’ funds into accounts
controlled by the organiser and his confederates. The Barlow Clowes judgment
does not deal straightforwardly with Twinsectra and its implications. Instead,
acknowledging ‘an element of ambiguity’ susceptible of being read to encompass
the defendant’s subjective views of honesty, Barlow Clowes claims to clarify that
what was required was ‘only that his knowledge of the transaction had to be such
as to render his participation contrary to normally accepted standards of honest
conduct’.87 Given the facts, it is remarkable that the defendant’s argument had any
prospect of success, for unlike the other accessory defendants in this sequence of
cases, the accessory knew his client was engaged in major criminal misconduct via
out-and-out misappropriation of investors’ money.

83 ibid 168 (Lord Hoffman).

84 ibid 203 (Lord Millett).
85 Millett (n 55).
86 Barlow Clowes International Ltd v Hamilton [2005] UKPC 37, [2006] 1 WLR 1476.
87 ibid 1481.
 Accessory Disloyalty 269

IV. Investment Bankers as Accessories

Although the general structure of accessory liability is well established in the

United States, its application to categories of actors can be controversial, most
recently among investment banks and the lawyers who advise them. This section
opens with a brief description of salient features of Delaware corporate law that
shape liability in the M&A context. The section next reviews recent applications of
accessory doctrine to investment bankers, focusing mostly on the best developed
and most recent case, and then explores implications of accessory liability in this
setting.

A. Duties, Liabilities and Roles

In contrast to the sparing definition of ‘fiduciary’ that typifies UK doctrine, Dela-

ware law characterises directors’ fiduciary duties as multifaceted, consisting of a
duty of loyalty (which incorporates a duty of good faith) and a duty of care.88 Cases
fleshing out distinctive content for the duty of good faith cast it as a component of
the duty of loyalty that prohibits knowing or reckless conduct detrimental to the
corporation’s interests.89 When directors initiate or consider engaging in a M&A
transaction that would end the company’s separate existence or otherwise transfer
control, the duties that directors owe to the target and its shareholders remain
the fiduciary duties of loyalty (and good faith) and care; but the object towards
which the duties should be exercised narrows to obtaining the best deal reasonably
available for the target’s shareholders.90 To fulfil their duties, target directors often
retain an expert adviser to assist in estimating the company’s value relative to the
price and other terms on which it might be sold.91 Investment banks that perform
this advisory service often serve an additional agency role on behalf of the target
by contacting prospective bidders, conducting an auction or otherwise attempting
to elicit the best price and executing the transaction.92 As section II noted, some
investment banks furnish only these services; others—typically larger banks—also
furnish financing to enable purchasers to complete M&A deals, including those

88 On the history of the duty of good faith as a component of the duty of loyalty, see AS Gold, ‘The

New Concept of Loyalty in Corporate Law’ (2009) 43 University of California, Davis Law Review 457.
89 ibid.
90 The intricacies of a sizeable number of cases articulating the specifics are beyond the scope of

this chapter. Conventionally, though, target directors are said to owe Revlon duties, a label derived from
Revlon Inc v Macandrews & Forbes Holdings Inc, 506 A 2d 173 (Del 1986), which made clear that the
court’s review in this context is distinctively exacting.
91 AW Tuch, ‘Banker Loyalty in Mergers and Acquisitions’ (2016) 94 Texas Law Review 1079,

1093–98.
92 ibid 1093–95.
270 Deborah A DeMott

for which the same bank also serves as an adviser to the target company’s board.93
Providing financing for an acquisition generally commands much higher fees than
advising the board of an acquisition target.
The Delaware corporation statute permits a company to include a provision in
its charter—its ‘certificate of incorporation’—that exculpates directors from mon-
etary liability stemming from breaches of duty, except for breaches of the duties
of loyalty and good faith.94 Thus, in a typical company, directors who breach their
duties of care do not confront a risk of monetary liability, whether or not the
breach occurs in the M&A context. The protection afforded by an exculpatory
provision extends only to directors and not to officers or third-party providers
of professional services, like investment banks. As discussed more fully below,
the terms on which a target’s board retains an investment bank may attempt to
address and mitigate liability risks for the bank, including those stemming from
its provision of advisory services to a target and financing to a bidder linked by
the same M&A deal. In general, Delaware cases do not give effect to provisions
in engagement agreements that through general or unspecific terms purport to
relieve the bank of liability.95

B. Accessory Doctrine Applied

The Delaware Supreme Court’s 2015 opinion in RBC Capital Markets LLC
v Jervis96 is a legal landmark for many reasons. Indeed, RBC Capital was not the
first acknowledgment from a Delaware court that investment banks could be sub-
ject to accessory liability when the bank’s conflicting interests had a substantial
connection to breaches of fiduciary duty by a target’s directors.97 The preceden-
tial gravity of RBC Capital stems in part from its procedural status. Unusually,
the case ‘went the distance’ through a full trial before the Court of Chancery

93 Bratton and Wachter (n 54) 24 (describing practice of ‘stapled financing’ and the conflicts it

engenders).
94 Del Code Ann tit 8, § 102(b)(7).
95 Rural/Metro I (n 57). There is no clear English authority addressing the availability to an acces-

sory of an exclusion clause that protects a primary wrongdoer. For discussion of exclusion clauses
when the primary wrong is a breach of contract, see Davies, Accessory Liability (n 3) 145.
96 RBC Capital (n 2).
97 Noteworthy predecessors are In re El Paso Corp Shareholder Litigation, 41 A 3d 432 (Del Ch 2012)

(directors relied on advice from M&A adviser that owned 19% equity interest in prospective buyer;
bank’s team led by banker with large personal shareholding in buyer); In re Del Monte Co Shareholder
Litigation, 25 A 3d 813 (Del Ch 2011) (M&A adviser to target surreptitiously assisted potential bid-
ders in structuring joint bid, among other instances of problematic conduct). An earlier precedent
questioned the general propriety of ‘stapled financing’, ie, acquisition financing offered by target’s
M&A adviser to prospective bidders. See In re Toys ‘R’ Us Shareholder Litigation, 877 A 2d 975 (Del
Ch 2005). Still earlier authority recognised a claim of accessory liability against an adviser retained by
a management group taking a company private. See In re Shoe-Town Inc Stockholders Litigation, 1990
WL 13475 *7–8 (Del Ch Feb 12 1990).
 Accessory Disloyalty 271

and two lengthy opinions from that Court to an appeal decided by the Delaware
Supreme Court.98 Although the bank as appellant expressly made no arguments
on appeal requiring review of any finding of fact, the Supreme Court examined
the record in its entirety, documenting its effort in an opinion dominated as
much by a detailed factual narrative as by legal analysis. This underscores the
settled and straightforward basics of this accessory tort under Delaware law. It
also underscores the character and degree of the bank’s departures from legally
tolerable conduct.
Engaged as its M&A adviser by the board of a long-time client, Rural/Metro
Corp, the bank structured the sale process on an unusual two-track basis with the
objective—not initially disclosed to its client—of enabling the bank to obtain a
role in financing the sale and acquisition of another company. That this company
was a direct competitor of Rural/Metro complicated the sale process and limited
the number of bidders. The bank also, in the court’s characterisation, engaged in
‘illicit manipulation’ of the directors’ deliberative process by altering its valuation
analyses to cast a better light on the bid favoured by the bank. As a consequence,
Rural/Metro sold for substantially less than it was worth, injuring its sharehold-
ers;99 Rural/Metro’s directors breached their fiduciary duties of care through the
underpriced sale, their acquiescence in a flawed process, plus false statements
made to Rural’s shareholders concerning the deal.
RBC Capital articulates the elements of accessory liability in familiar terms.
Focusing in particular on the requirement that the accessory knowingly partici-
pated in the primary breach, the court endorsed the Court of Chancery’s state-
ment that accessory liability requires the accessory to have acted with scienter, that
is with ‘an illicit state of mind’, meaning with ‘actual or constructive knowledge
that their conduct was improper’.100 One might wonder how close the scienter
standard comes to Twinsectra’s subjective requirement that an accessory proceeds
with self-awareness of dishonesty, beyond knowledge that its conduct is dishon-
est. The ‘manifest intentionality’ of the bank’s conduct, according to RBC Capital,
‘is demonstrative of the advisor’s knowledge of the reality that the Board was
proceeding on the basis of fragmentary and misleading information’.101 This for-
mulation turns on an objective assessment of whether an accessory acted with
knowledge of the primary wrong, not the more subjective focus required by
Twinsectra.

98 For this terminology, see Amalgamated Bank v Yahoo! Inc, 2016 WL 402540,*17 (Del Ch Feb 2,

2016) (discussing In re The Walt Disney Co Derivative Litigation, 907 A 2d 693 (Del 2006) as instance
that ‘went the distance’).
99 Delaware characterises such injuries as individual to shareholders, not injuries to the company

that give rise to claims that must be brought in derivative suits.

100 RBC Capital (n 2) 862, quoting Wood v Baum, 953 A 2d 136, 141 (Del 2008) (Del 2015) (internal

quotation marks omitted). Although this language posits constructive knowledge as an alternative to
actual knowledge, the scienter requirement seems to obviate its significance.
101 RBC Capital (n 2).
272 Deborah A DeMott

C. Further Implications

RBC Capital emphasises the bank’s authorship of breaches of duty committed by

the target’s directors: the bank ‘knowingly induced’ the breaches ‘by exploiting its
own conflicted interests to the detriment of Rural and by creating an informa-
tional vacuum’.102 Undoubtedly, the directors failed to exercise adequate oversight
of the bank once they knew that it had entanglements with prospective bidders,
but the bank’s own conduct initiated the cascade of woes that followed.103 Given
its emphasis on damning factual specifics, RBC Capital leaves open whether lia-
bility follows when an adviser is subject to an undisclosed conflict and aware of
breaches of the duty of care by directors, but overall the adviser’s conduct is less
problematic.104
A separate question is how best to characterise the relationship between a target
corporation (or its directors) and an investment bank retained to act as a M&A
adviser. To the extent that the relationship—founded as it is in an engagement
agreement—is contractual,105 the bank’s obligations might be delimited by agree-
ment. RBC Capital explicitly rejected the Court of Chancery’s description of these
relationships that positions M&A advisers as ‘gatekeepers’.106 This characterisa-
tion, unmoored by any articulation of duty, lacks clarity and coherence with tort
doctrine more generally. Additionally, RBC Capital does not explicitly characterise
the relationship between target directors and their M&A adviser as fiduciary.107
Instead, discussing the informational asymmetries that typify contracting between
a bank and its client, the Court emphasised the significance of disclosure to ‘level
the field’ but also concluded with an unqualified assertion of an obligation ‘not to
act in a manner that is contrary to the interests of the board of directors’.108 This
links the bank’s liability back to basic tort doctrine by stressing the categorical
obligation to refrain from intentionally wrongful conduct.
Finally, RBC Capital ‘went the distance’ in an additional and unusual respect.
The bank, as the sole defendant not to settle prior to trial, confronted a judg-
ment for $91,323,554.61, or $4.17/share, representing damages suffered by Rural’s

102 ibid.
103 This calls to mind the argument in Tan that the justification for accessory liability is even
stronger when the primary wrongdoer is only hapless or careless.
104 Recent examples lack the full factual development of RBC Capital. See Singh v Attenborough, 137

A 3d 151, *2 n 7 (Del 2016) (characterising the bank’s conduct in RBC Capital as duping the board into
breach of duty of care for the bank’s own motives; bank in instant case, in contrast, delayed its disclo-
sure of prior pitch of advisory client to acquirer until the merger agreement was signed); In re TIBCO
Software Inc Shareholders Litigation, 2015 WL 6155894 (Del Ch Oct 20, 2015) (denying motion to
dismiss; not wanting to jeopardise $47.4 million fee, adviser concealed from target board information
that shares had been miscounted and that acquirer had relied on miscount in calculating considera-
tion, resulting in bargain price for acquirer).
105 See Bratton and Wachter (n 54) 7–8.
106 Rural/Metro I (n 57).
107 On justifications for so characterising M&A advisers, see Tuch, ‘Banker Loyalty in Mergers and

Acquisitions’ (n 91).
108 RBC Capital (n 2) 865.
 Accessory Disloyalty 273

former shareholders. Relying on the Delaware statute governing contribution

among tortfeasors,109 the bank sought a credit against the judgment for settlement
amounts paid by other defendants—$5 million by another bank that served in a
secondary role, and $6.6 million by two conflicted directors who played signifi-
cant roles in the sale process. Resolving questions of first impression, the Court of
Chancery apportioned responsibility between the bank and the other defendants.
To do so required assessing the character of the bank’s tort.
Although Delaware’s contribution statute does not explicitly bar contribution
on behalf of intentional tortfeasors, the Court considered at length the type of
intentional tort that accessory liability represents. The bank knowingly partici-
pated in (and to a considerable extent induced) the directors’ breaches of duty, but
its conduct was not criminal and was not intended to cause physical injury.110 Its
intentional tort thus lacked the moral gravity that should exclude the possibility
of contribution. On the other hand, to the extent the bank misled its client’s direc-
tors, it came to equity with unclean hands in its quest for contribution; to permit
contribution (here in the form of settlement credit) would enable the bank to ‘take
advantage of the targets of its own misconduct’.111 Calculating contribution in this
light, the Court exercised its discretion to reduce the judgment against the bank
to $75.8 million, having allocated some measure of fault to two directors who had
distinct personal interests in the sale.

V. Conclusion

These contrasts help make the case for accessory liability a worthy subject for fur-
ther academic scrutiny. The comparative account in this chapter also demonstrates
the significance of taxonomic placement for substantive doctrine. The emphasis
in US law on objective measures for accessory culpability fits well with tort law’s
general focus on legally constructed reasonable persons, not the inward-looking
reflections of individual actors. As Justice Holmes wrote: ‘The law takes no account
of the infinite varieties of temperament, intellect, and education which make the
internal character of a given act so different in different men. It does not attempt
to see men as God sees them’.112 The chapter’s comparative account also highlights
the interstitial function that accessory liability can serve, whether c­ haracterised as
a tort or an equitable wrong. The prospect of accessory liability may deter conduct
by actors situated to withhold facilitation necessary to the wrongdoing of o ­ thers,

109 Delaware Uniform Contribution Among Tortfeasors Act, Del Code tit 10 §§ 6301–08.
110 In re Rural/Metro Stockholders Litigation, 102 A 3d 205, 237 (Del Ch 2014) (Rural/ Metro II), affd
sub nom RBC Capital (n 2).
111 Rural/Metro II (n 110). Thus, albeit the tortious character of the bank’s wrong, equitable ­doctrine

applied.
112 OW Holmes, The Common Law (Boston, Little Brown & Co, 1881) 108.
274 Deborah A DeMott

especially when other constraints on problematic conduct are weak, as well as

serving as an additional source of recovery for victims of wrongdoing. The com-
parative account also illustrates the independent character of accessory liability,
which rationalises outcomes—as in Tan and RBC Capital—in which an acces-
sory’s culpability differs from that of the primary wrongdoer.
 12
Equitable Liability of Corporate
Accessories

JAMIE GLISTER*

I. Introduction

The purpose of this chapter is to discuss two different models of equitable liabil-
ity that may apply to corporate accessories to a breach of trust or fiduciary duty.
By ‘corporate accessory’ I simply mean a company that has become involved in a
breach through receiving property,1 or taking a diverted business opportunity, or
somehow acting in a way that has assisted a fiduciary to breach his or her fiduci-
ary duty.
These corporate accessories have distinct legal personality and so are strangers
to the underlying relationship between fiduciary and principal. However, some-
times the connection between the wrongdoing fiduciary and the corporate acces-
sory is so close that the courts have felt able to treat the two as relevantly the same
actor. The corporate accessory may be termed the ‘creature company’ or ‘alter ego’
or ‘cat’s paw’ of the fiduciary. In these cases the corporate accessory and its con-
troller are viewed as one unit, rather than as separate parties, and the same orders
are usually addressed to both.
Clearly, not all corporate accessories that become involved in breaches of fidu-
ciary duty can properly be seen as creature companies of the wrongdoing fidu-
ciaries. Where a corporate accessory cannot be characterised in this way, it will
be treated as a separate actor—as a ‘true’ third party—in the normal way. That
corporate accessory may or may not be liable for its involvement in the breach, but
any liability will be on the conventional Barnes v Addy basis.2

* I would like to thank the participants at the conference, and the editors, for their helpful com-

ments. I am also grateful to Newcastle Law School, UK, where I wrote this chapter as a visiting fellow
in early 2016.
1 I include knowing recipients as ‘accessories’, although I acknowledge that recipient liability itself

might not properly be categorised as ‘accessorial’: see PS Davies, Accessory Liability (Oxford, Hart Pub-
lishing, 2015) 91–93.
2 Barnes v Addy (1874) LR 9 Ch App 244 (CA).
276 Jamie Glister

I outline in section II these two different models of corporate liability: first,

treating the wrongdoer and the company as the same actor; second, treating the
company as a separate actor but with imputed knowledge so as to ground Barnes
v Addy liability. As will be seen, there is doubt over the continued existence of the
first model in England and Wales. It may be that corporate accessories in that
jurisdiction can now only be treated as distinct actors, even where the creature
company description does fit and where the accessory is simply being used by the
wrongdoing fiduciary as a vehicle for his or her actions.
In section III, I explain the possible differences that may follow depending on
whether a corporate accessory is treated as the same actor as the wrongdoing fidu-
ciary, or as a separate actor. The most obvious involves liability for gains: under
the first model, the fiduciary and the accessory are each liable for the total profits
made by both; under the second model, liability for gains is several. But there may
also be differences in respect of the calculation of compensation payable, and in
respect of whether a claimant can seek gain-based and loss-based remedies against
two separate wrongdoers.

II. Two Models of Corporate Liability

The concept of a corporate ‘alter ego’ can be used in two distinct senses here.
The first is where the court effectively disregards a company’s separate existence
and treats actions by the company as actions by the controller of it. This has two
results: first, it means that the company’s controller (who is usually a wrongdoing
fiduciary) can be personally liable for gains that are in fact made by the associated
company; second, it means that the company can be liable to account to the fiduci-
ary’s principal even though the company did not owe any duty to that person. It
should be noted that, although the company’s separate existence is being ignored
to a certain extent, these cases still generally involve orders being made against
both the fiduciary and the company that he or she controls.3
This line of authority is considered in the section below. As will be seen, there
is real doubt about its continued existence in England and Wales. Following Prest
v Petrodel Resources Ltd in particular,4 the courts may prefer to see companies
associated with wrongdoing fiduciaries as true, separate third parties. These com-
panies may have the fiduciary’s knowledge attributed to them (and it is here that
we see the second sense of ‘alter ego’), and this imputed knowledge may ground
Barnes v Addy liability to the fiduciary’s principal. However, as will be discussed in

3 This may not be the case if the company in question has already been dissolved, eg, Arcutes Hold-

ing Inc in Otkritie International Investment Management Ltd v Urumov [2014] EWHC 191 (Comm).
4 Prest v Petrodel Resources Ltd [2013] UKSC 34, [2013] 2 AC 415. See also VTB Capital Plc

v Nutritek International Corp [2013] UKSC 5, [2013] 2 AC 337 (company controllers not to be seen as
liable under contracts made by their company).
 Equitable Liability of Corporate Accessories 277

section III, the nature and extent of liability imposed on a Barnes v Addy analysis
will not necessarily be the same as that imposed when the company and its con-
troller are seen as relevantly one person.

A. Model One: Wrongdoer and Company as the Same Actor

In Gencor v Dalby,5 a fiduciary, Mr Dalby, channelled a secret profit to a company

that he controlled in the British Virgin Islands, Burnstead Ltd. Orders to disgorge
that profit were made against both the fiduciary and the company. Rimer J had no
time for the argument that no order could be made against Mr Dalby because he
had not actually made any profit, and no order could be made against Burnstead
Ltd because it had not breached any fiduciary duty:
I do not accept that argument which, if correct, would provide the easiest possible escape
from the rigours of equity’s strict principle of accountability. All that would be required
would be for the profiting director to ensure that he diverts the profit into his own crea-
ture company. The facts of this case are that Burnstead was an offshore company which
was wholly owned and controlled by Mr Dalby and in which nobody else had any ben-
eficial interest. Everything it did was done on his directions and on his directions alone.
It had no sales force, technical team or other employees capable of carrying on any busi-
ness. Its only function was to make and receive payments. It was in substance little other
than Mr Dalby’s offshore bank account held in a nominee name. In my view this is the
type of case in which the court ought to have no hesitation in regarding Burnstead sim-
ply as the alter ego through which Mr Dalby enjoyed the profit which he earned in breach
of his fiduciary duty to ACP. If the arrival at this result requires a lifting of Burnstead’s
corporate veil, then I regard this as an appropriate case in which to do so. Burnstead is
simply a creature company used for receiving profits for which equity holds Mr Dalby
to be accountable to ACP. Its knowledge was in all respects the same as his knowledge.
The introduction into the story of such a creature company is, in my view, insufficient
to prevent equity’s eye from identifying it with Mr Dalby … I hold that Mr Dalby and
Burnstead are both accountable for the profit represented by this commission and I will
make an order against them accordingly.6
Another example is Trustor AB v Smallbone.7 In that case, Mr Smallbone caused
payments to be made from Trustor, of which he was managing director, to another
company that he controlled, Introcom. These payments were made in breach of
his fiduciary duty owed to Trustor. Introcom then disbursed the funds, including
paying some to Mr Smallbone personally. The case is discussed below on the point
of the quantum of equitable compensation payable by a dishonest assistant.8 It is

5 Gencor ACP Ltd v Dalby [2000] EWHC 1560 (Ch), [2000] 2 BCLC 734.
6 ibid [26]. Although Mr Dalby and Burnstead Ltd were liable on this basis, this would not have
prevented Rimer J from finding another defendant, Mr Meehan, liable for dishonestly assisting
Mr Dalby to divert the relevant opportunities to Burnstead. For other reasons, however, no order was
made: ibid [83]–[88].
7 Trustor AB v Smallbone (No 2) [2001] EWHC 703 (Ch), [2001] 1 WLR 1177.
8 See text to n 79.
278 Jamie Glister

also relevant to the current discussion because Morritt VC decided that Trustor
could pierce the corporate veil of Introcom, so as to make receipt by Introcom
treated as receipt by Mr Smallbone personally.9 Since an order had already been
made against Introcom in earlier proceedings,10 Morritt VC’s order had the effect
of making Introcom and Mr Smallbone jointly liable for the receipts of both.
Both Gencor v Dalby and Trustor v Smallbone were decided on a ‘piercing the
veil’ basis, but a different approach was taken in CMS Dolphin v Simonet.11 In
that case, Mr Simonet diverted business opportunities away from CMS Dolphin,
a company of which he was a director. The business was first given to a new part-
nership, referred to as Millennium, and then transferred to a new company that
Mr Simonet formed, Blue Ltd. Although it operated for a time, Blue Ltd soon
failed. The question was whether Mr Simonet was personally liable for the profits
made by Blue Ltd. Lawrence Collins J concluded that both Mr Simonet and Blue
were equally liable for those profits,12 with the reason being that ‘they have jointly
participated in the breach of trust’.13
Cases in this line usually involve the same person being both a wrongdoing
fiduciary and the controller of a corporate accessory. The point is to enlarge the
personal liability of the fiduciary by making him or her liable for gains that were
actually made by the accessory. However, it is not necessary for the defendant spe-
cifically to be a fiduciary; the important point is that he or she is a wrongdoer. At
first instance in Novoship,14 Christopher Clarke J had applied Gencor v Dalby and
Trustor v Smallbone in treating dishonest assistants and their companies as the
same actors. In relation to one of the assistants, Mr Nikitin, Christopher Clarke
J held:
The account must be against Henriot Finance, who were the immediate earners of the
profit, and also against Mr Nikitin, who was the architect of the dishonest assistance
effected through him and Henriot Finance, which was both his alter ego and the com-
pany which he chose as the immediate destination of the profits. It is not necessary to
determine where, as between those two, the profits have ended up. That does not mean
that the Claimants are entitled to recover twice: only that both are accounting parties.15

9 Trustor AB v Smallbone (No 2) [2001] EWHC 703 (Ch), [2001] 1 WLR 1177 [23]–[25]; cf Law

Society of England & Wales v Isaac & Isaac International Holdings Ltd [2010] EWHC 1670 (Ch) [40].
10 For details of the earlier proceedings, see Trustor AB v Smallbone [2000] EWCA Civ 150 [8]–[18].

A brief summary is also given in Trustor AB v Smallbone (No 2) [2001] 1 WLR 1177 [1].
11 CMS Dolphin Ltd v Simonet [2001] EWHC 415 (Ch).
12 ibid [98]–[105] (in fact no final order was made against Blue as it was insolvent).
13 ibid [103]; see criticism of this reasoning in Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638

(Ch) [1574]–[1576]; National Grid Electricity Transmission Plc v McKenzie Harbour Management
Resources Ltd [2009] EWHC 1817 (Ch) [117]; VTB Capital Plc v Nutritek International Corp [2012]
EWCA Civ 808 [69]–[74] (appeal dismissed [2013] UKSC 5, [2013] 2 AC 337; only brief comment
made on this point [136]).
14 Novoship (UK) Ltd v Mikhaylyuk [2012] EWHC 3586 (Comm).
15 ibid [529]; see also [413]–[414] re another defendant, Mr Ruperti, who settled and was not

involved in the appeal: see Novoship (UK) Ltd v Mikhaylyuk [2015] EWHC 992 (Comm).
 Equitable Liability of Corporate Accessories 279

This point was not discussed in the Court of Appeal, where it was simply assumed
that Mr Nikitin could be liable for profits made by companies that he controlled.16
The issue in the Court of Appeal was the availability and calculation of accounts
of profits against third parties, not how those third parties may be treated inter se.
Cook v Deeks may also be an example of this type of ‘same actor’ case.17 Three
directors of the Toronto Construction Company acquired a contract for their own
benefit in breach of their fiduciary duty to the company. The directors formed a
new company, the Dominion Construction Company, which took over the con-
tract and made substantial profits. Finding in favour of the plaintiff, a shareholder
in the original Toronto Construction Company, Lord Buckmaster LC said:
Their Lordships have throughout referred to the claim as one against the defendants GS
Deeks, GM Deeks, and TR Kinds [the three directors]. But it was not, and it could not be,
disputed that the Dominion Construction Company acquired the rights of these defend-
ants with full knowledge of all the facts, and the account must be directed in form as an
account in favour of the Toronto Company against all the other defendants.18
There is, however, some doubt about what exactly Cook v Deeks decided on the
liability point. Some later cases have treated it as establishing joint and several
liability among the three directors and the Dominion Construction Company for
the same global amount.19 On this ‘same actor’ approach, each defendant would
be liable for the profits made by themselves and the others: in effect, one account
would be taken against all four defendants. But Lewison J took a different view in
Ultraframe (UK) Ltd v Fielding.20 He said that Cook v Deeks
was a case in which the directors and the company were each ordered to account for prof-
its. But there is no indication that the order for the account went further than ordering
each of them to account for his (or its) own profits.21
Lewison J preferred to see the liability of third-party companies as independ-
ent Barnes v Addy-type liability (which he recognised could include a liability to
account for profits).

16 Novoship (UK) Ltd v Mikhaylyuk [2014] EWCA Civ 908, [2015] 1 QB 499 [62].
17 Cook v Deeks [1916] 1 AC 554.
18 ibid 565. The slightly odd phrasing is explained by the TCC itself being formally a defendant.

The plaintiff was a TCC shareholder (and the fourth director) and the central question in the case
was whether or not the three defendant directors could validly resolve that TCC had no interest in the
impugned contract. That resolution was held ineffective. The outcome was that the account would be
taken in favour of the TCC, against the three defendant directors and the DCC, but the plaintiff Cook
‘must have the conduct of the proceedings’.
19 Examples include CMS Dolphin (n 11) [104]; Grimaldi v Chameleon Mining NL (No 2) [2012]

FCAFC 6, (2012) 200 FCR 296 [243]; Cornerstone Property & Development Pty Ltd v Suellen Properties
Pty Ltd [2014] QSC 265, [2015] 1 Qd R 75 [98]; J McGhee (ed), Snell’s Equity, 33rd edn (London, Sweet
& Maxwell, 2015) para 7-055.
20 Ultraframe (n 13).
21 ibid [1574]. A point in favour of this view is that if Cook v Deeks did involve a form of joint

liability for profits, then it apparently operated to make the three human defendants liable for profits
made by each other too. The general rule of several liability for profits might be sidestepped by treating
a fiduciary and company as relevantly the same actor, but applying that analysis among humans would
be a much bolder step.
280 Jamie Glister

i. Basis of Liability
The liability imposed in these cases is easy to describe in general terms. The
wrongdoing fiduciary and the company are treated as relevantly one actor, with
each liable for the gains made by, and losses caused by, themselves and the other.
But the proper basis of this liability is more difficult to pin down. In Gencor
v Dalby and Trustor v Smallbone, we have seen that orders were made against both
the wrongdoers and the companies that they controlled. The judges therefore saw
no inconsistency in using a ‘piercing the corporate veil’ rationale to ground liabil-
ity in the fiduciary, yet still making orders against the relevant companies.22 Rather
than piercing the veil, Lawrence Collins J in CMS Dolphin v Simonet preferred to
explain this type of liability on a breach of trust in which the fiduciaries and their
companies had ‘jointly participated’. In Cook v Deeks, the Privy Council simply
said that the Dominion Construction Company acquired the rights of the direc-
tors ‘with full knowledge of all the facts’.23
In Prest v Petrodel Resources Ltd,24 Lords Sumption and Neuberger sought to
explain the results in these cases in a way that did not involve references to pierc-
ing the corporate veil or to a particular type of joint liability. In relation to Gencor
v Dalby, Lord Sumption noted that the order against Mr Dalby could be justi-
fied because he had received the money through his agent, Burnstead Ltd; and
the order against Burnstead could be justified because Mr Dalby’s knowledge was
imputed to Burnstead, which meant Burnstead was aware of the ‘prior equitable
interest’ of the claimant. Some features of this explanation are worth noting. First,
it involves Burnstead being Dalby’s agent for the purposes of receipt, but Dalby
being Burnstead’s agent for the purposes of attribution of knowledge. ­Second, it
also involves conceptualising the claimant’s right to the secret profit as an equitable
interest of which Burnstead could have knowledge.25 Yet the claimant only ever
sought an account of profits, and both Gencor v Dalby and Prest v Petrodel were
decided before FHR v Cedar Capital26 (although Gencor was decided at a time
when Reid27 may have been assumed to reflect the law in England). This equitable
interest point is important because Lord Sumption went on to say that the result
in Gencor v Dalby would have been the same if Burnstead was in fact a natu-
ral person through whom Dalby had channelled his profit. For that to be true,
the money in the hands of the natural person must have been subject to a prior
equitable interest. Seen as an agent of Mr Dalby, a natural person would only be

22 This point admittedly ignores the litigation history in Trustor. The correctness of the order made

against Introcom was not in issue before Morritt VC.

23 Cook (n 17) 565.
24 Prest (n 4) [31]–[33] (Lord Sumption), [68] (Lord Neuberger); see also CH Tan, ‘Veil Piercing—A

Fresh Start’ [2015] Journal of Business Law 20.

25 A similar analysis was used Queensland Mines v Hudson (1976) ACLC 28,658, although the claim

in that case was time barred and the finding of underlying breach of fiduciary duty was overturned:
(1978) 18 ALR 1.
26 FHR European Ventures LLP & Ors v Cedar Capital Partners LLC [2014] UKSC 45, [2015] AC 250.
27 Attorney General for Hong Kong v Reid [1994] 1 AC 324.
 Equitable Liability of Corporate Accessories 281

personally liable for inconsistent dealing (which requires a prior interest). Even
seen as a wholly separate third party, with no imputation of knowledge, a natural
person recipient would only be liable if she personally knew of an interest binding
the money, not a claim in respect of it.28
Lord Sumption explained Trustor v Smallbone in a similar way: Introcom was
Mr Smallbone’s agent, so receipt by Introcom counted as receipt by Mr Smallbone.
This analysis ‘did not involve piercing the corporate veil, and did not depend on
any finding of impropriety’.29 His Lordship did not explain on what basis the order
against Introcom (whose receipt on this analysis appears ministerial) could there-
fore have been made.30
Cook v Deeks was not mentioned in Prest v Petrodel, but we have seen that
Lewison J in Ultraframe questioned whether it ever did involve joint liability
among the defendants. Cook was also recently mentioned in Novoship in the Court
of Appeal,31 where it was seen as providing authority for the award of an account
of profits against a Barnes v Addy third party. That interpretation is consistent with
the view taken in Ultraframe. If, on the other hand, the three human defendants
in Cook v Deeks were actually liable under the ordered account to disgorge profits
made by the company, then the case provides no instruction on the liability of a
Barnes v Addy third party.
Since Prest v Petrodel, only one case appears to have treated a corporate acces-
sory as an alter ego in the sense used here. In Otkritie International Investment
Management Ltd v Urumov,32 Mr Urumov and Mr Pinaev were held liable for
sums that were actually received by a company they owned and controlled (and
that Eder J had ‘no doubt … was their vehicle for receiving and distributing the
fraud proceeds’).33 The company itself had since been dissolved and was not a
defendant. Trustor v Smallbone and Prest v Petrodel were both cited. There were
also alternative bases for the relief that was awarded, and, quite simply, the point
was not seen as important in otherwise mammoth litigation.
The subsequent re-explanations of Gencor and Trustor in Prest v Petrodel do
not fit those cases exactly. Of course this is not surprising; as a matter of his-
tory the cases were not actually decided on those grounds. But the important
question is whether or not this re-explanation will actually mark a change in the
English approach to cases of this type.34 If even very closely connected corporate
28 Knowledge of a claim can count as knowledge of an interest, but the interest itself still has to be

there. It is not enough to have perfect knowledge of a personal claim: see Papadimitriou v Crédit Agri-
cole Corp and Investment Bank [2015] UKPC 13, [2015] 1 WLR 4265 [12]–[21].
29 Prest (n 4) [32].
30 Lord Sumption recognised that the order against Introcom had been made at an earlier stage

in proceedings, but was still operative: ibid [22]. Also see the different treatment of Lord Sumption
and Lord Neuberger of the point of why in Jones v Lipman [1962] 1 WLR 832 the vendor’s company,
in addition to the vendor himself, was amenable to an order of specific performance: ibid [30] (Lord
Sumption); [73] (Lord Neuberger).
31 Novoship (n 16) [82]–[83].
32 Otkritie (n 3) [371], [404]; see also [167], [397].
33 ibid [309].
34 This form of alter ego liability still seems to exist in Australia: see Green v Bestobell Industries Pty

Ltd (No 2) [1984] WAR 32, 40; Grimaldi (n 19) [243]. In Cornerstone (n 19) [97]–[103], Jackson J was
282 Jamie Glister

a­ ccessories are always to be treated as Barnes v Addy third parties, rather than
as alter egos of their wrongdoing fiduciary controllers, what does that mean?
I will argue below that the consequences for a corporate accessory may be different
depending on whether it is seen as (i) the alter ego of the fiduciary, and so in effect
as another first-party wrongdoer; or as (ii) a true third party, liable for ­knowing
receipt or dishonest assistance, albeit that this liability is imposed because the
­fiduciary’s knowledge can be attributed to the company.
Finally, it may be noted that the cases in this line are generally concerned with
making a natural person liable for some benefit or opportunity that was actually
diverted to their company. Although orders can be made against the companies
too, the point is really to enlarge the liability of the human controller. Whether or
not this is objectionable, it would be quite another matter to make a company with
other activities liable for a gain that was actually made personally by its controller.
So far the courts have not struggled with this point simply because, in most of the
cases, the associated companies can easily be seen as nothing more than pure vehi-
cles for the impugned actions of their controllers. Where the companies do not
have any other activities, the difficulty does not arise. However, in CMS Dolphin,
Blue Ltd had operated successfully for a time and had presumably secured some
contracts that were not tainted by Mr Simonet’s original breach. (The point was
still not live in that case because Blue was insolvent by the time of the hearing and
was joined to the litigation as purely a formal matter.) The reason why the courts
have not been troubled on this point is probably similar to the reason why they
have not been troubled on the question of the necessary degree of control.35 Cases
where the degree of control is not obvious are (or were) probably not argued as
alter ego or piercing the veil cases. Similarly, if a company has ongoing, independ-
ent activities it is less likely that it could be characterised as the alter ego of one of
its controllers in the first place.

B. Model Two: Company as Separate Actor, with

Imputed Knowledge

The second use of the phrase ‘alter ego’ involves a method of attributing knowl-
edge to a company, usually for the purpose of making that company liable in some
way. The same concept is seen when reference is made to a company’s ‘directing

critical of this type of liability, although he pointed out that Farah Constructions Pty Ltd v Say-Dee Pty
Ltd [2007] HCA 22, (2007) 230 CLR 89 seems to assume it. See further J Glister, ‘Diverting Fiduciary
Gains to Companies’ (2017) 40 University of New South Wales Law Journal (forthcoming).
35 See Gencor (n 5) [19]; Trustor AB v Smallbone (n 10) [97] (Mr Smallbone thereafter conceded

that he controlled Introcom: Trustor AB v Smallbone (No 2) [2001] 1 WLR 1177 [16]); Antonio Gramsci
Shipping Corp v Stepanovs [2011] EWHC 333 (Comm), [2011] 1 Lloyd’s Rep 647 [17] (on joint control;
case since disapproved but not on this point: VTB Capital (n 4) [147]).
 Equitable Liability of Corporate Accessories 283

mind and will’.36 But, unlike the Gencor v Dalby and Trustor v Smallbone line of
cases discussed above, in this type of alter ego case the company is treated as a
separate actor. It is liable as a third party for its own wrong, not for the fiduciary’s
wrong. In the current context, the relevant liability is normally knowing receipt
or dishonest assistance, with the imputed knowledge being used to establish the
mental fault elements in those claims. Unlike the cases in the previous section, the
imputed knowledge here does not have to come from a wrongdoer. This is because
it is not only knowledge of a person’s own wrong that can be imputed to a com-
pany that he or she controls.
The most famous example of this type of imputation case is El Ajou v Dollar
Land Holdings plc.37 In that case, the defendant company, DLH, was held liable
for knowing receipt based on the imputation of its chairman’s knowledge that the
funds received were the proceeds of fraud. The complication was that the chair-
man, Mr Ferdman, had not acquired his knowledge of the fraud while acting for
DLH. For this reason, the Court of Appeal held that Mr Ferdman’s knowledge
could not be imputed on general agency principles. However, it could be imputed
on the basis that Mr Ferdman was DLH’s directing mind and will.38
The basis of imputation was not specifically addressed in Aerostar Maintenance
International Ltd v Wilson,39 although it seems also to have been a ‘directing mind
and will’ case. Mr Wilson, a director of Aerostar Maintenance, diverted business to
another company, Avman Ltd, in breach of his fiduciary duty to Aerostar. Morgan
J declined to follow CMS Dolphin v Simonet and make Mr Wilson personally liable
for profits that were actually made by Avman Ltd.40 He also distinguished Gencor
v Dalby and Trustor v Smallbone.41 However, Morgan J did find Avman Ltd ­liable
as a third party for knowing receipt and dishonest assistance. The necessary
­knowledge or dishonesty was easily imputed:
As to Avman’s knowledge, at the time that Avman entered into the contract with Romaero
and Galaxy, the knowledge of Mr Wilson is to be imputed to Avman and, as so imputed,
Avman knew that the benefits of the contracts it was making were property, or the trace-
able proceeds of property, held subject to fiduciary duties and that there had been a

36 See generally E Ferran, ‘Corporate Attribution and the Directing Mind and Will’ (2011) 127

LQR 239.
37 El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685. In Lebon v Aqua Salt Co Ltd (Mauritius)

[2009] UKPC 2 [24], Lord Hoffmann saw El Ajou as a forerunner of Meridian Global Funds Manage-
ment Asia Ltd v Securities Commission [1995] 2 AC 500; see also Bilta (UK) Ltd (in liq) v Nazir (No 2)
[2015] UKSC 23, [2016] AC 1 [68].
38 Note that Mr Ferdman was not one of the original wrongdoers; he merely had knowledge of their

wrongdoing.
39 Aerostar Maintenance International Ltd v Wilson [2010] EWHC 2032 (Ch) (liability); [2012]

EWHC 1353 (Ch) (quantum, after the claimants had elected for equitable compensation; see text to
n 109).
40 ibid [202]. Of course, a corporate accessory does not have to be a fiduciary’s alter ego before it

will be a breach of duty for the fiduciary to divert opportunities to it: Pennyfeathers Ltd v Pennyfeathers
Property Company Ltd [2013] EWHC 3530 (Ch) [117].
41 ibid [205].
284 Jamie Glister

breach of fiduciary duty in allowing or causing Avman to enter into those contracts. In
these circumstances, in my judgment, it was unconscionable for Avman to receive and
retain the benefit of the contracts … The case for dishonesty on the part of Avman is
that Mr Wilson was dishonest and his dishonesty is to be imputed to Avman. I find that
Mr Wilson was dishonest.42
Another case where the wrongdoing fiduciary was also the accessory’s directing
mind and will is Odyssey Entertainment Ltd v Kamp.43 Odyssey, a film sales agency,
successfully sued its former chairman and chief executive, Mr Kamp, for breaching
his fiduciary duty by pursuing opportunities on behalf of a new company, Time-
less, that he owned with his wife. Mr Kamp secured a deal for the rights to Space
Chimps 2: Zartog Strikes Back and also conducted a clandestine meeting with ‘the
creative mind behind Postman Pat’. Although Mr Kamp sought to resist the find-
ing of a breach of fiduciary duty, he admitted to being Timeless’s directing mind
and will. Once an underlying breach of fiduciary duty had been found, it was
therefore a short step to finding Timeless liable as an accessory.
The editors of Bowstead & Reynolds have questioned how far a ‘directing mind
and will’ doctrine should operate generally, as opposed to in the specific contexts
of the construction of statutes and contracts. In their view, general principles of
agency should apply when the question is about fixing companies with Barnes
v Addy liability, and they argue that that the mandate-confined rule of imputa-
tion does not operate as sharply as was thought in El Ajou.44 For the most part
I can bypass this issue, because the main point here is to distinguish between
(i) treating the corporate accessory and the wrongdoer as the same actor, and
(ii) treating the corporate accessory and the wrongdoer as separate actors. The
way that knowledge is imputed in cases in the second category is therefore not of
central importance. Even so, it is still worth making a brief digression.

i. Corporate Accessories and Human Accessories

Although the means by which knowledge is imputed is not relevant to the cen-
tral distinction drawn in this chapter, it is worth noting that the availability of
a ‘directing mind and will’ mode of imputation marks a difference between the

42 ibid [195], [198]. Both knowledge and dishonesty can be imputed: Roadchef (Employee Benefits

Trustees) Ltd v Hill [2014] EWHC 109 (Ch) [167]. But dishonesty cannot be aggregated, unlike (per-
haps) knowledge: see P Watts, ‘Imputed Knowledge in Agency Law—Excising the Fraud Exception’
(2001) 117 LQR 300, 302; C Mitchell, ‘Assistance’ in P Birks and A Pretto (eds), Breach of Trust (Oxford,
Hart Publishing, 2002) 139, 203–04; P Watts and F Reynolds (eds), Bowstead and Reynolds on Agency,
20th edn (London, Sweet & Maxwell, 2014) para 8-208(e).
43 Odyssey Entertainment Ltd v Kamp [2012] EWHC 2316 (Ch). In fact the claimant apparently

sought to ground liability on both models, though it is not clear if this was successful: see [228]–[229],
[283], [287].
44 Watts and Reynolds (n 42) paras 1-024, 8-209, 8-214; also P Watts. ‘The Company’s Alter Ego: An

Imposter in Private Law’ (2000) 116 LQR 525; P Watts, ‘Imputed Knowledge in Restitutionary Claims:
Rationales and Rationes’ in S Degeling and J Edelman (eds), Unjust Enrichment in Commercial Law
(Pyrmont, Thomson Reuters, 2008) 429. In Bilta (No 2) (n 37) [197], Lords Toulson and Hodge ‘[saw]
the force in the suggestion’ that an agency analysis would have worked in El Ajou.
 Equitable Liability of Corporate Accessories 285

treatment of corporate and human accessories.45 In cases where natural persons

receive property, the correct scope of the relevant agency principles then becomes
particularly important. Those principles may be broader in scope than sometimes
thought, but they are not wide enough to encompass a ‘directing mind and will’
concept that applies among natural persons.46
An example of the possible result of this difference in treatment can be seen
in the recent Australian case of Australasian Annuities v Rowley Super Fund.47
Mr Rowley, the sole director and one of two shareholders in Australasian Annu-
ities Pty Ltd (AA), a financial planning business, arranged for the company to
borrow $2.5 million from Macquarie Bank. With Macquarie’s knowledge, that
money was to be paid (and most of it was so paid) into the superannuation funds
of Mr and Mrs Rowley so they could take advantage of certain tax concessions.
When AA then failed during the global financial crisis, Macquarie Bank appointed
receivers and managers and tried to recover the funds that had been paid out as
superannuation contributions. The receivers argued that the payments had been
arranged by Mr Rowley in breach of his fiduciary duty to the company, and this
was accepted at trial and in the Court of Appeal. The receivers also argued that the
superannuation trustee, Rowley Super Fund Pty Ltd (RSF), should be imputed
with the knowledge of Mr Rowley, who was also a director of that company. That
contention was rejected at trial but was accepted by a majority of the Court of
Appeal. RSF was therefore liable in knowing receipt to repay the superannuation
contributions to AA.
For our purposes, the case is interesting because of the status of the superan-
nuation trustees. At first, the superannuation funds were held and managed by
four family members: Mr and Mrs Rowley and their two children. The trustees
were, therefore, four natural persons. Most of the superannuation payments paid
by AA were made during this period. It was only later that the corporate trustee
RSF was created, with the four family members as directors. The existing superan-
nuation funds were then transferred to this new corporate trustee, with some fresh
contributions also being made.
In Australia, superannuation trustees are not seen as volunteers. Instead, they
give value.48 This means that the equitable liability of such trustees, whether

45 And, therefore, of incorporated and unincorporated businesses.

46 Note Professor Watts’s tentative suggestion that the rules of imputation of knowledge could apply
outside agency relationships: ‘familial relationships, natural and corporate, may provide a separate
basis for imputation where the transaction is not, in substance, one at arm’s length’: Watts, ‘Imputed
Knowledge in Restitutionary Claims’ (n 44) 436. There must indeed be cases where a wrongdoer has
channelled funds to a wholly oblivious family member who has since spent them. But these would
probably not be treated as knowing receipt cases, so the imputation point would not arise.
47 Australasian Annuities Pty Ltd (ACN 006 313 408) (in liq) (recs and mgrs apptd) v Rowley Super

Fund Pty Ltd (ACN 129 688 455) [2015] VSCA 9, (2015) 318 ALR 302. Disclosure: I was an academic
consultant on RSF’s unsuccessful application for special leave.
48 Cook v Benson [2003] HCA 36, (2003) 214 CLR 370 (although one of the Court of Appeal judges

in Australasian Annuities, Neave JA, doubted that Cook applied to a self-managed situation: Australa-
sian Annuities (n 47) [144]–[150]).
286 Jamie Glister

natural or corporate, depends on knowledge at the time of receipt.49 In Australasian

Annuities v Rowley Super Fund, the Court of Appeal held that Mr Rowley’s knowl-
edge of his own breach could be imputed to the corporate trustee, RSF, because
Mr Rowley could be seen as the company’s directing mind and will.50 The
­corporate trustee was therefore liable in knowing receipt for all of the funds it
had received.51 But Mrs Rowley and the two children were not liable in knowing
receipt for the contributions that had earlier been paid to them. This was because
they had no personal knowledge of the breach, and Mr Rowley’s knowledge could
not be imputed to them because there was no agency.52 The difference between a
situation involving natural trustees and one involving a corporate trustee is there-
fore stark.

ii. ‘Fraud Exception’

It is also worth mentioning here the ‘fraud exception’ to the attribution of knowl-
edge, although it may well be that the label should now be discarded.53 This ‘excep-
tion’ operates to prevent knowledge of a director’s fraud on his company from
being attributed to that company. In most cases it prevents the wrongdoing direc-
tor, or a third party whom the defrauded company is pursuing, from arguing as a
defence that the claimant company had full knowledge of the wrongful conduct.
Since the principle usually operates in this context, it does not normally appear
in cases where it is the company itself that is being sued (and these are the cases
that are relevant to the present discussion). Indeed, in England it can probably be
said that the principle is simply inapplicable to such cases.54 However, one of the
corporate defendants in the Australian case of Grimaldi v Chameleon Mining NL
(No 2) did escape liability through this use of the fraud exception.55
In that case, Chameleon was suing Murchison, a company controlled at the
relevant time by Mr Grimaldi, for knowing receipt and assistance in respect of
Mr Grimaldi’s breach of fiduciary duty. Murchison accepted that its ­controlling

49 cf the English case of Clark v Cutland [2003] EWCA Civ 810, [2004] 1 WLR 783, where knowledge

could be given later because the pension fund trustees were volunteers.
50 Australasian Annuities (n 47) [136]–[143] (Neave JA); [261]–[269] (Garde AJA, citing El Ajou).
51 Including those funds that were transferred from the natural person trustees. It is arguable that,

to a three-quarter extent, those funds had passed through the hands of bona fide purchasers for value.
Peter Watts makes the same point in his chapter in this volume.
52 On this point all four judges agreed: Australasian Annuities Pty Ltd (in liq) v Rowley Super Fund

Pty Ltd [2013] VSC 543 [100]–[116] (Almond J); Australasian Annuities (n 47) [97]–[105] (Warren
CJ), [135] (Neave JA), [303] (Garde AJA).
53 See Bilta (No 2) (n 37) [9], [44], [191]: endorsing the view taken in Watts and Reynolds (n 42)

para 8-213, that the exception simply describes situations where there is no need to impute knowledge
to the company. See also Watts, ‘Imputed Knowledge in Agency Law’ (n 42).
54 See Morris v Bank of India [2005] EWCA Civ 693, [2005] 2 BCLC 328 [114]; Bilta (UK) Ltd (in

liq) v Nazir (No 2) [2013] EWCA Civ 968, [2014] Ch 52 [34]; [2015] UKSC 23, [2016] AC 1 [87]–[88].
Also see Moulin Global Eyecare Trading Ltd (in liq) v CIR [2014] HKCFA 22, (2014) 17 HKCFAR 218
[101], [131] (Lord Walker of Gestingthorpe NPJ); E Lim, ‘Attribution in Company Law’ (2014) 77 MLR
780, 800–02.
55 Grimaldi (n 19).
 Equitable Liability of Corporate Accessories 287

mind was Mr Grimaldi and that his knowledge could be imputed to it, except
where it involved knowledge of a fraud on Murchison. By characterising
Mr ­Grimaldi’s actions as a fraud on Murchison, rather than (or in addition to)
a fraud on ­Chameleon, Murchison escaped liability to Chameleon.56 The fraud
exception was therefore applied to a case where the company was the defendant
rather than the claimant, with the reason being that the director’s scheme involved
a fraud on the defendant company as well as a breach of duty in respect of the
claimant company. It may be noted that a similar argument had been summar-
ily rejected by the English Court of Appeal in Morris v Bank of India,57 although
in that case the ‘fraud’ perpetrated on the defendant company was argued to
be exposing it to potential liability for fraudulent trading under the Insolvency
Act 1986, section 213. As the Court held, a company could never be liable for
fraudulent trading at all if that argument was valid.
Even if it is theoretically possible for a company to raise the fraud exception in
the context of defending claims, which seems extremely doubtful in England, it
should still be hard to characterise the fiduciary’s actions as a fraud on the com-
pany if that company is simply being used to channel funds away from a principal.
Merely exposing the company to liability in knowing receipt or assistance, and
liability for costs, will not be sufficient.

III. Differences between the Two Models

Section II outlined two different models of corporate accessory liability. This sec-
tion will discuss three areas where there is, or might be, a difference in outcome
depending on which model is applied. The areas to be discussed involve gain-based
liability (where liability among fiduciaries and third parties is several, and each is
not liable for gains made by the other); loss-based liability (where the position is
not entirely clear, but where the liability might differ between fiduciaries and third
parties); and the question of whether a plaintiff can recover on different bases
from the fiduciary and the third party, or whether to do so would be inconsistent.

A. Gain-Based Liability

An undoubted difference between treating a corporate accessory as an alter ego of

the fiduciary and treating it as a separate third party concerns accountability for

56 Murchison escaped liability in respect of some of Mr Grimaldi’s breaches, but not all: ibid [285],

[747].
57 Morris (n 54). In the Court of Appeal in Moore Stephens (A Firm) v Stone & Rolls Ltd (in liq)

[2008] EWCA Civ 644 [114], Mummery LJ commented with some geographical accuracy that such an
argument ‘turns the world upside down’.
288 Jamie Glister

gains. Under the alter ego model, the accessory would be liable for its gains and
gains made by the fiduciary. Similarly, the fiduciary would be personally liable for
gains actually made by the accessory. Under the second model, however, both the
fiduciary and accessory would be liable only for gains that they individually made.
To put it another way, liability for gains between fiduciaries and third parties is
several.
This is the position in a nutshell, but some further points can briefly be made.
First, the issue is not always recognised. In Warman International Ltd v Dwyer,58
for example, accounts of profits were sought by Warman International against
its former employee and fiduciary, Mr Dwyer, and against two businesses Dwyer
controlled, BTA and ETA. The trial judge had made a single order, against all three
of Dwyer, BTA and ETA, of the combined amount of the profits made by BTA and
ETA. The structure of this order was not challenged in the High Court, where the
Court noted:
It is arguable that any order, such as that made by the trial judge, for payment of a sum
determined by an account of BTA’s and ETA’s profits should be divided into two orders,
one against BTA alone for the amount determined by reference to its profits and the
other against ETA alone for the amount determined by reference to its profits … As has
been mentioned, however, Dwyer, BTA and ETA did not argue in this Court or in the
Court of Appeal that the respective orders made in the courts below should not have
been made against the three of them jointly. In the absence of any such argument, it has
effectively been common ground that any orders made should be against all three.59
Second, there is an argument that a dishonest assistant ought to be liable for profits
actually made by the fiduciary. This does not depend on any alter ego argument;
it is simply a question of the nature of the liability owed by someone who is genu-
inely a third party (and a similar issue is discussed in the next section in relation to
an assistant’s compensatory liability). The proposition derives support from a line
of Canadian cases,60 although it has been examined and rejected in recent years
by courts in both Australia61 and England.62 While the proposition was rejected
in Grimaldi, it was suggested that for reasons of legal policy a fiduciary and third
party might be jointly and severally liable for profits if they acted in concert to
secure a mutual benefit: it should not be for a plaintiff to ‘untangle’ such matters.63

58 Warman International Ltd v Dwyer (1995) 182 CLR 544.

59 ibid 569.
60 Canada Safety Ltd v Thompson [1951] 3 DLR 295, 323; D’Amore v MacDonald (1973) 32 DLR
(3d) 543, 549; Abbey Glen Property Corp v Stumborg (1976) 65 DLR (3d) 235, 282; MacDonald v Hauer
(1976) 72 DLR (3d) 110, 130; Hanson v Clifford 1994 CanLII 2982 (BCSC); see also SB Elliott and
C Mitchell, ‘Remedies for Dishonest Assistance’ (2004) 67 MLR 16, 40–41.
61 Glandon v Tilmunda [2008] NSWSC 218 [108]; Grimaldi (n 19) [557]; cf Hodgson v Amcor Ltd

[2012] VSC 94 [1718]–[1721]; see also Agricultural Land Management Ltd v Jackson (No 2) [2014]
WASC 102 [480]; JD Heydon, MJ Leeming and PG Turner, Meagher Gummow and Lehane’s Equity:
Doctrines and Remedies, 5th edn (Chatswood, LexisNexis Butterworths, 2015) para 5-270.
62 Ultraframe (n 13) [1595]–[1601]; Electrosteel Castings (UK) Ltd v Metalpol Ltd [2014] EWHC

2017 (Ch) [50]–[51].

63 Grimaldi (n 19) [558].
 Equitable Liability of Corporate Accessories 289

Third, the calculation of an account of profits may differ if the accessory is

considered a discrete third party. That is, the total amount of disgorgeable profit
recoverable (severally) from the fiduciary and accessory may be lower if accesso-
ries are considered separately. This is because the accounts may be calculated dif-
ferently when made in respect of a third-party accessory rather than a first-party
fiduciary. The Court of Appeal in Novoship drew a distinction between true fiduci-
aries and third parties in this context, and also noted that the court has discretion
to refuse an account sought from a third party.64 I return to this point below.65
Fourth (and this is a minor point) there is an occasional judicial tendency in
England to refer to equitable compensation as a remedy awarded pursuant to a
liability to account for profits.66 That is perhaps consistent with seeing equitable
compensation as nothing more than the amount owing after an account has been
taken, but it still sounds odd. It is worth mentioning because, as will be discussed
in the next section, it is probably the case in England that a dishonest assistant is
jointly and severally liable with the fiduciary for the principal’s loss. If the fidu-
ciary’s liability to account for profits is referred to as a liability to pay equitable
compensation calculated according to the amount of the profit, there is a risk that
the assistant may be held jointly and severally liable for that amount.

B. Loss-Based Liability

The second area where treatment might differ involves the assessment of equitable
compensation for the principal’s loss.67 The question here is whether a third-party
accessory is liable to the same extent as the wrongdoing fiduciary, or whether the
accessory is liable only for the consequences of his or her involvement in that
breach. Is a dishonest assistant liable for losses flowing from the underlying breach
in which he or she assists, or is the assistant liable only for the consequences of the
assistance itself? This question is relevant to our discussion because, if the com-
pensatory liability of third parties and fiduciaries is assessed differently, corporate
accessories could then be in a different position depending on whether they are
seen as separate third parties or as alter egos of the wrongdoing fiduciaries.
We should immediately note that the actions of an accessory may be so vital to
the carrying out of the fiduciary’s breach that it is appropriate to make the acces-
sory liable for the whole loss flowing from that breach. In many cases, the point
addressed here will therefore be hidden. But the important question is whether
this equal liability necessarily applies: once a baseline finding of assistance has been

64 Novoship (n 16) [94]–[115], [119]. The decision is criticised in W Gummow, ‘Dishonest Assis-

tance and Account of Profits’ (2015) 74 CLJ 405.

65 See Section IV.
66 eg FHR (n 26) [6].
67 Much of the material in this section is taken from the fuller discussion in J Glister, ‘Knowing

Assistance and Equitable Compensation’ (2016) 42 Australian Bar Review 152.

290 Jamie Glister

made out,68 along with the requisite mental element, is the accessory necessarily
liable to the principal69 for the consequences of the fiduciary’s breach?
This is an area where the law is somewhat unsettled, or at least is not firmly
entrenched. In England, the law appears to be that dishonest assistants will be
liable to the same extent as the fiduciary; that is, liable for the consequences of the
trustee’s breach. Those assistants are therefore unable to reduce the award of equi-
table compensation made against them by showing, for example, that the trustee
would have gone ahead regardless of their help. However, although this appears to
be the position, it cannot be regarded as entirely settled. The point has only been
part of the ratio in two decided cases; it was not closely argued in either case; and
in one of the cases the Court of Appeal gave an alternative reason for the result. In
addition, and while again the point cannot be regarded as settled, it may be that
the law in Australia takes the opposite view. The area will therefore be discussed
in some detail, although of course the material that follows does not apply only to
corporate accessories.

i. English Authorities
It is difficult to find old authorities directly on the point. This is probably because
the language of equitable compensation as a remedy for loss simply did not exist
until recently. Instead, the question was whether or not a third party was to be
made a ‘constructive trustee’ for the purposes of liability to restore the trust fund.
Within such language it is implicit that, once a third party was found to be a con-
structive trustee, the attendant liability was the same as that owed by the true
trustees.
In Wilson v Moore,70 agents of executors helped the executors to misapply estate
property. Today the case might be treated as one of inconsistent dealing or know-
ing assistance. Sir John Leach MR said:
If [the agents] Messrs Marryat are chargeable, it is because, in the consideration of a
Court of Equity, they, by being parties to a breach of trust, have themselves become trus-
tees for the purposes of the testator’s will … All parties to a breach of trust are equally
liable; there is between them no primary liability.71

68 A claimant ‘must at least show that the defendant’s actions have made the fiduciary’s breach

of duty easier than it would otherwise have been’: D Hayton, P Matthews and C Mitchell, Underhill
and Hayton: Law of Trusts and Trustees, 18th edn (London, LexisNexis, 2010) para 98.52; Brink’s Ltd
v ­Abu-Saleh [1999] CLC 133; Brown v Bennett [1999] 1 BCLC 649, 659.
69 Regardless of the extent of the third party’s liability to the principal, questions of contribution

may arise between the third party and the fiduciary: see C Mitchell, ‘Apportioning Liability for Trust
Losses’ in P Birks and F Rose (eds), Restitution and Equity vol 1: Resulting Trusts and Equitable Compen-
sation (London, LLP, 2000) 211; A Gurr, ‘Accessory Liability and Contribution, Release and Apportion-
ment’ (2010) 34 Melbourne University Law Review 410. An added Australian complication, which will
not be discussed here, is the potential application of the Civil Liability Acts.
70 Wilson v Moore (1833) 1 M & K 126.
71 ibid 146.
 Equitable Liability of Corporate Accessories 291

Wilson v Moore was followed in Cowper v Stoneham,72 where the question was
whether solicitors of trustees had made themselves constructive trustees through
intermeddling. Stirling J said that it was ‘not a case of primary liability on the part
of the trustees and secondary liability on the part of the solicitors, but that Messrs
Stoneham and the trustees are all equally liable’.73
The point being made in both cases was that the defendant third parties were
just as ‘primarily’ liable as the defaulting trustees themselves.74 The liability of the
third parties did not depend on the trustees being unable to satisfy a judgment,
or indeed on the trustees being pursued at all. Essentially, the cases simply deter-
mined that the same liability was owed by the trustees and the relevant third par-
ties. It is true that the cases did not explicitly address the point of the quantum of
liability as between the trustees and the third parties, but it was implicit in each
case that the full loss could be recovered from all defendants (subject to double
recovery).

a. Grupo Torras v Al-Sabah

In terms of the modern law, the starting point for any discussion must be Grupo
Torras SA v Al-Sabah (No 5),75 one of the two cases that actually decides or applies
the point. The case concerned a Spanish company, Grupo Torras, and its parent,
the Kuwait Investment Office, both of which were the victims of several large-scale
frauds perpetrated by their directors. It was alleged that several third parties had
dishonestly assisted these breaches. In response to the submission that a plaintiff
must prove that the dishonest assistance has itself caused the loss suffered by the
plaintiff, Mance LJ held:
The starting point in my view is that the requirement of dishonest assistance relates not
to any loss or damage which may be suffered, but to the breach of trust or fiduciary duty.
The relevant enquiry is in my view what loss or damage resulted from the breach of trust
or fiduciary duty which has been dishonestly assisted. In this context, as in conspiracy,
it is inappropriate to become involved in attempts to assess the precise causative signifi-
cance of the dishonest assistance in respect of either the breach of trust or fiduciary duty
or the resulting loss.76
Mance LJ actually applied the law as postulated, because (following a baseline
finding of the fact of assistance) he only considered whether defendants were

72 Cowper v Stoneham (1893) 68 LT 18.

73 ibid 19; see also Blyth v Fladgate [1891] 1 Ch 337, involving a solicitor-trustee who invested
money in a poorly-performing security. The question was whether the solicitor’s partners were also
liable for the loss suffered. Stirling J held that they were, but this was either on the grounds of vicarious
liability for the acts of a partner, or on the grounds that all three partners were co-trustees de son tort:
see the discussion of the case in Re Bell’s Indenture [1980] 1 WLR 1217, 1226–31.
74 In this respect compare liability under Lumley v Gye (1853) 2 E & B 216; discussed in Davies (n 1)

258–60.
75 Grupo Torras SA v Al-Sabah (No 5) [1999] CLC 1469.
76 ibid 1667; (Mance J had been appointed to the Court of Appeal between the hearing and the

decision).
292 Jamie Glister

dishonest in the Royal Brunei Airlines v Tan sense.77 Ultimately, Mance LJ found
that four assistants were not dishonest, and one, Mr Folchi, was dishonest.
Mr Folchi was a lawyer who had assisted in some of the frauds by carrying
out instructions that were obviously questionable. In respect of those frauds,
Mr Folchi was liable for the same amounts as were the wrongdoing fiduciaries. An
appeal by Mr Folchi failed, and the Court of Appeal expressly agreed with Mance
LJ’s analysis of the point. However, and perhaps unhelpfully, the Court of Appeal
also added the following comment: ‘In any case Mr Folchi was, as the judge found
on ample grounds, a linchpin of the arrangements for all four transactions’.78
This alternative reason for the result—that Mr Folchi’s conduct was sufficient on
any model to attract liability for the full amount—perhaps undermines to some
degree the authority of Mance LJ’s statement of principle.

b. Trustor v Smallbone
The essential facts of Trustor v Smallbone have already been given during the alter
ego discussion.79 The case is also relevant to the question of the extent of an assis-
tant’s liability because of a comment made by the Court of Appeal. The context
was that Rimer J had made an interim payment order against Mr Smallbone in
the amount of £1 million, and the Court of Appeal had to decide whether or
not this order could be justified. Rimer J had made the order on the basis that
Mr Smallbone would clearly be liable to Trustor for damages or compensation for
breach of his directors’ duties in an amount of at least £1 million. The order had
not been made on the basis of obvious liability in dishonest assistance. Scott VC,
with whom Buxton LJ and Gage J agreed, said:
Introcom is liable, as constructive trustee, to account for and repay to Trustor the Trustor
moneys that were paid to it. Hence the order for repayment to Trustor of the SEK 166.7
million, the £404,000 and the FIM 70.45 million (the whole totalling some £20 million
in value). In respect of £426,439, the Trustor money received by Mr Smallbone from
Introcom, Mr Smallbone, as well as Introcom is accountable. But what of the balance?
Introcom was the creature of Mr Smallbone. He owned and controlled Introcom. The
payments out by Introcom of Trustor money were payments made with the knowing
assistance of Mr Smallbone. Rimer J, on several occasions in his judgment, characterised
Mr Smallbone’s participation in the steps taken to extract Trustor’s money and pay it out
to various recipients without the authority of Trustor’s board as being dishonest … It
would follow, it seems to me, from the judge’s finding of dishonesty on Mr Smallbone’s part
in respect of the payments out made by Introcom of Trustor’s money, that Mr Smallbone
would be liable jointly and severally with Introcom for the repayment of that money with
interest thereon. Mr Smallbone’s joint and several liability would not be confined to the part
that he personally received. In my judgment, the judge’s order for an interim payment by
Mr Smallbone of £1 million was not justified as an interim payment on account of

77 Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378.

78 [2001] CLC 221, 255 (an appeal by another defendant was successful).
79 Trustor AB v Smallbone (n 10); Trustor AB v Smallbone (No 2) [2001] 1 WLR 1177.
 Equitable Liability of Corporate Accessories 293

­ amages or compensation for loss caused by breach of duty as a director. The amount of
d
that loss is still too uncertain. But Mr Smallbone is, in my view, clearly liable, jointly and
severally with Introcom, for the whole of the sums for which Introcom is accountable.80
In fact it is far from clear that Mr Smallbone could be characterised as a dishon-
est assistant, since what he was doing was causing Introcom, the first recipient of
tainted funds, to squirrel those funds still further away from Trustor. But the rel-
evant fiduciary breach was Mr Smallbone’s own, as a director of Trustor; it was not
that of Introcom. Putting that to one side, the paragraph does assume joint and
several liability on the part of a dishonest assistant for the whole loss suffered.81
But the point was merely assumed, and ultimately the Court of Appeal decided
not to uphold the order anyway—precisely because Mr Smallbone had not had
the opportunity to make submissions on the reasoning used in the passage quoted
above.

c. Casio Computer Co Ltd v Sayo

The analysis in Grupo Torras was applied by the Court of Appeal in Casio Com-
puter Co Ltd v Sayo,82 the only other case where the point has been important. The
case concerned the issue of whether, in an action for dishonest assistance, the act
of assistance constitutes a harmful event ‘relating to tort, delict or quasi delict’ for
the purposes of the Brussels Convention. The Court of Appeal held that it does.
A further question then arose relating to causation, because liability in tort, delict
or quasi delict ‘can only arise provided that a causal connection can be established
between the damage and the event in which that damage originates’.83 Tuckey LJ
referred to Grupo Torras:
Grupo Torras also establishes that in a claim for dishonest assistance it is not necessary to
show a precise causal link between the assistance and the loss. Loss caused by the breach
of fiduciary duty is recoverable from the accessory. This is the relevant causal connection
for this purpose. In the absence of such a connection the accessory would be under no
liability. So this type of claim does depend on there being ‘a causal connection between
damage and the event in which the damage originates’.84
Again, the point was not the subject of argument and it seems fair to say that its
correctness was assumed rather than decided. Having said that, in some ways Casio
v Sayo is the strongest authority in favour of joint and several liability because it
was necessary for the decision in the case and there was no alternative reason also
suggested for that decision (as there was in Grupo Torras). It can also be noted
that, although those two cases agree on the legal position in respect of the assis-
tant’s liability, they are not entirely consistent in their rationales. At least, there is a

80 Trustor AB v Smallbone (n 10) [97]–[98] (emphasis added).

81 Note the comment assumes liability for the whole loss on assistance grounds but only for the
amount received on receipt grounds; cf the approach to Trustor v Smallbone taken in Prest v Petrodel.
82 Casio Computer Co Ltd v Sayo [2001] EWCA Civ 661.
83 Handelskwekerij GJ Bier BV v Mines de Potassed’Alsace SA [1976] ECR 1735, 1746.
84 Casio (n 82) [15] (Tuckey LJ); see also [52]–[53] (Pill LJ).
294 Jamie Glister

difference of emphasis. In Grupo Torras, Mance LJ employed a legal policy argu-

ment: ‘it is inappropriate to become involved in attempts to assess the precise
causative significance of the dishonest assistance’.85 In Casio v Sayo, on the other
hand, it was treated as a causation point: as a matter of legal causation, assistance
of more than a de minimis level causes the whole loss suffered as a result of the
breach. (Of course, on this latter approach it is wrong to distinguish between lia-
bility ‘for the breach’ and liability ‘for the assistance’.)

d. Other Cases
The point has been mentioned in a few other English cases, but very little seems
to have turned on it and it has certainly not been explored. In Ultraframe (UK)
Ltd v Fielding, Lewison J said that he could ‘see that it makes sense for a dishonest
assistant to be jointly and severally liable for any loss which the beneficiary suffers
as a result of a breach of trust’.86 But the two claims for dishonest assistance made
in that case both failed: one for a lack of dishonesty, the other for a lack of relevant
assistance. In Madoff Securities International Ltd v Raven, Popplewell J said that
the ‘liability of the assistant is for such loss as the party in breach of fiduciary duty
would be liable for. It is not necessary to show that the assistance itself is causative
of any loss’.87 Again the point was not truly in issue, however: Popplewell J found
no relevant breach of fiduciary duty, no dishonesty on the part of the third party,
and said that in any case no loss was suffered. The point was also mentioned in
Novoship at first instance and on appeal,88 but that case was really about the calcu-
lation of accounts of profits.
In Otkritie International Investment Management Ltd v Urumov, Eder J said that
‘liability is not limited to the loss caused by [the] assistance but extends to the loss
resulting from the relevant breaches of fiduciary duty’.89 The point might have
had some relevance there because the relevant defendant, Mr Jemai, was clearly
not one of the ringleaders in the fraud and he might otherwise have sought to
reduce his liability. Having said that, Mr Jemai was found liable for the full loss
anyway on the alternative grounds of deceit and conspiracy.90 (It is also interesting

85 Grupo Torras (n 75) 1667. This is also the reason given in Snell: ‘Since the defendant’s fault is seri-

ous, he cannot put the claimant to proof of the specific causal connection between the assistance he
gave and the loss that ensued’: McGhee (n 19) para 30-081.
86 Ultraframe (n 13) [1600]. The original emphasis on ‘loss’ exists because Lewison J was really

addressing the point about whether an assistant is liable for gains made by the trustee.
87 Madoff Securities International Ltd v Raven [2013] EWHC 3147 (Comm) [339], cited in L Tucker,

N Le Poidevin and J Brightwell (eds), Lewin on Trusts, 19th edn (London, Sweet & Maxwell, 2015) para
40-053.
88 Novoship (n 14) [90]; Novoship (n 16) [103].
89 Otkritie (n 3) [79], citing Grupo Torras.
90 ibid [519]. Mr Jemai’s sister, Ms Jemai, was also found liable for certain amounts on perhaps

problematic bases (eg, she was found liable for dishonest assistance, or in the alternative knowing
receipt, in respect of money that she had not received and when the company could not easily be said to
be her alter ego: see [549]). Gloster LJ gave permission to appeal in [2015] EWCA Civ 766, not directly
on this quantification point, but it may still be useful to observe any full appeal. Mr Jemai’s application
was refused: [2015] EWCA Civ 916.
 Equitable Liability of Corporate Accessories 295

to note that Eder J saw the liability to pay equitable compensation and the liability
to account as separate—yet on a traditional analysis it was the liability to account
that informed the nature and extent of the relief.)

ii. Australian Authorities

Several cases in Australia appear to take the view that an assistant is liable for the
whole loss flowing from the breach. However, in none of these has the point been
important. In New Cap Reinsurance Corporation Ltd v General Cologne Re Australia
Ltd, Young CJ in Eq noted that ‘the accessory is jointly and severally liable with the
principal malefactor to pay the amount of equitable compensation required to
restore the trust fund’,91 but nothing apparently turned on it. In Re-Engine Pty Ltd
(in liq) v Fergusson, Dodds-Streeton J would have found a third party jointly and
severally liable with the fiduciary for the ‘total loss and damage to the plaintiffs
sustained by reason of his breaches of fiduciary duty’,92 but the claim for know-
ing assistance failed due to a lack of relevant assistance.Ward J referred to Mance
LJ’s Grupo Torras formulation in George v Webb,93 but the third party’s conduct in
that case was so egregious that he would undoubtedly have been made liable for
the whole loss on any approach. Ward J’s analysis of the area was then adopted in
Craigcare Group Pty Ltd v Superkite Pty Ltd.94 Hallen J did not find knowing assis-
tance proved in that case, but would have found the assistant liable for the whole
loss if he had done so.
The High Court case of Michael Wilson & Partners Ltd v Nicholls95 may require
a different answer, however. That case has a complicated history and it was not
directly concerned with the point under discussion here. Nonetheless, at least one
subsequent case has been decided on the basis that Michael Wilson mandates that
a knowing assistant is liable only for the consequences of the assistance and not the
consequences of the underlying fiduciary breach.

a. Michael Wilson & Partners Ltd v Nicholls

The case involved the plaintiff, Michael Wilson & Partners (MWP); Mr Emmott,
a former director and shareholder of MWP; and the defendants Mr Nicholls and
Mr Slater who were both former employees of MWP. The facts were relatively
straightforward: Emmott, Nicholls and Slater left MWP to form their own com-
pany and took some of MWP’s clients with them. MWP pursued various claims
against Emmott in London, under an arbitration agreement contained in his

91 New Cap Reinsurance Corporation Ltd v General Cologne Re Australia Ltd [2004] NSWSC 781
[34].
92 Re-Engine Pty Ltd (in liq) v Fergusson [2007] VSC 57 [131], [158]. Dodds-Streeton J had liability

for the breach, not the assistance, in mind.

93 George v Webb [2011] NSWSC 1608 [262].
94 Craigcare Group Pty Ltd v Superkite Pty Ltd [2014] NSWSC 326 [224], [267] (note this case came

after Michael Wilson, discussed below).

95 Michael Wilson & Partners Ltd v Nicholls [2011] HCA 48; (2011) 244 CLR 427.
296 Jamie Glister

contract, and pursued Nicholls and Slater in the Supreme Court of New South
Wales. Relevantly, MWP claimed that Nicholls and Slater had knowingly assisted
Emmott in the breach of his fiduciary duties to MWP.
To cut a very long story short,96 Mr Nicholls and Mr Slater argued that their
liability could not be determined until the final accounts had been struck between
Mr Emmott and MWP in London. Those accounts would include compensation
owed by Mr Emmott to MWP for losses caused by his breach of fiduciary duty.
But the accounts would also include (and this would almost certainly be a greater
amount) money due to Mr Emmott as a part owner of MWP. Mr Nicholls and
Mr Slater argued that they would only be liable to MWP in the event that the
accounts between Mr Emmott and MWP revealed an amount owing to MWP.
In effect, Nicholls and Slater were trying to take advantage of Emmott’s ability to
bring into the account his shareholding in the MWP business.
The Nicholls and Slater argument took the form of seeking a stay of the New
South Wales proceedings until the London arbitration had been concluded. They
argued that it would be an abuse of process to allow MWP to continue. The New
South Wales Court of Appeal had granted a stay, and MWP appealed to the High
Court. In allowing MWP’s appeal, Gummow ACJ, Hayne, Crennan and Bell JJ
said:
All of the arguments that asserted there was an abuse of process proceeded, explicitly or
implicitly, from a common starting point—that any liability of the respondents to MWP
for knowingly assisting Mr Emmott in the breach of his fiduciary duties was limited by
the nature and extent of the relief MWP sought and obtained in the arbitration of its
claims against Mr Emmott. That is, as Lindgren A-JA put the point, the liability of the
respondents was no more than ‘ancillary, or coordinate with’, the liability of Mr Emmott.
This understanding of the relationship between the liabilities of a defaulting fiduciary
and a knowing assistant of the fiduciary’s breach should not be accepted.97
Their Honours continued:
No matter how the allegation of abuse of process was formulated, the allegation depended
upon treating the liability of the respondents as necessarily confined by the extent of
Mr Emmott’s liability to MWP. This was said to be because the respondents’ liability to
MWP was no more than accessorial to the principal wrongdoing of Mr Emmott. That
is not so. The claims against the respondents, as knowing assistants, were not dependent
upon the claims made against Mr Emmott in the fashion asserted by the respondents.
As MWP rightly pointed out, this Court has held that liability to account as a construc-
tive trustee is imposed directly upon a person who knowingly assists in a breach of fidu-
ciary duty. The reference to the liability of a knowing assistant as an ‘accessorial’ liability
does no more than recognise that the assistant’s liability depends upon establishing,
among other things, that there has been a breach of fiduciary duty by another. It follows,
as MWP submitted, that the relief that is awarded against a defaulting fiduciary and

96 Fuller details can be found in Glister, ‘Knowing Assistance’ (n 67).

97 Michael Wilson (n 95) [100].
 Equitable Liability of Corporate Accessories 297

a knowing assistant will not necessarily coincide in either nature or quantum. So, for
example, the claimant may seek compensation from the defaulting fiduciary (who made
no profit from the default) and an account of profits from the knowing assistant (who
profited from his or her own misconduct). And if an account of profits were to be sought
against both the defaulting fiduciary and a knowing assistant, the two accounts would
very likely differ. It follows that neither the nature nor the extent of any liability of the
respondents to MWP for knowingly assisting Mr Emmott in a breach or breaches of his
fiduciary obligations depends upon the nature or extent of the relief that MWP obtained
in the arbitration against Mr Emmott.98
For present purposes, the question is whether the reasoning in these passages nec-
essarily ousts or forbids a rule which provides that a knowing assistant is liable
for the total loss suffered as a result of breach in which he or she assists. That
is a difficult question and can probably only be answered by observing the way
that later cases treat this aspect of Michael Wilson. But it can at least be said that
Michael Wilson did not have to be decided in such a way. This is because it is
quite possible to recognise that the quantum of equitable compensation owed by
a fiduciary and two knowing assistants is the same, and even owed by them jointly
and severally to the plaintiff, while still acknowledging that no defendant can take
advantage of a right of set off held by another defendant. If a plaintiff ‘recovers’
the loss from the fiduciary through including the figure in an accounting exercise,
the fiduciary may seek contribution from the assistants. Alternatively, the plaintiff
may proceed against the assistants first, recover from them, and then the equity
to prevent double satisfaction would mean that the liability could no longer be
included in the account taken with the fiduciary. The assistants could then claim
contribution from the fiduciary. It follows that it was not necessary, in rejecting
the model of liability proposed by Mr Nicholls and Mr Slater, to decide that there
was no link between the liability of a defaulting fiduciary and the liability of his
knowing assistants.
Nonetheless, at least one subsequent Australian case has treated Michael Wilson
as requiring fiduciaries and assistants to be treated separately as regards equita-
ble compensation. Singtel Optus v Almad99 involved a senior employee of Singtel
Optus, Mr Curtis, who breached his fiduciary duties by placing Optus’s business
with third-party companies he controlled. An account of profits was sought from
one of those companies, Sumo, while equitable compensation was sought from
another, Electrosales. Optus tried to make Electrosales liable for the same amount
of equitable compensation as was sought from Mr Curtis himself. But McDougall
J held, relying on the Michael Wilson case:
There is no principle that, where it has been shown that an ‘assistant’ has been knowingly
involved in a breach of duty by a fiduciary, the liabilities of the fiduciary and the assistant
must necessarily be the same. It is clear, for example, that one may be called upon to

98ibid [105]–[106] (references omitted).

99Singtel Optus v Almad [2013] NSWSC 1427 (point not considered on appeal: Hasler v Singtel
Optus Pty Ltd [2014] NSWCA 266, (2014) 87 NSWLR 609).
298 Jamie Glister

make compensation, and the other to account for profits. And it is equally clear that the
measure of loss recoverable from each may differ.100
It must immediately be noted that the point was not central to the case, and that
McDougall J did not even have the benefit of submissions on it. The same out-
come could also have been reached by noting that Electrosales did not relevantly
assist in many of the breaches in respect of which compensation was sought from
Mr Curtis.101 Even so, McDougall J explicitly decided the case on the grounds that
Michael Wilson stood as authority for the proposition that the measure of loss
recoverable from a fiduciary and an assistant could differ. The authors of the latest
edition of Meagher Gummow and Lehane agree. According to them, the Australian
position was formerly that ‘a knowing participant was joint and severally liable
with the defaulting fiduciary for losses suffered by the principal as a result of the
fiduciary’s breach of duty’.102 But the authors think that the law has now changed,
and they cite Michael Wilson & Partners Ltd v Nicholls in support of that position.
For the reasons given above, the law on assessing the equitable compensation
payable by a knowing or dishonest assistant is not entirely settled in either England
or Australia. Academic opinion on what the position should be is also divided.103
If assistants can reduce or eliminate their liability by showing that the fiduciary
would have gone ahead anyway and the same loss would have been suffered, or by
arguing that the assistance provided by other third parties had a greater causative
effect, then this will mark another difference between treating corporate acces-
sories as the alter egos or fiduciaries and treating them as discrete third parties.

C. Recovery on Different Bases from Fiduciary and Third Party

A claimant cannot recover both an account of profits and equitable compen-

sation from the same defendant in respect of the same breach. He or she must
elect between these inconsistent remedies.104 The equity against double recovery,
sometimes referred to as the principle of full satisfaction, also prevents a claimant

100 ibid [280].

101 ibid [284].
102 Heydon, Leeming and Turner (n 61) para 23-555.
103 See G Virgo, The Principles of Equity and Trusts, 2nd edn (Oxford, OUP, 2016) 735–37; Davies

(n 1) 257; M Campbell, ‘The Honest Truth about Dishonest Assistance’ [2015] Conveyancer and Prop-
erty Lawyer 159, 166–67; all taking the view that assistants are liable for the whole loss but criticising
this position. By contrast, and in support of that position, see Elliott and Mitchell (n 60); C Mitchell
and S Watterson, ‘Remedies for Knowing Receipt’ in C Mitchell (ed), Constructive and Resulting Trusts
(Oxford, Hart Publishing, 2010) 115, 150–53; and for different reasons, P Ridge ‘Justifying the Reme-
dies for Dishonest Assistance’ (2008) 124 LQR 445, 457–59; P Ridge, ‘Monetary Remedies for Equitable
Participatory Liability: General Principles and Current Questions’ in S Degeling and J Varuhas (eds),
Equitable Compensation and Disgorgement of Profit (Oxford, Hart Publishing, forthcoming).
104 Tang Man Sit v Capacious Investments Ltd [1996] 1 AC 514, 521. It is not entirely clear why the

remedies are inconsistent: see P Birks, ‘Inconsistency Between Compensation and Restitution’ (1996)
112 LQR 375; S Watterson, ‘Alternative and Cumulative Remedies: What is the Difference?’ (2003) 11
Restitution Law Review 7; A Burrows, The Law of Restitution, 3rd edn (Oxford, OUP, 2011) 628–29; and
Paul Davies’ chapter in this volume.
 Equitable Liability of Corporate Accessories 299

recovering compensation from several defendants in an amount greater than the

actual loss suffered. But a claimant apparently can claim equitable compensation
from the fiduciary and an account of profits against a third party: as we have seen,
the plurality in Michael Wilson said ‘the claimant may seek compensation from the
defaulting fiduciary (who made no profit from the default) and an account of prof-
its from the knowing assistant (who profited from his or her own misconduct)’.105
There do not appear to be many cases where this actually happens,106 and in
Michael Wilson no authority was cited on the exact point.107 The plurality simply
said it followed from the proposition that liability to account as a constructive
trustee is imposed directly on a third party. In any event, there must be limits to
the analysis. If a director causes £1 million to be paid away from the company to
a third party, the claimant company surely cannot recover £1 million from the
director as equitable compensation and an additional £1 million from the third
party as an account of profits. In form that appears consistent but in substance
it is double recovery for loss. Having said that, if the third party puts the money
to gainful use and turns the £1 million into £2 million, it should be possible to
recover these profits, and it should be possible to do so without being required to
abandon the claim against the fiduciary. The position should be this: the fiduciary
is liable for £1 million and the third party is liable for £2 million, but the claimant
cannot recover more than £2 million in total.108 That may be effected by ordering
that both the fiduciary and third party are liable in respect of £1 million (joint
and several liability for that sum), and ordering that the third party is liable for an
additional £1 million.
A more difficult analytical question is whether a claimant can still claim equita-
ble compensation from a third party after an account of profits has been secured
against the fiduciary. It might be argued that an election for an account of profits
against a fiduciary wrongdoer effectively ratifies the underlying breach, and means
that no liability to pay equitable compensation can then be grounded on it.
Again, these considerations do not pertain only to corporate accessories. But
they do provide another example of the possible difference in outcome between
treating corporate accessories as alter egos and treating them as discrete third
parties.

105 Michael Wilson (n 95) [106].

106 One is Singtel Optus (n 99), where compensation was sought from Mr Curtis and an account of
profits from Sumo. The latter was eventually given effect through a declaration of constructive trust.
107 The passage was adopted from the supplementary submissions of the appellant, and the only

authority cited there was a ‘cf ’ reference to a comment by McLelland J at trial in United States Surgical
Corp v Hospital Products International Pty Ltd (1982) 2 NSWLR 766, 817. The correct interpretation
of what McLelland J said there is a matter of debate: it has been questioned whether he meant to say
that assistants are liable for gains made by the fiduciary (see Heydon, Leeming and Turner (n 61) para
5-270), and on one reading it also suggests that assistants can be liable both for their gains and losses
suffered by the principal.
108 cf Charter plc v City Index Ltd [2008] Ch 313 [64]–[71].
300 Jamie Glister

IV. Conclusion

The previous section III explained the possible differences between treating a cor-
porate accessory as a discrete third party and treating it as the same actor as the
wrongdoing fiduciary. It must be remembered, however, that the discussion in this
chapter is focused specifically on corporate accessories that can (or could) be seen
as alter egos. The question is really about the differences in treatment that may be
seen here: would the outcome of a case be different if a corporate accessory that
could have been treated as an alter ego is instead treated as a discrete third party?
Some cases would indeed have different outcomes. We have seen that, in Aero-
star Maintenance v Wilson,109 Morgan J refused to treat the corporate accessory,
Avman Ltd, as the alter ego of its controller Mr Wilson. This meant Avman was
liable to disgorge profits it had made, but Mr Wilson was not. In the event, Avman
failed between the liability and quantum judgments. The fact that Mr Wilson
could not be made personally liable for the original Avman profits influenced
the claimant’s decision to elect for equitable compensation against Mr Wilson. If
Avman had been treated as an alter ego, the claimant would probably have elected
for an account of profits against Mr Wilson, but calculated on the basis of profits
actually made by Avman.
On the other hand, some of the distinctions identified in section III may not
obtain when applied to third parties who are so closely connected to the wrong-
doing fiduciaries that they may be seen as their alter egos. Take the specific point
about the calculation of accounts of profits, for example. Although the Court of
Appeal made it plain in Novoship that the assessment of accounts awarded against
fiduciaries and third parties would differ, it is not easy to see how such a difference
would work in a case where the third party was controlled by the wrongdoing
fiduciary. That is, even if the corporate accessory is to be considered as a discrete
third party, and not as the alter ego of the fiduciary, the fact that the third party
is controlled by the fiduciary must tell on the calculation of the account taken
against the accessory. It would seem wrong for equity to allow a fiduciary to limit
the scope of the obligations owed to his or her principal by operating through a
corporate vehicle and thereby putting gains that would otherwise have been dis-
gorgeable beyond the reach of that principal.
In conclusion, the liability of a corporate accessory could conceivably differ
depending on whether it is seen as the alter ego of its controller or as a separate
actor. That said, the closer the relationship between a company and its controller,
the less likely it will be that the company’s treatment under a ‘separate actor’ model
will be very different from its treatment under an ‘alter ego’ model. A company
treated as an alter ego can in theory be made liable for profits actually received

109 Aerostar Maintenance (n 39).

 Equitable Liability of Corporate Accessories 301

by its controller; however there do not appear to be any cases where this has been
the point of the exercise. Instead, the point of an alter ego analysis is to enlarge
the personal liability of the controller by including amounts that were actually
attributable to the company.110 Indeed, it is here where the distinction between the
two models will be more clearly seen: the different models of corporate accessory
liability may not significantly affect the liability of those accessories, but they will
change the personal liability of the wrongdoing company controller.

110 See Glister, ‘Diverting Fiduciary Gains’ (n 34).

302
 13
The Nature of ‘Knowing Receipt’

WILLIAM SWADLING

I. Introduction

Suppose a trustee holds a parcel of shares on trust for a class of objects. The trust
might be fixed or discretionary. For the sake of argument, assume the simplest
possible scenario, a fixed trust with one adult beneficiary. In breach of trust, the
trustee transfers the shares to the defendant. There are two types of claim the
beneficiary might bring against the defendant, one for the return of the shares
themselves, which we will call the ‘specific’ claim, the other a monetary claim for
their value, which we will call the ‘personal’ claim.
The specific claim is undoubtedly strict,1 subject only to a defence of the recip-
ient being ‘equity’s darling’. The personal claim, which is the subject matter of
this chapter, is, by contrast, fault based, although, as will be seen, there is contro-
versy over the exact level of fault required. For the moment, we will simply refer
to the fault requirement as one of ‘knowledge’. That ‘knowledge’ is of the rights
having been dissipated in breach of trust. The defendant might have had that
knowledge at the point of receipt, or have acquired it later, whilst the rights were
still vested in him.2
The purpose of this chapter is to examine the various explanations of the
personal claim. One is that there are in fact two potential personal claims, one in
unjust enrichment, the other in wrongs. This is the view of Lord Nicholls, writ-
ing extrajudicially,3 and Birks.4 The unjust enrichment claim is strict, though
yielding only the value of the rights received and subject to defences of change
of position and bona fide purchase. The wrongs-based claim, by contrast, is fault

1 Details of the specific claim are set out in section III below. It is often called ‘proprietary’, though

this is a misnomer as the rights which the court orders to be returned may well be personal.
2 Agip (Africa) Ltd v Jackson [1990] Ch 265, 291 (Millett J).
3 Lord Nicholls, ‘Knowing Receipt: The Need for a New Landmark’ in WR Cornish, R Nolan,

J O’Sullivan and G Virgo (eds), Restitution: Past, Present and Future (Oxford, Hart Publishing,
1998) 231.
4 P Birks, ‘Receipt’ in P Birks and A Pretto (eds), Breach of Trust (Oxford, Hart Publishing,

2002) 213.
304 William Swadling

based, requiring dishonesty, with relief extending to the beneficiary’s loss or the
recipient’s gains beyond the value of the rights themselves. The wrong, according
to Lord Nicholls, is a species of the equitable wrong of dishonest participation in
a breach of trust, akin to the common law wrong of inducing breach of contract.5
A second view holds that one who receives rights with knowledge of their dis-
sipation in breach of trust becomes a genuine trustee of such rights. In one ver-
sion of this thesis—that propounded by Mitchell and Watterson—such recipient
will become immediately accountable to the beneficiary for what he does with the
rights. Should he dissipate them in breach of trust, the beneficiary can falsify the
recipient’s account, thus rendering the recipient liable to be ordered by the court
to reinstate the trust fund, either in the hands of the original trustee or in new
trustees or in the beneficiary himself if he is of full age, sound mind and absolutely
entitled. Although the payment away will be a breach of trust, the claim is for fal-
sification and is not a claim in wrongdoing.6 A simpler version of this thesis is put
forward by both Gardner7 and Chambers,8 who likewise say that one who receives
rights with knowledge of a dissipation in breach of trust becomes a trustee of such
rights. They argue that the recipient will commit a breach of trust if such rights are
transferred by him to someone other than the original trustee or to new trustees
or to the beneficiary himself if of full age, sound mind and absolutely entitled.
The claim in knowing receipt, they say, is simply the money claim for the wrong
of breach of trust.
So far as the first view is concerned, the position adopted in this chapter is that
although analysing knowing receipt as claim in wrongs is possible, though not
the particular wrong of dishonest participation in a breach of trust, there can be
no claim in unjust enrichment on the scenario set out above for the simple rea-
son that the defendant’s enrichment, the shares, comes not from the beneficiary
claimant but from the trustee. The defendant’s enrichment, in other words, is not
at the beneficiary’s expense. As to the second view, the argument will be made that
the knowing recipient is not a trustee and is therefore under no duty to provide
an account which can be falsified; nor can he be sued for breach of trust. As indi-
cated above, the best account of the liability we call knowing receipt is that it is
an equitable wrong. However, it is not the ‘receipt’ which is the gist of the action,
but the later dealing with the rights in a way which is inconsistent with the terms
of the trust on which they were originally held. ‘Knowing receipt’, therefore, is
a misnomer—the liability is better seen as a species of the equitable wrong of
‘inconsistent dealing’.

5 Nicholls (n 3) 243–44. The other form of participatory liability according to Lord Nicholls is the

dishonest assistance of a breach of trust.

6 C Mitchell and S Watterson, ‘Remedies for Knowing Receipt’ in C Mitchell (ed), Constructive and

Resulting Trusts (Oxford, Hart Publishing, 2010) 115.

7 S Gardner, ‘Moment of Truth for Knowing Receipt?’ (2009) 125 LQR 20.
8 R Chambers, ‘The End of Knowing Receipt’ (2016) 2 Canadian Journal of Comparative and

Contemporary Law 1.
 The Nature of ‘Knowing Receipt’ 305

II. Two Possible Distractions

At the outset, we must notice two possible distractions. The first relates to rights
held beneficially at the point of dissipation. The second concerns the equitable
liability known as ‘inconsistent dealing’. As already indicated, the second turns out
not to be a distraction at all.

A. Rights Held Beneficially

This chapter is only concerned with rights previously held on trust, not those
held beneficially at the point of wrongful dissipation. Unfortunately, the distinc-
tion between the two has not always been properly drawn. In the past, the specific
and personal claims outlined above have also been available in cases concerning
persons in fiduciary relations with companies, for example, directors, who cause
through a breach of fiduciary duty on their part rights held outright by the corpo-
ration to be transferred away. Claims are then brought by the company against the
recipient to recover either the rights themselves or their value.
An example is Bank of Credit and Commerce International (Overseas) Ltd
v Akindele,9 where the defendant, Akindele, entered into a contract with Inter-
national Credit and Investment Co (Overseas) Co Ltd (ICIC), a company within
the BCCI group, for the purchase of shares in the holding company of the group,
BCCI Holdings, for US$10 million. The agreement provided that should Akin-
dele wish to sell the shares within two years, ICIC would buy them back at 15 per
cent compounded per annum more than he paid. Akindele exercised the option
and ICIC repurchased the shares for US$16.679 million. The liquidators of the
by now insolvent ICIC claimed the US$6.679 million profit from Akindele on the
ground that the whole scheme had been fraudulently entered into by its directors
to inflate the apparent worth of the BCCI group. This, they said, meant that the
sum claimed had been transferred to Akindele in breach of fiduciary duty and that
he was liable as a knowing recipient. At first instance, Carnwarth J rejected the
claim, though only on the ground that Akindele had acted honestly throughout—
a conclusion which the Court of Appeal refused to set aside, though at the same
time taking the opportunity to frame the enquiry not in terms of dishonesty but
of ‘unconscionability’. Akindele’s lack of knowledge of the directors’ fraud, it was
held, meant it was not ‘unconscionable’ for him to retain the profit.
This line of authority was, however, decisively rejected by the House of Lords
in Criterion Properties plc v Stratford UK Properties LLC.10 Two directors of the

9 Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2001] Ch 437 (CA); see

also Belmont Finance Corpn v Williams Furniture (No 2) [1980] 1 All ER 393 (CA); Eagle Trust v SBC
Securities [1993] 1 WLR 484; Cowan de Groot Properties v Eagle Trust [1992] 4 All ER 700; El Ajou
v Dollar Land Holdings [1994] 2 All ER 685 (CA).
10 Criterion Properties plc v Stratford UK Properties LLC [2004] UKHL 28, [2004] 1 WLR 1846 (HL).
306 William Swadling

c­ laimant company purported to enter into a ‘poison pill’ agreement on its behalf
with the defendant company. When the defendant company sought to enforce
the poison pill agreement, the claimant sought to have it set aside as against the
defendant company as having been procured by the directors of the claimant
company in breach of their fiduciary duty. The claim was argued in terms of the
defendant company being liable for the unconscionable receipt of rights from the
claimant, scil the rights under the poison pill agreement. The House of Lords held
that the claim was misconceived. Lord Nicholls said:
If a company (A) enters into an agreement with B under which B acquires benefits from
A, A’s ability to recover these benefits from B depends essentially on whether the agree-
ment is binding on A. If the directors of A were acting for an improper purpose when
they entered into the agreement, A’s ability to have the agreement set aside depends upon
the application of familiar principles of agency and company law. If, applying these
principles, the agreement is found to be valid and is therefore not set aside, questions of
‘knowing receipt’ by B do not arise. So far as B is concerned there can be no question of
A’s assets having been misapplied. B acquired the assets from A, the legal and beneficial
owner of the assets, under a valid agreement made between him and A.11
Thus, the issue was seen not as one of the unconscionable receipt of rights but
whether the claimant company gave authority for the signing of the poison pill
agreement. If it gave actual authority for the signing of the agreement, then there
was nothing wrong with the receipt of rights transferred under it. If there was no
actual authority, then the question was whether there was apparent (ostensible)
authority. However, even if apparent authority was present, it would not avail a
counterparty who knew or ought to have known that there was no actual author-
ity. According to Lord Scott:
If a person dealing with an agent knows that the agent does not have actual authority
to conclude the contract or transaction in question, the person cannot rely on apparent
authority. Apparent authority can only be relied on by someone who does not know that
the agent has no actual authority. And if a person dealing with an agent knows or has rea-
son to believe that the contract or transaction is contrary to the commercial interests of
the agent’s principal, it is likely to be very difficult for the person to assert with any cred-
ibility that he believed the agent did have actual authority. Lack of such a belief would be
fatal to a claim that the agent had apparent authority.12
In this respect, but in this respect alone, a test of constructive notice (which is what
unconscionable receipt might possibly be)13 would be relevant in a case where a
company is caused by a fiduciary acting in breach of duty to transfer rights it holds
beneficially to a third party. It is, however, crucial to understand that this issue
does not go to any recipient liability. It is concerned instead with the logically prior
question whether the contract, assuming there was such a contract, pursuant to

11 ibid [4].
12 ibid [31].
13 See text to nn 37–44.
 The Nature of ‘Knowing Receipt’ 307

which rights were transferred was valid. If the contract was valid, then that would
be the end of the matter.
What, however, of the situation where the contract is void on the ground that
there was no actual or apparent authority, or there was apparent authority but
the recipient knew or ought to have known of the lack of actual authority? Lord
Nicholls said that in such cases a strict liability personal claim in unjust enrich-
ment was available to the claimant company:
If … the agreement is set aside, B will be accountable for any benefits he may have
received from A under the agreement. A will have a proprietary claim, if B still has the
assets. Additionally, and irrespective of whether B still has the assets in question, A will
have a personal claim against B for unjust enrichment, subject always to a defence of
change of position. B’s personal accountability will not be dependent upon proof of
fault or ‘unconscionable’ conduct on his part. B’s accountability, in this regard, will be
‘strict’.14
Although this statement was obiter dicta in Criterion, it was accepted by the
New South Wales Court of Appeal in Fistar v Riverwood Legion and Community
Club Ltd15 and by the Full Court of the Federal Court of Australia in Great Invest-
ments Ltd v Warner.16 We are not concerned in this chapter with whether such a
proposition is correct, save to note that it is not free from criticism.17 Crucially,
however, the unjust enrichment claim in such cases is not caught by the objection
made below in respect of rights held on trust immediately prior to their disposi-
tion: in cases like Fistar and Great Investments, the defendant’s enrichment was
clearly at the claimant’s expense since it was the claimant itself which transferred
the rights to the defendant, not a third party.

B. Liability for Inconsistent Dealing

The second point to note is the existence of a species of equitable liability known
as ‘inconsistent dealing’. The leading case is Lee v Sankey.18 Here, a firm of solicitors
was employed by will trustees to receive the proceeds of the testator’s real estate,
which had been compulsorily purchased by a railway company. The solicitors were
to hold the money until a suitable investment became available. In breach of their
instructions, the solicitors paid over the money to one of the trustees without
the authority of the other. The money was then dissipated in breach of trust and,
the trustee in breach having died insolvent, a claim was successfully made against

14 Akindele (n 9) [4].
15 Fistar v Riverwood Legion and Community Club Ltd [2016] NSWCA 81.
16 Great Investments Ltd v Warner [2016] FCAFC 85.
17 R Stevens ‘The Proper Scope of Knowing Receipt’ [2004] Lloyd’s Maritime and Commercial Law

Quarterly 421, 425.

18 Lee v Sankey (1873) LR 15 Eq 204.
308 William Swadling

the solicitors for the loss by the surviving trustee and the trust beneficiaries. Bacon
VC held that the solicitors were:
liable to make good to the trust estate the amount of trust moneys which they received by
the authority of the two trustees, and from which they have not been discharged by any
act or authority of the same two trustees. It is well established by many decisions, that a
mere agent of trustees is answerable only to his principal and not to cestuis que trust in
respect of trust moneys coming to his hands merely in his character of agent. But it is
also not less clearly established that a person who receives into his hands trust moneys,
and who deals with them in a manner inconsistent with the performance of trusts of
which he is cognizant, is personally liable for the consequences which may ensue upon
his so dealing.19
Although for many years thought to be simply part of the liability known as know-
ing receipt, one difference to the scenario posited at the beginning of this chapter
is that the receipt by the solicitors in Lee v Sankey was perfectly lawful and not a
dissipation in breach of trust. This led Millett J (as he then was) in Agip (Africa)
Ltd v Jackson20 to state, contrary to the position adopted at the time by the prac-
titioner text Snell,21 that inconsistent dealing was a separate and distinct head of
liability from knowing receipt, and that ‘much confusion has been caused by treat-
ing [knowing receipt] as a single category and by failing to differentiate between a
number of different situations’. In his Lordship’s view, there were ‘two main classes
of case’:
The first is concerned with the person who receives for his own benefit trust property
transferred to him in breach of trust. He is liable as a constructive trustee if he received it
with notice, actual or constructive, that it was trust property and that the transfer to him
was a breach of trust; or if he received it without such notice but subsequently discovered
the facts. In either case he is liable to account for the property, in the first case as from
the time he received the property, and in the second as from the time he acquired notice.
The second and, in my judgment, distinct class of case is that of the person, usually an
agent of the trustees, who receives the trust property lawfully and not for his own benefit
but who then either misappropriates it or otherwise deals with it in a manner which is
inconsistent with the trust. He is liable to account as a constructive trustee if he received
the property knowing it to be such, though he will not necessarily be required in all cir-
cumstances to have known the exact terms of the trust.22
The conclusion this chapter will reach is that though it is right to question whether
cases of inconsistent dealing can properly be analysed as a species of knowing

19 ibid 211.
20 Agip (Africa) Ltd (n 2); see also Baden, Delvaux and Lecuit v Société General pour Favoriser le
Développement du Commerce et de l’Industrie en France SA (1983) [1993] 1 WLR 509, 571–72 (Peter
Gibson J).
21 PV Baker and P St J Langan, Snell’s Principles of Equity, 28th edn (London, Sweet & Maxwell,

1982) 194, 195.

22 Agip (Africa) Ltd (n 2) 291.
 The Nature of ‘Knowing Receipt’ 309

receipt, the best explanation of cases in Millett J’s first category is that they are in
fact a sub-category of the equitable wrong of inconsistent dealing.

III. The Specific Claim

We will now set out the nature of the specific claim. We do this because if the
defendant is ipso facto a trustee of the rights he receives, this may go some way to
explaining the personal claim as involving the duties of a trustee. The purpose of
this section is accordingly to demonstrate that, though commonly described as
such, the recipient is not a trustee of the rights he receives but simply liable to be
ordered to return them at the suit of the beneficiary.
It is well settled that if in the example given at the beginning of this chapter the
defendant still has the shares, he is liable at the suit of the trust beneficiary to be
ordered by a court to reconvey them in specie to the original trustees, or to the
solely-entitled adult beneficiary himself should he so choose. The same regime
will apply to the traceable proceeds of the shares should they have been exchanged
for other rights by the time of trial. This claim to the shares or their traceable pro-
ceeds will also apply to remote recipients, those who receive from the initial recipi-
ent, to those who receive from remote recipients, and so on. The specific claim is
strict. In other words, it does not matter what the recipient knew or ought to have
known when receiving the shares or their traceable proceeds.
The only defence to the specific claim is that the recipient was ‘equity’s darling’,
ie, that in good faith he gave value in exchange for a right recognised by the com-
mon law (and shares are such rights) and that he had no notice, actual, construc-
tive, or imputed, that the original transfer was made in breach of trust.23 It is
important to stress that this must be a purchase24 for value of a legal right; if equi-
table rights are transferred in breach of trust, for example, where the transferred
rights were the subject matter of a sub-trust, bona fide purchase will not avail the
recipient, no matter how much value he gave, how much bona fides he possessed,
and how little notice he had.
What is the status of the person who still has the shares or their traceable pro-
ceeds but who is not equity’s darling? It is often said that he is a trustee of such
rights. But what sort of trust is this? Is the recipient a trustee of an express trust?
Or is it a constructive trust? It is clearly not an express trust. Take the case of
an innocent recipient who gives no value. No one would say that they had the
same duties as the trustee from whom the rights were received. If, for example,
the recipient gave away the shares whilst innocent, it is accepted on all sides that

23 Pilcher v Rawlins (1872) 7 Ch App 259.

24 Purchase in this context means consensual transfer rather than transfer by operation of law, eg,
as on intestacy. Thus, a gift is a ‘purchase’, which explains the otherwise redundant requirement that
the purchase be ‘for value’.
310 William Swadling

he would not be personally liable for breach of trust. Nor would he be liable if he
spent the dividends earned from the shares on a holiday for himself. Yet such acts
by the original trustee would undoubtedly make him liable to be sued for breach.
At best, therefore, the recipient can only be a constructive trustee of a constructive
trust, though that still leaves open the question of the content of such constructive
‘trust’. It is, however, submitted that the language of trusteeship is inapt even here.
The description of the defendant as a trustee seems to be used only to indicate that
he does not hold the rights beneficially, that they are encumbered by the ability of
the beneficiary to obtain a retransfer.
The description of the recipient as a trustee in such a situation is probably due
to a dictum of Lord Lindley in Hardoon v Belilios, where he said: ‘All that is neces-
sary to establish the relation of trustee and cestui que trust is to prove that the legal
title was in the plaintiff and the equitable title in the defendant’.25 Such thinking
was, however, rightly rejected by Lord Browne-Wilkinson in Westdeutsche Landes-
bank Girozentrale v Islington LBC, where he described the proposition that ‘where
the legal title is in A but the equitable interest in B, A holds as trustee for B’ as
‘fallacious’.26 His lordship said:
There are many cases where B enjoys rights which, in equity, are enforceable against the
legal owner, A, without A being a trustee, eg an equitable right to redeem a mortgage,
equitable easements, restrictive covenants, the right to rectification, an insurer’s right
by subrogation to receive damages subsequently recovered by the assured … Even in
cases where the whole beneficial interest is vested in B and the bare legal interest is in A,
A is not necessarily a trustee, eg where title to land is acquired by estoppel as against the
legal owner; a mortgagee who has fully discharged his indebtedness enforces his right
to recover the mortgaged property in a redemption action, not an action for breach of
trust.27
Moreover, the statement in Hardoon v Belilios should not be taken out of context.
That was a case of an express trust, with shares being vested in the claimant for
a third party. The defendant was an assignee of the third-party beneficiary. The
claimant trustee was held liable on calls made on the shares and sought an indem-
nity from the defendant, who sought to escape liability on the ground that he had
made no promise to indemnify. The Privy Council held that it did not matter, that
it was enough that there was a trustee/beneficiary relationship. The case therefore
says nothing about the operation of constructive trusts.28

25 Hardoon v Belilios [1901] AC 118, 123.

26 Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669, 706.
27 ibid 706–07.
28 One decision which might be cited in support of the proposition Lord Browne-Wilkinson

thought fallacious is the Court of Appeal case of Independent Trustees Services Ltd v GP Noble Trustees
Ltd [2012] EWCA Civ 195, [2013] Ch 91 (CA), where at [79] doubt is thrown on his Lordship’s reason-
ing by Lloyd LJ. However, this is immediately qualified at [83] by the statement that: ‘It may not matter
whether the holder of the legal title who is liable to be sued so as to enforce such rights is or is not to be
categorised as a trustee. What does matter is the recognition of the right to sue and thereby to enforce
those rights, in relevant circumstances’. Moreover, Lloyd LJ relied on an article by Sir Peter Millett
 The Nature of ‘Knowing Receipt’ 311

The upshot, therefore, is that there is no need to describe the recipient of

rights dissipated in breach of trust as a trustee; it is enough to say that he takes
subject to an encumbrance, viz the beneficiary’s ability to obtain from the
court an order that he reconvey the rights he received. We are perfectly happy
to describe other encumbrances in such terms, for example, leases, easements
and restrictive covenants over land, so it is difficult to see why the language of
trusteeship is needed here.

IV. The Personal Claim

We now turn to the focus of this chapter, the personal claim. If by the time of
trial the defendant no longer has the shares or their traceable proceeds, he will
be liable at the suit of the beneficiary to be ordered by the court to pay a sum of
money to the beneficiary representing the value of the shares if he had knowledge
at the point of receipt that the shares were transferred to him in breach of trust
and he received the shares beneficially. He will also incur such liability if, though
innocent at the point of receipt, he acquired the knowledge later, before dissipat-
ing the shares. Like the specific claim, the only defence will be that the defendant
was equity’s darling, a bona fide purchaser of a legal right for value without notice,
actual, constructive, or imputed.

A. Constituent Elements of ‘Knowing Receipt’

i. Rights Transferred in Breach of Trust

The first requirement of the liability is that the rights received were originally
transferred in breach of trust. As we have seen, rights held beneficially at the point
of the impugned transfer are not the subject of this liability.

ii. Knowledge
The second requirement is that the recipient knew, either at the point of receipt,
or later whilst they were still vested in him, that the rights received were previ-
ously held on trust for the claimant beneficiary and transferred away in breach.
There is, however, no agreement on exactly what knowledge means in this con-
text, which is undoubtedly a product of the failure of judges properly to analyse

(as he then was) entitled ‘Restitution and Constructive Trusts’ (1998) 114 LQR 399, where he said,
at 404, that the issue was ‘essentially a question of semantics’ and that it ‘probably does not matter if we
say that the relationship is not a trust relationship, so long as we call it something else. The trouble is
that we have no other name for it’.
312 William Swadling

the type of ­liability in question. In re Montagu’s Settlement Trusts,29 Megarry V-C,

after a careful review of the authorities and much argument, held that knowl-
edge meant exactly what it says, that the defendant must know of the dissipation
in breach of trust, or have deliberately shut his eyes to the possibility. This was
to be contrasted with ‘notice’, which included not only what the defendant knew
(actual notice), but also what he would have discovered had he made reasonable
enquiries and inspections (constructive notice), and the knowledge of his agent
(imputed notice). In re Montagu’s Settlement Trusts itself, the claimants were keen
to attribute the knowledge of the defendant’s solicitors to the defendant recipient,
but Megarry V-C said that whilst that was the right test in relation to disqualifying
the defendant from any defence of bona fide purchase for value without notice—
which had no possible application on the facts as the recipient was a donee—only
conduct amounting to a ‘want of probity’ would suffice for the personal claim,
which required either knowledge or a deliberate closing of the eyes.30
On the other hand, many judges do talk in terms of notice. Thus, Millett J in
Agip said that constructive notice was enough for the personal claim:
[T]he person who receives for his own benefit trust property transferred to him in breach
of trust … is liable as a constructive trustee if he received it with notice, actual or con-
structive, that it was trust property and that the transfer to him was a breach of trust, or
if he received it without such notice but subsequently discovered the facts.31
This was also the view of the Supreme Court of Canada in Citadel General Assur-
ance Co v Lloyds Bank Canada, where La Forest J said:
Relief will be granted where a stranger to the trust, having received trust property for his
or her own benefit and having knowledge of facts which would put a reasonable person
on inquiry, actually fails to inquire as to the possible misapplication of trust property.
It is this lack of inquiry that renders the recipient’s enrichment unjust.32
The Canadian Supreme Court was there talking of the claim being in unjust enrich-
ment, in which case, as we will see, a fault requirement makes no sense whatever.
Finally, in the recent decision of Papadimitriou v Crédit Agricole Corp & Investment
Bank,33 Lord Sumption did exactly what Megarry V-C said could not be done
and equated the test for notice in the defence of bona fide purchase with that of
knowledge in recipient liability, thus incorporating even imputed notice. He said:
Whether a person claims to be a bona fide purchaser of assets without notice of a prior
interest in them, or disputes a claim to make him accountable as a constructive trustee

29 Re Montagu’s Settlement Trusts [1987] Ch 264.

30 ibid 285.
31 Agip (Africa) Ltd (n 2). His Lordship took the same view in El Ajou v Dollar Land Holdings plc

[1993] 3 All ER 717. The Court of Appeal also adopted a constructive notice approach in Houghton
v Fayers (2000) 2 ITELR 512 (CA), where Nourse LJ said that the defendant will be personally liable
for receipt if he knew or ought to have known that the money was paid in breach of fiduciary duty. It
should, however, be noted that constructive notice may well be the correct test in such cases, which all
involve rights being held outright before the impugned dissipation.
32 Citadel General Assurance Co v Lloyds Bank Canada [1997] 3 SCR 805 [49].
33 Papadimitriou v Crédit Agricole Corp & Investment Bank [2015] UKPC 13 (PC).
 The Nature of ‘Knowing Receipt’ 313

on the footing of knowing receipt, the question what constitutes notice or knowledge is
the same.34
The point, however, was unnecessary for the decision; moreover, the case was a
Privy Council one on appeal from Gibraltar. It is, however, vital to understand that
the facts which disqualify a defence of equity’s darling and the level of knowledge
required for liability for receipt have nothing whatever to do with each other. The
first is concerned with the question whether an equitable interest survives a trans-
fer of a legal right which it burdens, which legal right may or may not have been
held on trust. Thus, prior to the enactment of the various registration regimes in
land law,35 it was the test used to decide whether titles to land were burdened by
prior equitable36 encumbrances such as restrictive covenants, equitable easements,
options to purchase and so on. The latter, by contrast, is concerned with the ques-
tion whether a court will order a defendant to put his hand in his pocket and pay
a sum of money to a trust beneficiary. The confusion in this area is again sympto-
matic of the fact that no judge has stopped to examine the nature of the liability
we call knowing receipt.
Finally, we have the hopeless formulation in the decision of the Court of
Appeal in BCCI v Akindele,37 where we are told that the test for recipient liability
is whether it would be ‘unconscionable for the defendant to retain what he has
received’.38 We have already seen how the House of Lords in Critierion held that
the Court of Appeal in Akindele was wrong to see the case in terms of recipient
liability. It is in any case odd for the Court to use the language of ‘retention’ in
cases where the defendant no longer has the right in question. It is even odder,
however, to talk about ‘unconscionability’, relying, as the Court did, on the Privy
Council decision in Royal Brunei Airlines Sdn Bhd v Tan,39 where that word was
expressly said to be unworkable as a test in the context of assistance liability.40
Predictably, no one knows what it means. Nor is it possible to know. As Birks
pointed out:
‘Unconscionable’ gives no guidance. At one extreme it is unconscionable not to repay
what you were not intended to receive. At the other extreme, it is unconscionable to be
dishonest. ‘Unconscionable’, indicating unanalyzed disapprobation, thus embraces every
position in the controversy.41

34 ibid [33].
35 Land Charges Act 1925; Land Registration Act 1925.
36 Legal encumbrances bound without more.
37 Akindele (n 9).
38 ibid 455.
39 Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 (PC).
40 ibid 392 (Lord Nicholls): ‘It is essential to be clear on what, in this context, unconscionable means.

If unconscionable means no more than dishonesty, then dishonesty is the preferable label. If uncon-
scionable means something different, it must be said that it is not clear what that something different
is. Either way, therefore, the term is better avoided in this context’ (emphasis in original).
41 Birks, ‘Receipt’ (n 4) 226.
314 William Swadling

Looking to how the word is treated in the courts, unconscionability might be said
to exclude constructive notice, and that was certainly the view of Judge Chambers
QC in Papamichael v National Westminster Bank plc.42 However, in Akindele itself,
Nourse LJ said that unconscionability lay somewhere ‘between actual and con-
structive knowledge’ in the context of the particular case.43 As we have seen, this
may well be correct in a claim which turns on whether one contracting party can
rely on the other’s apparent authority. But in the context of recipient liability, the
test of ‘unconscionability’ is best forgotten.44

iii. Beneficial Receipt

A lack of understanding of the nature of recipient liability also seems to explain
the third requirement, that the defendant’s receipt be ‘beneficial’. In Agip (Africa)
Ltd v Jackson,45 the defendants escaped liability for receipt (but not assistance)
because they received the rights as agents and passed them on to third parties
according to instructions issued by their principal. Millett J said:
The essential feature … is that the recipient must have received the property for his own
use and benefit. This is why neither the paying nor the collecting bank can normally
be brought within it. In paying or collecting money for a customer the bank acts only
as his agent. It is otherwise, however, if the collecting bank uses the money to reduce
or discharge the customer’s overdraft. In doing so it receives the money for its own
benefit.46
According to Millett J, this was not ‘a technical or fanciful requirement. It is essen-
tial if receipt-based liability is to be properly confined to those cases where the
receipt is relevant to the loss’.47
A requirement of beneficial receipt is, however, decidedly odd since,
ex hypothesi, the recipient will not take the rights beneficially unless he is equity’s
darling, in which case he will escape liability completely. What Millett J seems to
be talking about, therefore, is how the defendant perceives himself to be taking
the right.
The requirement can also lead to bizarre results. As Agip itself shows, if the
defendant is an agent, he is free of recipient liability, no matter that he has actual
knowledge that the dissipation is in breach. So, too, if he takes as trustee, another
form of non-beneficial receipt. Suppose I hold shares on trust for a claimant. In
breach of trust, I transfer those shares to the defendant to hold on trust for my
son. The defendant will not, apparently, be liable to a personal receipt claim by the

42 Papamichael v National Westminster Bank plc [2003] EWHC 164 (Comm) [247], [2003] 1 Lloyd’s

Rep 341.
43 Akindele (n 9) 458.
44 Unfortunately, despite Criterion, some cases still use unconscionability as a test of liability, one

example being Charter plc v City Index Ltd [2007] EWCA Civ 1382, [2008] Ch 313 (CA).
45 Agip Africa Ltd (n 2) aff ’d [1991] Ch 547 (CA).
46 ibid 292.
47 ibid.
 The Nature of ‘Knowing Receipt’ 315

claimant even if he has actual knowledge of my breach.48 There is no good reason

for the defendant to escape liability here.49 As seen above, the motivation of Millett
J’s rule in Agip was the protection of banks. However, banks always give value in
exchange, so are potentially equity’s darlings. It is also important to note that Lord
Millett is a supporter of the unjust enrichment analysis of recipient liability,50
where ministerial receipt is certainly a defence.51 However, if, as will be argued
below, recipient liability is not a species of unjust enrichment, then it may be that
the requirement of beneficial receipt is misplaced.

V. Understanding the Liability

What then is it that triggers the liability in knowing receipt? Is it a species of

wrongdoing? Is it unjust enrichment? Or is it something else altogether?

A. The Language of Awards

One thing obscuring analysis in this area is the language of the awards made by
the courts. Orders to pay money at common law come in various guises: damages,
debt, payment of the agreed sum, and money had and received. However, since
this is a claim by a beneficiary of a trust, and the common law does not recog-
nise trusts, it is of necessity a claim in equity. Here, money claims are couched
in terms of the ‘accountability of a trustee’.52 The language is, however, fictitious.
As Ungoed-Thomas J explained in Selangor United Rubber Estates Ltd v Cradock
(No 3), a case concerned with liability for assisting a breach of trust, such a defend-
ant is not a trustee, merely ‘liable to account as though he were a trustee’.53 Unfor-
tunately, many cases ignore the fiction and speak of the defendant being ‘liable to
account as a constructive trustee’. Indeed, in one of the leading cases of recipient
liability, Hoffmann LJ unhelpfully described the claim as one ‘to enforce a con-
structive trust on the basis of knowing receipt’.54
The language of accountability ‘as if ’ or (worse) as a ‘constructive trustee’ poses
a number of difficulties of analysis, most especially the fact that it is used to cover

48 El Ajou (n 31) 738 (Millett J); Savings & Investment Bank Ltd v Fryers [1990–92] MLR 339, 362.
49 He will not escape liability in New Zealand (Gathergood v Blundell & Brown Ltd [1992] 3 NZLR
643) or in Australia (Quince v Varga [2008] QCA 376).
50 El Ajou (n 31) 738–40; Twinsectra Ltd v Yardley [2002] 2 AC 164, [105] (HL).
51 A Burrows, The Law of Restitution, 3rd edn (Oxford, OUP, 2011) 558–68.
52 More recently, there has also been a tendency to use the language of equitable compensation,

even, bizarrely, for claims which have as their object the disgorgement of gains: FHR European Ventures
v Mankarious [2014] UKSC 45 (SC) [1], [6], [7], [22], [33], [41], [42].
53 Selangor United Rubber Estates Ltd v Cradock (No 3) [1968] 1 WLR 1555, 1583 (emphasis

supplied).
54 El Ajou (CA) (n 9) 700.
316 William Swadling

many sorts of different liabilities. Thus, compensation claims against those who
commit the equitable wrong of dishonestly assisting a breach of trust are framed
in such terms, as are claims made against those who make gains in breach of fidu-
ciary duty.55 It is even used in equitable unjust enrichment claims, for example, in
cases of undue influence.56
At a general level, therefore, it is impossible to work backwards from the lan-
guage of remedy to deduce what is going on. In this respect, knowing receipt might
be a claim in unjust enrichment, a claim in wrongs, or something else altogether.
It is like saying there is a money remedy at common law and trying to work out
from that fact alone the nature of the cause of action. In our case, the only thing
we know is that some sort of analogy is being drawn with the position of a trus-
tee; what we do not know is whether this is at the substantive or remedial stage
of the enquiry. In other words, we do not know whether some of the duties of the
trustee are being exported to the recipient (substantive), or whether what is at
stake is merely a liability to be ordered to do what trustees are sometimes ordered
by courts to do, viz, put their hands in their pockets and pay over money to the
claimant (remedial).
Of late, courts have eschewed the use of the language of accountability as a
constructive trustee in money claims against non-trustees, saying that it has no
substantive content and is purely remedial. Thus, in Paragon Finance Plc v DB
Thakerar & Co, Millett LJ said:
Equity has always given relief against fraud by making any person sufficiently implicated
in the fraud accountable in equity. In such a case he is traditionally though I think unfor-
tunately described as a constructive trustee and said to be ‘liable to account as construc-
tive trustee’. Such a person is not in fact a trustee at all, even though he may be liable to
account as if he were. He never assumes the position of a trustee, and if he receives the
trust property at all it is adversely to the plaintiff by an unlawful transaction which is
impugned by the plaintiff. In such a case the expressions ‘constructive trust’ and ‘con-
structive trustee’ are misleading, for there is no trust and usually no possibility of a pro-
prietary remedy; they are ‘nothing more than a formula for equitable relief ’.57
His lordship made similar remarks in Dubai Aluminium Co Ltd v Salaam, where
he described the ‘constructive trust’ as ‘merely the creation of the court … to meet
the wrongdoing alleged: there is no real trust’.58
More recently, in Williams v Central Bank of Nigeria, Lord Sumption said that
cases of assisting a breach of trust and the receipt of rights dissipated in breach
involve:
[P]ersons who never assumed and never intended to assume the status of a trustee,
whether formally or informally, but have exposed themselves to equitable remedies by

55 Attorney General for Hong Kong v Reid [1994] 1 AC 324 (PC).

56 Allcard v Skinner (1887) 36 ChD 145 (CA).
57 Paragon Finance Plc v DB Thakerar & Co (A Firm) [1994] 4 All ER 400, 409 (CA).
58 Dubai Aluminium Co Ltd v Salaam [2003] 2 AC 366, 404 (HL).
 The Nature of ‘Knowing Receipt’ 317

virtue of their participation in the unlawful misapplication of trust assets. Either they
have dishonestly assisted in a misapplication of the funds by the trustee, or they have
received trust assets knowing that the transfer to them was a breach of trust. In either
case, they may be required by equity to account as if they were trustees or fiduciaries,
although they are not … The intervention of equity in such cases does not reflect any
pre-existing obligation but comes about solely because of the misapplication of the
assets. It is purely remedial.59
However, despite the courts’ recent preference for the language being purely
remedial, one question addressed below is whether, in the particular instance of
recipient liability, the language of constructive trusts is not a fiction but entirely
appropriate, that there really is a trust and duties of trusteeship in such cases.
However, we begin with unjust enrichment.

B. A Liability in Unjust Enrichment

Peter Birks originally explained the personal claim for the receipt of rights dissi-
pated in breach of trust as one in unjust enrichment.60 Liability in unjust enrich-
ment is generally strict, which meant that the fault requirement in a case like Re
Montagu was immediately out of place, but that was precisely the point of Birks’
analysis. Drawing on standard cases of unjust enrichment, in particular, the strict
liability of the recipient of a mistaken payment in a case like Kelly v Solari,61 where
the claimant insurance company allegedly paid out by mistake to the defendant
on a policy which had lapsed, Birks argued that the same rationale applied to the
recipient of rights dissipated in breach of trust. In the case of the mistaken pay-
ment, strict liability is explained by the law’s focus on the lack of the claimant’s
consent to the transfer, more particularly, its vitiation (due to the mistake). The
state of mind of the recipient is neither here nor there, at least when determining
the constituent elements of the cause of action.62 In the case we are discussing, the
claimant beneficiary gave no consent whatever to the transfer; he was ‘ignorant’ of
it. According to Birks, that made it an even stronger case for strict liability. Yet the
case law requires fault, which, he said, must be a mistake.
Though never abandoning this thesis, Birks later changed his mind in one
important respect. This was in his adoption63 of the view of Lord Nicholls that
there are two possible claims in such a scenario: a strict liability unjust enrichment
claim and a fault-based claim in wrongs.64 The claim in wrongs would be relevant

59 Williams v Central Bank of Nigeria [2014] UKSC 10, [2014] AC 1189, [9].
60 P Birks, ‘Misdirected Funds: Restitution from the Recipient’ [1989] Lloyd’s Maritime and
Commercial Law Quarterly 296.
61 Kelly v Solari (1841) 9 M & W 54.
62 The defendant’s state of mind may, however, be relevant in the context of defences.
63 Birks, ‘Receipt’ (n 4) 223.
64 Nicholls (n 3) 244.
318 William Swadling

where what was sought was a sum greater than the amount by which the defend-
ant was enriched. For example, the trustee might have lost valuable investment
opportunities whilst the trust rights were in the hands of the defendant; the only
way through to such losses would be via a claim in wrongs. So, too, with second-
ary gains.
Let us focus for now, however, on the unjust enrichment explanation of the
receipt claim. It suffers from a number of difficulties. The first is that there is
no recognised unjust factor. As just seen, Birks based his cause of action on the
­beneficiary’s ‘ignorance’ of the transfer away of the trust rights, but ignorance has
never been acknowledged as an unjust factor, even at common law.65 At common
law, Birks relied on cases such as Holiday v Sigil,66 where the plaintiff dropped a
£500 note which was then picked up by the defendant. The claimant brought a suc-
cessful action for money had and received and the defendant was ordered to pay
him £500. However, this is hardly authority for a ground of ignorance at common
law. First, no argument was made in the case other than as to the type of evidence
admissible to prove the alleged facts. Second, the long-abolished action for money
had and received was multi-causal. Though it could be brought for certain cases
of unjust enrichment, it was also available for wrongdoing, and even consensual
debts. Third, the defendant’s enrichment could not be said to be at the claimant’s
expense. There is no doubt that the defendant was enriched by his taking of the
physical note itself, the ‘thing’, but what he did not receive was the claimant’s right
with respect to the thing. In this respect, it is different from the cases with which
Birks makes a comparison where the claimant’s right passes to the defendant. The
point has been noted by Chambers. In speaking of the difference between a per-
son to whom a title to a car was transferred as a result of a fraudulently induced
mistake and one who received a title from someone who stole the car, he wrote:
The real difference between us is the source of our enrichment. You received the previous
owner’s title, the transfer of which was flawed and therefore reversible. In contrast, the
true owner of my stolen car retains a title which was never transferred to me. The thief
who stole the car thereby obtained a new title (that is, a new right to possession created
simply by taking possession). I acquired the thief ’s title, and my enrichment is not at the
owner’s expense. While the owner can sue me for wrongful interference with her or his
right to possession, this is not a claim for restitution of unjust enrichment. The owner is
enforcing a pre-existing right to possession (presumably acquired by consent) and not
attempting to reverse the thief ’s transfer to me.67
The position in equity is no different. The precise problem was pointed out by
Lionel Smith in 2000.68 Once again, the defendant is enriched in the example

65 See further WJ Swadling, ‘Ignorance and Unjust Enrichment: The Problem of Title’ (2008)

28 OJLS 627.
66 Holiday v Sigil (1826) 2 Car & P 177.
67 R Chambers, ‘Two Kinds of Enrichment’ in R Chambers, C Mitchell and J Penner (eds),

Philosophical Foundations of the Law of Unjust Enrichment (Oxford, OUP, 2009) 242, 250.
68 L Smith,’ Unjust Enrichment, Property and the Structure of Trusts’ (2000) 116 LQR 412.
 The Nature of ‘Knowing Receipt’ 319

posited at the beginning of this chapter; the receipt of the shares is undoubtedly
an enrichment. But crucially those rights came not from the beneficiary himself,
but from the trustee. As with the case of the thief at common law, it is completely
different from Kelly v Solari, where the defendant’s enrichment undoubtedly came
from the claimant. The defendant’s enrichment in our case is therefore at the trus-
tee’s expense, not that of the beneficiary. According to Smith:
In the mistaken payment, the defendant is enriched by the receipt of value which the
plaintiff used to have but no longer has … But what happens in the case of receipt of
trust property? The defendant gets (we may assume) legal title to the trust property; that
is something which the beneficiary never had. In some kinds of trust it may be that the
trustee itself did not have legal title. But in any case the defendant acquires its interest
from the trustee, and so gets something which the beneficiary never had.69
Despite this fatal criticism, Birks refused to concede the point,70 dismissing it as
‘technical’, in the same way that he dismissed objections I had previously raised to
his arguments for ignorance at common law.71 The reason he thought it technical
seems to have been that, for him, there was something called ‘equitable title’, which
was to be contrasted with legal title. In the case of a trust, whilst the trustee had
legal title, the beneficiary had equitable title. Thus, in the case posited at the outset
of this chapter, there will be a legal title to the shares vested in the trustee, and an
equitable title vested in the beneficiary. Moreover, for Birks, these were two ver-
sions of the same thing. It was this ‘equitable title’, which in ways that were never
explained, which gave the beneficiary the ability to sue.
However, talk of equitable title behind a trust is mistaken. Although Birks did
not fall into the trap of thinking that placing rights on trust involves a splitting of
the subject-right into two parts —a legal part, and an equitable part—he misun-
derstood the nature of a trust, which is not to create an equitable analogue of the
right held on trust.72
The most obvious illustration of this point is that, as Smith notes in the quota-
tion above, equitable rights can also form the subject matter of a trust. In such
a situation, it is impossible to say that the trustee holds the legal right and the
beneficiary the equitable right. We would have to instead say that the trustee holds
the equitable right and that the beneficiary also holds the equitable right—a clear
impossibility.
Moreover, it is not the case that the beneficiary has an equitable version of the
trustee’s right, for this would mean that English law was in a perpetual state of
conflict. Speaking of the rule found in section 25 of the Judicature Act 1873, that

69 ibid 428–29.
70 Birks, ‘Receipt’ (n 4) 233–39.
71 Swadling (n 65).
72 It is significant that Birks never thought in terms of rights as enrichment, but only value. It may

be this failure on his part which explains his mistake in this area.
320 William Swadling

in the case of conflicts between law and equity, the rules of equity are to prevail,
Maitland said of a trust of a title to land:
Equity did not say that the cestui que trust was the owner of the land, it said that the
trustee was the owner of the land, but added that he was bound to hold the land for the
benefit of the cestui que trust. There was no conflict here. Had there been a conflict here
[section 25] of the Judicature Act [1873] would have abolished the whole law of trusts.
Common law says that A is the owner, equity says that B is the owner, but equity is to
prevail, therefore B is the owner and A has no right or duty of any sort or kind in or about
the land. Of course the Judicature Act has not acted in this way; it has left the law of trusts
just where it stood, because it found no conflict, no variance even, between the rules of
the common law and the rules of equity.73
In truth, the rights of the beneficiary of a trust are of a completely different order
from those held by the trustee. The rights of the beneficiary are to an account
of the exercise of the rights of the trustee and not some attenuated form of the
subject-rights themselves. This is made clear by James LJ in Smith v Anderson, who
defined a trustee as:
a man who is the owner of the property and deals with it as principal, as owner, and as
master, subject only to an equitable obligation to account to some persons to whom he
stands in the relation of trustee, and who are his cestuis que trust.74
The fact that the beneficiary does not have an equitable version of the trustee’s
right is neatly illustrated by Schalit v Joseph Nadler,75 where a lease of land was
vested in trustees on trust for a beneficiary. The beneficiary sought to exercise the
remedy of distraint, which was then available to trustees for non-payment of rent
by the tenant.76 The court held that she could not do so:
The right of the cestui que trust whose trustee has demised property subject to the
trust is, not to the rent, but to an account from the trustee of the profits received from
the demise … The cestui que trust has no right to demand that the actual bank-notes
received by the trustee shall be handed over to him or that a cheque for rent drawn to
the trustee shall be indorsed over. What he can require is that the trustee shall account to
him, after taking credit for any outgoings or other payments properly chargeable, for the
profits received from the trust property.77

73 FW Maitland (eds AH Chaytor and WJ Whittaker) Equity: A Course of Lectures, revised by

J Brunyate (Cambridge, CUP, 1936) 17. When Maitland speaks of the trustee being the owner of the
‘land’, he of course means a right with respect to that land, such as a fee simple or a lease.
74 Smith v Anderson (1880) 15 Ch D 247, 275: ‘Property’ is here used to describe the right held on

trust, rather than any physical thing to which it might relate.

75 Schalit v Joseph Nadler [1933] 2 KB 79.
76 The landlord’s right of distraint was abolished with effect from 6 April 2014 by Part 3 of the

Tribunals, Courts and Enforcement Act 2007. However, a statutory scheme (Commercial Rent Arrears
Recovery) was immediately enacted, though only for commercial premises.
77 Schalit (n 75) 83 (Acton and Goddard JJ). Note that this has nothing to do with the distinction

between law and equity, but with the fact that the right to rent is vested in the trustee, not the benefi-
ciary, with the result that, viz a viz the beneficiary, no money is due. Thus, even if there was a ‘fusion’ of
law and equity, the result in this case would have been no different. Another decision in the same vein
is Atlasview Ltd v Brightview Ltd [2004] 2 BCLC 191, where beneficiaries of trust of shares sought to
 The Nature of ‘Knowing Receipt’ 321

Viscount Sumner spoke in similar terms in Baker (Inspector of Taxes) v Archer Shee:
The trustee has the full … property in the whole of the trust fund and the beneficiary
has not. … It is the trustee alone who can give a discharge for interest, rent or dividends
to the parties who have to pay them in respect of the invested trust estate, nor need they
know the beneficiary in the matter. All that the latter can do is to claim the assistance of
[the court] to enforce the trust and to compel the trustee to discharge it.78
We see the same thinking in the decision of the Court of Appeal in MCC Proceeds
v Lehman Brothers,79 which involved bearer shares held on trust for the claim-
ant. As shareholders, the trustees had a right to the exclusive possession forever
of the share certificates. In breach of trust, they pledged the shares to the defend-
ant as security for a loan by handing over the share certificates to the defendant.
The claimant beneficiary brought an action against the defendant for conversion
of the share certificates, a tort committed by those who interfere with another’s
right to the exclusive possession of tangible moveables. The beneficiary’s claim
was rejected by the Court of Appeal. It was the trustee who had a right to exclusive
possession of the share certificates, not the claimant beneficiary, who could not
therefore maintain conversion.80 It is for the same reason that a beneficiary cannot
sue a thief of the subject matter of rights held on trust; that is a job for the trustee,
though in certain circumstances the trustee must lend his name to the beneficiary
should he refuse to sue.81
Of course, this objection only holds true for rights previously held on trust.
To be fair to Birks, many of the cases he was concerned with, cases such as BCCI
v Akindele,82 involved rights held outright, so that the enrichment of the defendant
was undoubtedly at the claimant’s expense.
Birks further spoke of having to see the package of protection as a whole.
In his view, the beneficiary’s right to bring an unjust enrichment claim against
a recipient from the trustee was connected to the fact that claims in respect of
traceable substitutes were only explicable as responding to unjust enrichment.83
As to this latter proposition, he thought that wrongdoing as an explanation was
ruled out following the Court of Appeal’s decision in Jones (FC) & Sons (a firm)

bring an unfair prejudice action under s 459 of the Companies Act 1985. Such action is only available
to the members of a company. The claim was dismissed on the ground, inter alia, that the claimants
were not members of the company.
78 Baker (Inspector of Taxes) v Archer Shee [1927] AC 844, 850 (PC).
79 MCC Proceeds Inc v Lehman Brothers International (Europe) [1998] 4 All ER 675 (CA).
80 The reason they did not bring a claim against the defendant in respect of their own right was that

it was liable to be defeated by a plea of bona fide purchase for value without notice. No such defence,
however, would have applied on the facts to the right to exclusive possession at law. The defendants,
however, had not interfered with that particular right; indeed, they were transferees of it.
81 These situations are limited. They are described in Vandepitte v Preferred Accident Insurance

Corpn of New York [1933] AC 20 (PC). For full discussion, see L Tucker, N Le Poidevin and J Brightwell
(eds), Lewin on Trusts, 19th edn (London, Sweet & Maxwell, 2015) paras 43–01–43-016.
82 Akindele (n 9).
83 Birks, ‘Receipt’ (n 4) 216–22.
322 William Swadling

Trustee v Jones,84 and that an appeal to the miscellany beyond consent, wrongs and
unjust enrichment could not work. That left only unjust enrichment as a plausible
explanation.85 The connection with the personal claim under consideration here
was this. If, according to Birks, there had been a substitution by the recipient in
our example of the shares, and that substitute was still in the recipient’s hands, the
claimant could bring a tracing claim, which was, in his view, a proprietary unjust
enrichment claim. It would, argued Birks, be inconsistent in such circumstances to
deny a personal unjust enrichment claim on our facts.86
This, however, is an extremely insecure foundation on which to rest an argu-
ment for unjust enrichment as an explanation of recipient liability in cases of
breach of trust. The reason is that no one, Birks included, has ever come up with
a satisfactory explanation why we allow claims to substitutes. Over a century ago,
Maitland said it was excessively generous to trust beneficiaries,87 and it still is.
Despite these difficulties, Lord Nicholls also argues for an unjust enrichment
claim on the facts given above,88 as does Burrows,89 and the editors of Goff and
Jones.90 However, like Birks, none give a convincing reason why the defendant’s
enrichment in the case at hand can be seen as at the beneficiary’s expense.

C. Knowing Recipient is a Genuine Trustee Who Owes

a Duty to Account to His Beneficiary

We saw above that the language of awards that the defendant is liable to account
as a constructive trustee is nowadays dismissed by most judges and commentators
as pure fiction, designed only to bring the defendant within equity’s jurisdiction.
Although the defendant is liable to account ‘as if he were’ or ‘as a constructive’
trustee, it does not mean he really is a trustee; it is trusteeship by a metaphor.
There is not the substance of a trust; the language is purely remedial, much like
that of quasi-contract in unjust enrichment claims before the abolition of the
forms of action in the mid-nineteenth century.
Mitchell and Watterson, however, argue that in this particular instance the
knowing recipient is a genuine trustee of the rights he receives. They say:
Liability for knowing receipt is a distinctive, primary, custodial liability, which closely
resembles the liability of express trustees to account for the trust property with which
they are charged. In short, when the courts say that a knowing recipient is ‘personally

84 Jones (FC) & Sons (a firm) Trustee v Jones [1997] Ch 159 (CA).
85 cf the appeal to the reasoning of Sherlock Holmes by Lord Millett in Twinsectra (n 50) [100].
86 Birks, ‘Receipt’ (n 4) 238.
87 Maitland (n 73) 220.
88 Nicholls (n 3) 236–39.
89 Burrows (n 51) 416–31. The enrichment objection is discussed briefly at 428–29.
90 C Mitchell, P Mitchell and S Watterson (eds), Goff and Jones: The Law of Unjust Enrichment,

9th edn (London, Sweet & Maxwell, 2016) paras 8–119 to 8–137.
 The Nature of ‘Knowing Receipt’ 323

liable to account as a constructive trustee’, they mean exactly what they say: because of
the circumstances in which knowing recipients receive title to the misapplied property,
Equity fixes them with custodial duties which are the same as some of the duties which
are voluntarily assumed by express trustees.91
As a trustee, they argue, the knowing recipient is duty bound to account to his
‘beneficiary’ for his stewardship of the rights he holds for him on trust. This stew-
ardship duty entails a duty to retransfer the right received to the trustee. If the
recipient transfers away the right other than back to the trustee from whom it was
received, or to the beneficiary if he or she is of full age, sound mind and absolutely
entitled, the beneficiary can falsify the account and ask the court to enforce the
trustee’s primary duty to reinstate the trust fund. This would be done by an order
that the defendant pay over the value of the right and it is this claim to pay money
which Mitchell and Watterson argue is the one we call ‘knowing receipt’.
The authors stress that this is not a claim for breach of duty; nor is it a claim
for unjust enrichment, though they would also allow a strict liability claim for the
latter. The difference between the two is that the unjust enrichment claim would
be subject to a defence of change of position and would only yield the defendant’s
gain at the point of receipt. So, in the shares example, unjust enrichment would
give the claimant the value of the shares at the date of receipt, whilst the account
claim would give the value at the date of claim, which would be of importance
where the shares had risen in value in the interim.
Mitchell and Watterson claim two advantages for their thesis. The first is that
it is consistent with the language of the courts. The second is that it explains the
requirement of knowledge, which in the authors’ view is what turns the recipient
into a trustee of the rights he receives. There are, however, at least five problems
with their thesis.
The first is the paucity of authority for their theory.92 Not a single decision
cited by Mitchell and Watterson is directly on point which, given the number of
recipient liability cases, is surprising. They also place much reliance on the strange
Australian case of Evans v European Bank Ltd93 where a company, Benford Ltd,
which was used as a vehicle to channel fraudulently obtained funds, was held to
be a constructive trustee of such funds for the victims of the fraud and thereby
fixed with a duty to track down those victims and repay them from the funds it
held, and in the meantime invest the funds for them. The case is, however, hardly a
strong precedent. First, it relies on the Australian High Court decision in Black v S
Freedman & Co,94 which held that a thief holds his title to things he steals on trust

91 Above n 6, 129–30.
92 It was, however, adopted subsequently by Sir Terence Etherton, giving the advice of the Privy
Council in Arthur v A-G of the Turks & Caicos Islands [2012] UKPC 30 (PC). However, the point was
obiter. Moreover, the decision did not involve rights previously held on trust but outright. Finally, it
also seems to have been decided in ignorance of Criterion.
93 Evans v European Bank Ltd [2004] NSWCA 82 (NSWCA).
94 Black v S Freedman & Co (1910) 12 CLR 105 (HCA).
324 William Swadling

for his victim. This is controversial in the extreme, not least because the victim’s
title to the stolen goods will be superior to that of his trustee/thief. For that reason
alone, the case is unlikely to be followed in this jurisdiction. Second, a receiver had
been appointed in respect of Benford, and it was the receiver who was making
the argument—against Benford’s own interests—that such duties were owed. This
meant that the point that Benford was a trustee was hardly contested.
Other cases relied upon involve defendants inducing breaches of trust, which are
clearly distinguishable from cases of receipt. Mitchell and Watterson also claim the
support of Megarry VC in re Montagu, Millett J in Agip (Africa) Ltd v Jackson, and
Lord Browne-Wilkinson in Westdeutsche Landesbank Girozentrale v I­ slington LBC
for the proposition that, unless the recipient is equity’s darling, he must restore the
rights to their rightful owner if he still has them. However, not only are such state-
ments obiter dicta, they are also ambiguous, for they could equally well be saying
that the defendant is liable to be ordered by a court of competent jurisdiction to
restore the rights, which is something less than there being an immediate duty to
do so absent any court order.95
The second problem is that no explanation whatever is provided why a defend-
ant who receives with ‘knowledge’ is turned by operation of law into a trustee.
We might, with Lord Browne-Wilkinson in Westdeutsche Landesbank Girozentrale
v Islington LBC,96 say it is a necessary condition, for it would be unreasonable for a
person with no knowledge that he had received rights held on trust for another or
for a purpose to be fixed with trusteeship duties. However, it does not thereby fol-
low that it is sufficient. The vast majority of trusts arise consensually, with right-
holders being bound by the obligations of trusteeship precisely because they have
been voluntarily assumed. That will not, of course, be the case here.97 At the very
least, it is incumbent on Mitchell and Watterson to explain why trusteeship duties
are being imposed on such a person. At present, their argument does nothing
more than imply an ‘ought’ from a ‘can’.
Third, it is difficult to see how Mitchell and Watterson’s thesis can be squared
with the subsequent decision of the United Kingdom Supreme Court in AIB Group
(UK) Plc v Mark Redler & Co Solicitors.98 Even if there was a duty to account before
payment away, does not payment away mean that the transaction is now ‘com-
plete’, so that the only claim available is one for equitable compensation? It might
be argued that the transaction would only be complete if the rights were returned
to the original trustee/beneficiary, but in both the earlier case of Target Holdings

95 Indeed, all Lord Browne-Wilkinson seems concerned with is the continuing enforceability of the

right against a recipient who is not equity’s darling.

96 Westdeutsche Landesbank Girozentrale (n 26) 709 (HL).
97 As Lord Sumption said in Williams v Central Bank of Nigeria: ‘The essence of a liability to account

on the footing of knowing receipt is that the defendant has accepted trust assets knowing that they
were transferred to him in breach of trust and that he had no right to receive them. His possession is
therefore at all times wrongful and adverse to the rights of both the true trustees and the beneficiaries.
No trust has been reposed in him’: [2014] UKSC 10 [31] (SC).
98 AIB Group (UK) Plc v Mark Redler & Co Solicitors [2014] UKSC 58 (SC).
 The Nature of ‘Knowing Receipt’ 325

Ltd v Redferns,99 and in AIB itself, the fact that the moneys were paid away to
unauthorised persons did not stop the transactions being so adjudged. These, of
course, were cases of express trusts, so the proposition should apply a fortiori to
a trust which is the creation of the law. Thus, in a case like re Montagu where all
that remained following the death of the life tenant was an absolutely entitled
beneficiary, the Tenth Duke of Manchester, the payment away by the father of the
rights he received in breach of trust meant that that transaction was also complete,
with the result that the only possible claim against him would have been one for
equitable compensation; no claim for falsification of an account would have been
available.
Fourth, is it really true to say that there is a duty on the recipient to retrans-
fer the right to the trustee at the point at which knowledge supervenes? A more
viable explanation would be that there is at best only a liability to be so ordered,
with no duty before judgment. What, for example, if difficult issues of fact were
involved as in BCCI v Akindele,100 where a trial was necessary to decide whether
the defendant had notice of the dissipation in breach of duty? In such a case, can
it really be said that there is a duty to repay before any adjudication on the state
of the recipient’s state of mind? Moreover, to say, as do Mitchell and Watterson,
that there is a duty to restore because restoration will absolve the defendant from
any claim in court101 is nonsensical. Obviously, if a recipient voluntarily restores
rights received in breach of trust, then the claimant beneficiary will have nothing
left to complain about. But it does not thereby follow that there must have been
a duty so to do. To take an example from the law of unjust enrichment, if title
to a painting is transferred to me by mistake and I immediately and voluntar-
ily reconvey that title, no claim in unjust enrichment will lie against me. But we
cannot read into that fact the proposition that I was under some kind of duty to
make specific restitution.
Fifth, and finally, even in the case of express trustees, is it correct to say that
the beneficiary has a ‘right’ to an account without having to go anywhere near
a court? Take the case of a beneficiary who alleges that the trustee negligently
invested the trust fund and now seeks to surcharge the account with the shortfall.
Is it really possible to say that the defendant trustee is immediately bound to pay
what a court will only later find due after a trial? Are we seriously saying that all
trustees have crystal balls? Whilst it may be true that there is a primary duty on a
trustee to produce the trust accounts to certain beneficiaries,102 falsification and
surcharge do not involve the performance of primary duties; they are nothing

99 Target Holdings Ltd v Redferns [1996] AC 421 (HL).

100 Akindele (n 9).
101 Mitchell and Watterson (n 6).
102 Mitchell and Watterson say that a trustee is under a primary duty to produce accounts, though

they present no proof. They simply point to fact that the trustee will be liable for costs of proceedings
if he does not produce them and will have to pay costs of accounting too, as opposed to being able to
charge it to trust fund: ibid 120, fn 22.
326 William Swadling

more than court ordered remedies for breach of trust. Indeed, Mitchell and Wat-
terson give the game away when they say that in an action for a common account,
the trustee has to justify his records.103 But this can only mean justify to the court.
This is clear from their statement that ‘evidential presumptions are made against
him if he fails to do so’.104 Such language only makes sense if we are talking about
court proceedings, not duties arising before trial. Indeed, Mitchell and Watterson
go on to say that ‘the accounting process is the conceptual mechanism through
which beneficiaries can bring … different types of compensation claim against
trustees’,105 which is hardly consistent with any pre-existing duty.

D. Knowing Recipient is a Trustee and Commits a Breach

of Trust When He Dissipates the Rights; The Money
Award Made Against Him is for Breach of Trust

A view similar to Mitchell and Watterson has been put forward separately by both
Simon Gardner106 and Robert Chambers,107 save that they are not talking about
the enforcement of any ‘primary custodial duties’ which, for the reasons explained
above, is problematic, but instead a secondary duty to pay damages for breach of
trust in transferring the rights away other than to the trustee/truly entitled benefi-
ciary. According to Chambers:
liability for knowing receipt is nothing other than liability for breach of trust. It arises
because the recipient has obtained assets that are held in trust, and after becoming aware
of the trust, has failed to perform the basic trust duties to preserve the trust assets and
transfer them to either the beneficiaries or the proper trustees. This requires actual
knowledge of the trust or the circumstances giving rise to it. Notice is insufficient. This
is not a form of restitution of unjust or wrongful enrichment, so it should not matter
whether the assets were received for the recipient’s own benefit. The recipient is an actual
trustee and not just being treated as if that was true. This is not a form of accessory or
secondary liability. It is fundamentally different from liability for knowingly assisting a
breach of trust or fiduciary duty.108
However, the question once again is why a knowing recipient is a trustee of the
rights he receives. Gardner says that the defendant cannot be liable for failing to
safeguard the rights he receives unless he knows that the rights he holds are trust
rights. This, however, is no justification at all, for, like Mitchell and Watterson, it
does no more than imply an ‘ought’ from a ‘can’. Chambers puts forward a more
sophisticated argument based on an analogy with the duties of a finder of goods,

103 ibid 121.

104 ibid.
105 ibid 122.
106 Gardner (n 7) 22.
107 Chambers, ‘The End of Knowing Receipt’ (n 8).
108 ibid 4.
 The Nature of ‘Knowing Receipt’ 327

who, he says, is just as much a bailee as one entrusted with their care.109 But though
it is true that a finder has been held to be a bailee and subject to the same duties to
care for the goods as a gratuitous bailee,110 this is an insecure foundation on which
to build, for the notion of the finder as bailee was invented purely to allow losers of
goods to bring detinue against finders. It is nothing more than a distortion of the
forms of action, similar to the idea that claims in unjust enrichment and restitu-
tion for wrongs rested on an ‘implied contract’; it should not be allowed to change
the substance of the matter.111

E. A Liability in Wrongs

The best hope of explaining the liability we call knowing receipt is as a species of
wrongdoing. However, for the reasons given immediately above the wrong cannot
be said to be breach of trust, as the recipient is not a trustee. What other alterna-
tives exist?
We saw above that Lord Nicholls advocated seeing knowing receipt, like assis-
tance of a breach of trust, as a species of dishonest participation in a breach of
trust.112 It is, however, difficult to see how this can work, for the defendant’s
receipt need not be coterminous with the breach of trust; the rights may have
been received many years later and need not have come from the trustee himself.
Moreover, the receipt by the defendant may have been purely passive.
Lionel Smith has suggested that knowing receipt is equity’s analogue to the
common law tort of conversion.113 His main argument is that both conversion and
knowing receipt involve a wrongful interference with proprietary rights.114 More-
over, such thinking, according to Smith, is consistent with the scenario whereby
the recipient only later becomes aware that his receipt was of rights dissipated in
breach of trust ‘since it presupposes a continuing proprietary right in the plain-
tiff with which the defendant interferes’.115 As to the fact that conversion is strict,
whilst knowing receipt is fault based, this is explained by the fact the former has to
be strict because the common law has no equivalent of the Roman rei vindicatio
for goods. The only way the common law can enforce rights in respect of goods
is through the law of wrongs, and their protection would be too weak with only a
fault-based wrong. Equity, by contrast, has the specific claim, which means that it
can be ‘more sensitive about what counts as wrongful receipt’.116

109 ibid 8–11.

110 N Palmer, Bailment, 3rd edn (London, Sweet & Maxwell, 2009) ch 26.
111 As witness the inapplicability of the rule that a bailee is estopped from denying his bailor’s title
in the context of so-called bailment by finding: Biddle v Bond (1865) 6 B & S 225.
112 Nicholls (n 3) 243–44.
113 L Smith, ‘W(h)ither Knowing Receipt?’ (1998) 114 LQR 394.
114 ibid 395.
115 ibid 396.
116 ibid 397.
328 William Swadling

Is Smith’s analogy with common law conversion convincing? A first difference is

that the holder of title to goods needs only one right, whereas the trust beneficiary
will need two. The right of a title-holder to goods to exclusive possession binds
generally. However, it is not as simple as regards the position of a beneficiary of
a trust. Such a person clearly has rights against his trustee, but these are to the
due administration of the trust and it is not that right which a claim for know-
ing receipt can possibly be enforcing. We would therefore have to say that he has
another right, viz, that third parties do not knowingly receive rights transferred
to them in breach of trust. This is certainly possible, for it is already the case that
a trust beneficiary has a right that others do not dishonestly assist the trustee to
commit breaches of trust.117 Moreover, there is likewise a right against third par-
ties that they do not knowingly induce the trustee to commit a breach of trust.118
And we have already seen how those who receive rights in an authorised fashion,
but who then knowingly deal with them inconsistently with the terms of the trust,
will be liable to make good losses to the beneficiaries.119
However, even if there were multiple rights, a further problem is that the
defendant in a knowing receipt claim, as opposed to one who induces or assists
breaches of trust, need not have done anything at all. Whilst conversion cannot be
committed without some action on the part of the defendant, this is not the case
with knowing receipt where, as we have just noted, the receipt can be purely pas-
sive. A wrong generally requires some action on the part of the defendant, as wit-
ness the common law’s general reluctance to impose liability for mere omissions
to act.
This raises the vital question whether receipt really is, as the Court of Appeal
said in Novoship (UK) Ltd v Mikhaylyuk, ‘the gist of the action’.120 Such a proposi-
tion is already doubtful when it is remembered that, in the case of innocent receipt,
liability may arise later, if and when knowledge supervenes. Might the essence of
the liability instead be the subsequent dissipation of the rights with knowledge?
Given the availability of a strict liability claim for the specific return of the rights,
a claimant will only bring a knowing receipt claim where the rights have already
been dissipated, a fact which renders the case law ambiguous, for whether it is
receipt or dissipation which is the ‘gist’ will be hidden from view. However, if it was
the dissipation, things become much simpler, for knowing ‘receipt’ would then be
simply a species of inconsistent dealing.

117 Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 (PC); Twinsectra (n 50); Barlow Clowes

International Ltd v Eurotrust International Ltd [2006] 1 WLR 1476 (PC); Abou-Rahmah v Abacha
[2006] EWCA Civ 1492 (CA).
118 Fyler v Fyler (1841) 3 Beav 550; Eaves v Hickson (1861) 30 Beav 136; re Midgely [1893] 3 Ch 282.
119 Lee v Sankey (n 18).
120 Novoship (UK) Ltd v Mikhaylyuk [2014] EWCA Civ 908 [89]; see also Agip (Africa) Ltd (n 2) 291,

where Millett J said that the knowing recipient was ‘liable to account for the property … from the time
he received the property’.
 The Nature of ‘Knowing Receipt’ 329

It should be stressed that we are not here saying that the recipient is subject to
the same duties as the trustee. The trustee may, for example, have been under a
duty to invest or to sell. The recipient will be under no similar duty. His duty is
simply not to dissipate the rights in a way which is inconsistent with the terms of
the trust. In this respect, the wrong is analogous to the common law tort of induc-
ing breach of contract.121 Strangers to a contract are never duty bound to perform
the obligations of the contracting parties. They are, however, under a duty not to
knowingly induce a contract party to breach his contract, such duty being owed
to the counterparty to the contract. Likewise, one who knowingly receives rights
which have been dissipated in breach of trust, or who later discovers they were
so dissipated whilst the rights are still vested in them, comes under a duty not to
further dissipate the rights in a way which is inconsistent with the original trusts
on which they were held.
Such assimilation of knowing receipt within inconsistent dealing would have
the advantage of catching the case where rights are received not because of a breach
of trust, but equally not because of some authorised disposition by the trustees.
Suppose a sole trustee dies intestate, as in Paul v Constance,122 and the rights held
on trust pass under the rules of intestacy to his widow. There is no doubt that the
widow is liable to be ordered to give up the rights themselves if she still has them.
One would have thought that she would be personally liable should she dissipate
them with knowledge that they were held on trust, though this comes within nei-
ther knowing receipt—because the right was not received by virtue of a breach of
trust—nor ‘inconsistent dealing’—because the receipt was unauthorised.
Analysing knowing receipt as a species of inconsistent dealing would have a
number of consequences. First, it would show that the difficult requirement of
‘beneficial receipt’ was misplaced. As we have seen, such a requirement only makes
sense if knowing receipt is analysed as a species of unjust enrichment. Seeing it
instead as a manifestation of the equitable wrong of inconsistent dealing means it
has to be removed. Second, it would mean time running not from point of receipt
but from the later dissipation. Third, it would mean that there was no claim if the
rights were lost without fault on the part of the recipient.
We have already noted the uncertainty surrounding the correct level of fault
necessary to trigger liability in knowing receipt. Does analysis as part of a wider
wrong of inconsistent dealing help to resolve this issue? Although the case law is
sparse, the rule in inconsistent dealing cases is that there must be actual knowl-
edge that the dealing is inconsistent or a deliberate closing of the eyes to that
fact. Thus, in Williams-Ashman v Price & Williams,123 Bennett J refused to hold a
­solicitor liable for inconsistent dealing whose only sin was that he acted honestly
but ‘incautiously’.124 The upshot, therefore, is that Megarry V-C was ultimately

121 Lumley v Gye (1853) 2 E & B 216.

122 Paul v Constance [1977] 1 WLR 527 (CA).
123 Williams-Ashman v Price & Williams [1942] Ch 219.
124 ibid 228.
330 William Swadling

right in re Montagu’s Settlement Trust to insist on a high degree of fault, and that
those cases which hold that constructive or even imputed notice is enough are
wrongly decided.

VI. Conclusion

This chapter has examined the nature of the nature of the equitable liability we call
‘knowing receipt’. It has rejected an explanation as one in unjust enrichment for a
number of reasons, prime amongst them being that the defendant’s enrichment—
the receipt of the right dissipated in breach of trust—does not come from the
beneficiary. The enrichment, in other words, is not at the claimant’s expense. This
is not, of course, an issue where rights which are held beneficially by a corporation
are misapplied by a fiduciary, but as the House of Lords pointed out in Criterion
Properties plc v Stratford UK Properties LLC,125 such cases cannot be analysed in
terms of knowing receipt. The notion that the knowing recipient is a genuine trus-
tee of the rights he receives was also rejected for a number of reasons, the chief
being that there is no satisfactory reason why he should be a trustee. The recipient
is, of course, bound by the rights of the beneficiaries to obtain an order from the
court for the return of such rights, but he does not have the custodial duties of a
trustee and so is not liable to account to the ‘beneficiary’; nor is he liable to pay
money for breach of trust. The only viable explanation is a liability in wrongs,
though not one of participating in a breach of trust, as the receipt might come
after the breach and may well involve no action on the defendant’s part. Instead,
the liability should be seen as a species of a larger wrong called inconsistent deal-
ing. Such wrong is committed when the recipient deals with the right in a way
which he knows is inconsistent with the terms of the trust on which they were
originally held, or to which fact he deliberately closes his eyes. It should be stressed
that we are not saying that the recipient is a trustee of the rights received, merely
that he will commit a wrong should he dissipate them in a way which is inconsist-
ent with the trusts on which they were originally held. What this means, therefore,
is that ‘knowing receipt’ is a misnomer. Receipt is not the gist of the action, but the
later, inconsistent, dealing.

125 Criterion (n 10).

 14
Exposing Third-Party Liability
in Equity: Lessons from the
Limitation Rules

SARAH WORTHINGTON

I. Introduction

It is impossible to explain the law unless its foundations are clearly understood.
This chapter owes its genesis to my inability to explain the law set out by the
Supreme Court in Williams v Central Bank of Nigeria.1 The headline finding in
Williams is that dishonest assisters and knowing recipients2 are not ‘trustees’, so
they never run the risk of time running without limitation under the Limitation
Act 1980, section 21(1). This might look unexceptional were it not that other par-
ties who are also not express trustees, or even trustees at all, are not similarly pro-
tected. These less fortunate ‘trustees’ will be exposed to claims without limitation
of time if the claim is for fraud or fraudulent breaches of trust, or for the recovery
of trust property or its proceeds in these trustees’ hands or converted to these
trustees’ use.
The law on limitation, especially limitation in equity, is typically considered
difficult. But the decision in Williams cannot be confined to its limitation con-
text. The Supreme Court made a number of crucial claims about the fundamental
nature of dishonest assistance and knowing receipt, and it is these, not any par-
ticular limitation rules, which are the central concern of this chapter. The Court’s
final conclusions on limitation depend entirely on the accuracy of the initial char-
acterisation of dishonest assisters and knowing recipients. This chapter seeks to
unpick the logic. The result is to raise doubts about the majority’s interpretation.

1 Williams v Central Bank of Nigeria [2014] UKSC 10, [2014] AC 1189 (SC).
2 ‘Unconscionable recipients’ may seem to be more appropriate modern terminology, but it has
proved difficult to use in recent cases: see CE Webb and T Akkouh, Trusts Law, 4th edn (London,
Palgrave Macmillan, 2015) 345–46 for a rather damning assessment. In Williams itself, a word search
produces 117 hits for ‘knowing’ and only two for ‘unconscionable’.
332 Sarah Worthington

Based on the analysis here, a number of significant claims are advanced. In par-
ticular, and despite popular assertion to the contrary, it is suggested that knowing
recipients and dishonest assisters are indeed fiduciaries. This conclusion has at
least two obvious consequences. First, it clarifies the nature and quantum of the
remedies available against these third parties, and the justification for them. It
also distinguishes and illuminates the remedies available against innocent donees.
Second, this novel recognition of the importance of fiduciary characterisation in
applying the limitation rules, if correct, has the advantage of enabling straightfor-
ward negotiation of equitable liability under the Limitation Act 1980, and elimi-
nating the current confusing complexity.3
The conclusion that these third parties are fiduciaries may appear dramatic,
but the reality is that much of the case law before Selangor United Rubber Estates
Ltd v Cradock (No 3)4 and Paragon Finance Plc v DB Thakerar & Co5—two
authorities relied upon by the majority in Williams—was precisely along these
lines, and understood as such. What confounded straightforward analysis was
use of the word ‘constructive’ without holding firmly to its roots. Courts impos-
ing third-party liability sought to identify what level of knowledge would consti-
tute a defendant a ‘constructive trustee’. This way of posing the question—and
its detours into notice, constructive notice, dishonesty and unconscionability—
provides a veritable feast of often rather unfocused legal analysis. With the ben-
efit of hindsight, this focus misunderstands the question to which knowledge,
dishonesty or unconscionability might be the answer. The crucial question, in
modern terminology, is simply whether the defendant is a fiduciary. This focus
was always there, but hidden behind the word ‘constructive’.
Moreover, the conclusion advanced here produces an outcome where there are
strong and sound parallels between the position at common law and the position
in equity in relation to property, fraudsters and other wrongdoers. That is not
necessarily a good in itself. There may be sound policy reasons for treating com-
mon law and equitable rights differently, but where those reasons for difference
are not obvious, analogies can be reassuring. This is so with the Limitation Act
provisions.
Finally, these conclusions highlight a number of crucial features concerning
trust and fiduciary law generally, and accessory liability in particular. The key
insight is to notice that equity’s unrelenting focus is on property holding and
property management. In particular, equity’s focus is on the property itself, and
not on the parties with interests in the property or with claims in respect of its
mismanagement. It is this property focus, rather than a claimant focus, which

3 Contrast the current convoluted position: see L Tucker, N Le Poidevin and J Brightwell (eds),

Lewin on Trusts 19th edn (London, Sweet & Maxwell, 2015) paras 44-049–44-078, especially the
distinctions between corporate opportunities and bribes at paras 44-071–44-072, and theft at para
44-078.
4 Selangor United Rubber Estates Ltd v Cradock (No 3) [1968] 1 WLR 1555 (Ch).
5 Paragon Finance Plc v DB Thakerar & Co (A Firm) [1998] EWCA Civ 1249, [1999] 1 All ER 400

(CA).
 Exposing Third-Party Liability in Equity 333

marks a powerful divide between equity and the common law, with some striking
consequences.6
In making out these claims, this chapter considers, in turn, the Supreme Court
analysis and its basis; an alternative and preferred basis for drawing the relevant
analytical distinctions; the route to finding that dishonest assistants and knowing
recipients are fiduciaries; and finally, the general remedial and particular limita-
tion consequences of this. The chapter includes a brief comparison of the resulting
parallels between the equitable and common law limitation rules, and the appro-
priateness of this, and then sums up by exposing the crucial and distinctive char-
acteristics of accessory liability in equity.

II. The Supreme Court Analysis in Williams

Williams v Central Bank of Nigeria7is the first decision at Supreme Court level
on the Limitation Act 1980 as it applies to strangers to the trust.8 The facts were
simple. Williams was the victim of a sting operation perpetrated by the Nigerian
Security Services. He deposited US$6.5 million with a solicitor in England in order

6 See S Worthington, ‘Revolutionary Breakthroughs in Personal Property Law: Redrawing the

­ onceptual Map’ in S Worthington, A Robertson and G Virgo (eds), Revolution and Evolution in Private
C
Law (Oxford, Hart Publishing, forthcoming 2017).
7 Williams (n 1). See also the Singapore CA decision in Yong Kheng Leong v Panweld Trading Pte

Ltd [2013] 1 SLR 173 [49]–[55], pre-dating Williams, but consistent with its conclusions in adopting
the Paragon Finance distinction between Type I and Type II constructive trusts, and holding that the
exclusion of limitation in their equivalent of the Limitation Act 1980 s 21(1) applies only to Type I.
Here, a director-shareholder was held to be in that category, and to have behaved fraudulently, so no
limitation applied.
8 The decision has been subjected to extensive academic comment: see PS Davies, ‘Limitation in

Equity’ [2014] Lloyd’s Maritime and Commercial Law Quarterly 313; J Lee, ‘Constructing and Limiting
Liability in Equity’ (2015) 131 LQR 39; Z Bryan, ‘Limitation and Fraudulent Breaches of Trust’ (2015)
21 Trusts & Trustees 405; M Carn, ‘Williams v Central Bank of Nigeria: Constructive Trusts and the Law
of Limitation’ (2014) 28 Trust Law International 3; C Hare, ‘Trust Law’s Limitations’ [2014] Restitu-
tion Law Review 110; E Talbot Rice and A Holden, ‘A Trustee by Any Other Name: Who is a “Trustee”
for Limitation Purposes?’ (2014) 7 Journal of International Banking and Finance Law 438; S Watter-
son, ‘Limitation of Actions, Dishonest Assistance and Knowing Receipt’ (2014) 73 CLJ 253. Also see
J Dietrich and P Ridge, Accessories in Private Law (Cambridge, CUP, 2015) 284–86. More generally, see
W Swadling, ‘Limitation’ in P Birks and A Pretto (eds), Breach of Trust (Oxford, Hart Publishing, 2002);
S Gardner, ‘Moment of Truth for Knowing Receipt’ (2009) 125 LQR 20; R Walker, ‘Dishonesty and
Unconscionable Conduct in Commercial Life—Some Reflections on Accessory Liability and Knowing
Receipt’ (2005) 27 Sydney Law Review 187; C Mitchell, ‘Dishonest Assistance, Knowing Receipt, and
the Law of Limitation’ [2008] Conveyancer and Property Lawyer 226, 229; D Sheehan, ‘Disentangling
Equitable Personal Liability for Receipt and Assistance’ (2008) 16 Restitution Law Review 41; C Mitchell
and S Watterson, ‘Remedies for Knowing Receipt’ in C Mitchell (ed), Constructive and Resulting Trusts
(Oxford, Hart Publishing, 2010); J Palmer, ‘Attempting Clarification of Constructive Trusts’ (2010)
24 New Zealand Universities Law Review 113; L Smith, ‘Fiduciary Relationships: Ensuring the Loyal
Exercise of Judgement on Behalf of Another’ (2014) 130 LQR 608; W Swadling, ‘The Fiction of the
Constructive Trust’ (2011) 64 Current Legal Problems 399; D Whayman, ‘Remodelling Knowing Receipt
as a Gains-Based Wrong’ (2016) Journal of Business Law 565.
334 Sarah Worthington

to guarantee what turned out to be a bogus loan. The solicitor/trustee paid away
US$6 million to the defendant’s bank account in England, and kept US$500,000
for himself. More than 20 years later Williams launched proceedings, claiming in
knowing receipt and dishonest assistance against the bank. The preliminary issue
was whether his action was time barred. By majority the Supreme Court held it
was.
Although the focus here is on the general issue of third-party liability in equity,
the limitation context is salutary. It demands robust characterisation of claims.9
Section 21(3) of the Limitation Act 1980 prescribes a six-year limitation period for
any ‘action by a beneficiary to recover trust property or in respect of any breach
of trust’ not otherwise covered by the Act. But a significant exception appears in
section 21(1):
No period of limitation prescribed by this Act shall apply to an action by a beneficiary
under a trust, being an action—
(a) in respect of any fraud or fraudulent breach of trust to which the trustee was
a party or privy; or
(b) to recover from the trustee trust property or the proceeds of trust property in
the possession of the trustee, or previously received by the trustee and con-
verted to his use.
On its face, this provision applies only to trusts and trustees. However, the Limita-
tion Act provides, in section 38(1), that ‘trust’ and ‘trustee’ have the same meaning
as in the Trustee Act 1925, which itself provides, in section 68:
(1) In this Act, unless the context otherwise requires …
(17) … the expressions ‘trust’ and ‘trustee’ extend to implied and constructive trusts, and
to cases where the trustee has a beneficial interest in the trust property, and to the duties
incident to the office of a personal representative.
From those seemingly slim pickings, and despite the express words in the Trustee
Act 1925, the Supreme Court held that ‘constructive trustees’ who acquired that
label by being knowing recipients or dishonest assistants were not themselves
‘trustees’ within the Limitation Act section 21(1), and neither were they defend-
ants being sued ‘in respect of any fraud or fraudulent breach of trust to which
the [true] trustee was a party or privy’.10 Accordingly, the Limitation Act 1980
section 21(1) did not disapply the six-year statutory limitation period. In short,
the Central Bank of Nigeria could not be sued. Lord Mance delivered a robust
dissent.

9 The same is often said of the insolvency context, which demands accurate characterisation of

proprietary and personal claims.

10 On the first issue, the 4:1 majority was led by Lord Sumption and Lord Neuberger, each giving

separate judgments, Lord Hughes signing up with the latter and Lord Clarke agreeing rather reluc-
tantly with both. On the second issue, the Court split 3:2, Lord Mance and Lord Clarke dissenting. That
second issue is not important here.
 Exposing Third-Party Liability in Equity 335

In reaching this conclusion, the distinction seen as critical by the majority was
one identified by Millett LJ in Paragon Finance Plc v DB Thakerar & Co.11 In that
case, Millett LJ had distinguished between constructive trustees who are true trus-
tees (now labelled Type I) and those simply exposed by their unlawful conduct to
trustee-style remedies (Type II). Only the former category, so the majority held,
were within the ambit of section 21(1) of the Limitation Act.12 Millett LJ explained
the differences:
[Type I cases are those] where the defendant, though not expressly appointed as trustee,
has assumed the duties of a trustee by a lawful transaction which was independent of and
preceded the breach of trust and is not impeached by the plaintiff. The second [Type II]
covers those cases where the trust obligation arises as a direct consequence of the unlaw-
ful transaction which is impeached by the plaintiff.
… In the first class of case, however, the constructive trustee really is a trustee. He does
not receive the trust property in his own right but by a transaction by which both par-
ties intend to create a trust from the outset and which is not impugned by the plaintiff.
His possession of the property is coloured from the first by the trust and confidence by
means of which he obtained it, and his subsequent appropriation of the property to
his own use is a breach of that trust … In these cases the plaintiff does not impugn the
transaction by which the defendant obtained control of the property. He alleges that the
circumstances in which the defendant obtained control make it unconscionable for him
thereafter to assert a beneficial interest in the property.
The second class of case is different. It arises when the defendant is implicated in a
fraud. Equity has always given relief against fraud by making any person sufficiently
implicated in the fraud accountable in equity. In such a case he is traditionally though
I think unfortunately described as a constructive trustee and said to be ‘liable to
account as constructive trustee’. Such a person is not in fact a trustee at all, even though
he may be liable to account as if he were. He never assumes the position of a trustee,
and if he receives the trust property at all it is adversely to the plaintiff by an unlawful
transaction which is impugned by the plaintiff. In such a case the expressions ‘con-
structive trust’ and ‘constructive trustee’ are misleading, for there is no trust and usu-
ally no possibility of a proprietary remedy; they are ‘nothing more than a formula for
equitable relief ’.13
One might ask why, if equity saw fit to make all these parties liable precisely as if
they were real trustees,14 it should not also subject them to the same limitation
rules.15 Indeed, commentators had assumed this followed automatically from the

11 Paragon Finance (n 5) 408–09, cited in Williams (n 1) [10]. Lord Millett reiterated these views in

Dubai Aluminium Co Ltd v Salaam [2002] UKHL 48; [2003] 2 AC 366 [141]–[142]. See also Ungoed-
Thomas J in Selangor United Rubber Estates Ltd (n 3) 1579, cited in Williams (n 1) [10].
12 Williams (n 1) [4], [8]–[9], [12]–[13], [26]–[31], [49]–[57], [64]–[68], [90], [114], [165]. Per-

haps rather inconsistently, these people were nevertheless sufficiently within the definition of ‘trustee’
to enable them to be given the protection of the six-year limitation period in the Limitation Act s 21(3).
13 Paragon Finance (n 5) 408–09.
14 The detail emerges in the discussion which follows.
15 Paragon Finance (n 5) 414, a suggestion rejected by Lord Neuberger in Williams (n 1) [65].
336 Sarah Worthington

revisions enacted in the Limitation Act 1939 which had adopted a wider definition
of trusts and trustees, now repeated in the Limitation Act 1980.16
In rejecting this conclusion, the Supreme Court paid a great deal of attention to
the findings of older cases and the development of the law on limitation in equity.
The gulf between the majority and the minority in interpreting these materials is
notable. In large measure it reflects quite different approaches to the relevant his-
tory. Originally, before any statutory intervention, it was only express trustees who
were subjected to claims without limitation. The rules on limitation in equity have
now changed dramatically, moving from no statutory prescription at all to rather
detailed statutory coverage, and from no limitation for express trustees to six-year
limitation periods for a broader class of defendants but subject to exceptions. In
addition, the language of trusts (express or otherwise) and fiduciaries and all their
various remedial consequences has tightened up significantly,17 and the jurisdic-
tion itself has expanded enormously.18 In this new environment, it is impossible
to find hard answers to current technical questions simply from the words used
by judges in earlier times. It is essential that decisions are grounded in policy and
principle.
The Supreme Court adopted the distinctions identified by Millett LJ in Paragon
Finance. These may be exactly the right distinctions, but the judgments contain
more by way of assertion than justification in explaining why this might be so,
and in particular why a statute specifically worded to apply to ‘constructive trusts’
and ‘constructive trustees’ should apply only to a select subset of such trusts and
trustees. If the Supreme Court’s analysis is to be applied confidently in the future,
its underpinnings need to be clearly understood.

III. Distinguishing between Types

of Constructive Trustee

In identifying the types of ‘trustee’ exposed to liability without limitation, the

Supreme Court drew distinctions between (i) those who had lawfully assumed
fiduciary obligations from the outset (even without formal appointment) and
those whose possession or interference was from the start wrongful and adverse
to the rights of the beneficiaries; (ii) those who intended to act as trustees and
those who did not; (iii) those in whom the beneficiaries reposed trust and con-
fidence and those in whom no one ever placed trust and confidence; and finally

16 Lord Mance provides some detail in Williams (n 1) [140]–[142], [144]–[145], [148].

17 As is well illustrated by the wide-ranging categories of ‘fiduciaries’ analysed in PD Finn, Fiduciary
Obligations (Sydney, Law Book Company, 1977). See also the discussion in S Worthington, ‘Fiduciaries:
Following Finn’ in T Bonyhady (ed), Finn’s Law: An Australian Justice (Sydney, Federation Press, 2016).
18 Consider common intention constructive trusts, Quistclose trusts and proprietary estoppel

claims.
 Exposing Third-Party Liability in Equity 337

(iv) those involved in an existing/institutional trust and those subject merely to a

remedial formula.19 Describing the distinctions in this way highlights a number
of incongruities.
Take the first two differences: these seem to suggest limitation rules will punish
trustees who begin life innocently but turn bad, while relieving those who are bad
from the outset. On its own terms, this looks odd. Defendants who take it upon
themselves to act as de facto trustees, acting properly at the outset, will be Type I
constructive trustees and subject to the disadvantages in section 21(1); by contrast,
defendants who behave dishonestly from the outset in assisting or interfering in
the management of the trust assets and their distribution will escape, being subject
merely to a six-year limitation period on the authority of Williams.20 More­over,
clean and clear factual distinctions between the two classes may be impossible
to determine. In short, enormously significant legal distinctions seem difficult to
justify in principle or to draw in practice.
Alternatively, take the line between an institutional trust and a remedial for-
mula. In England, all trusts are institutional.21 Knowing recipients must therefore
be individuals who once held assets on an institutional (albeit constructive) trust,
and are now sued because they no longer have either the assets or their proceeds.
By contrast, company directors do not hold property on trust, but are liable by
analogy with express trustees; they are thus subject to what emerged, historically,
as a ‘remedial formula’. However, we know from Williams that the appropriate
limitation categorisation falls precisely the opposite way: the section 21(1) limita-
tion provisions apply to directors but not to knowing recipients. We return to this
later,22 but note for now that a classification based on contrasting an institutional
trust with a ‘remedial formula’ may be difficult.
The difficulties go well beyond this. Take the line between lawful and adverse
possession of property. If an express trustee absconds with trust assets, or takes
an opportunity which ought to have been pursued for the trust, or takes a bribe,
are these gains held on Type I or Type II constructive trusts? The difference mat-
ters. The analysis in FHR European Ventures LLP & Ors v Cedar Capital Partners
LLC might suggest that all disloyal gains are held on the original trusts, and thus
the Limitation Act section 21(1)(b) applies.23 But it might equally be argued,
particularly in relation to the opportunity and the bribe, that the beneficiary’s
interest in these assets is not ‘independent of and preced[ing] the breach of trust

19 Williams (n 1) [9]–[11], [31], [64], [165]. Lord Clarke seemed to think (iii) was decisive, whereas

that might be thought of least significance. See the similar list advanced by P Smith and R Davern,
‘I Want My (Equitable) Property Back: Time Limits on Recovering Trust Property from Innocent
­Volunteers’ (2015) 21 Trusts & Trustees 1096, 1097–08.
20 Although note that Millett LJ places Pallant v Morgan [1953] Ch 43 firmly in the Type I category:

Paragon Finance (n 5) 409.

21 Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669 (HL); FHR European

­Ventures LLP & Ors v Cedar Capital Partners LLC [2014] UKSC 45 (SC).
22 See below, VI. ‘Dishonest Assistants Are Fiduciaries’.
23 FHR (n 21).
338 Sarah Worthington

[but instead arises] as a direct consequence of the unlawful transaction’.24 The

complications multiply if the defendant is not a trustee but a company director.
The problem is not academic.25 This too is considered later, and a more direct
approach suggested.26

IV. Language and Logic

We cannot think about legal concepts clearly unless we use language that is clear.
The immediate trap is how we understand ‘constructive’.
In equity, we typically use the expression ‘constructive’ to mean ‘is not X, but
because of the surrounding circumstances will be treated as if it were X’. On this
basis we might unthinkingly say that a constructive trusts ‘are not trusts, but
because of the surrounding circumstances will be treated as if they were trusts’.
This is flawed. Equity’s historical starting point was the express trust. Accordingly,
it would be more accurate to say that constructive trusts ‘are not express trusts, but
because of the surrounding circumstances will be treated as if they were express
trusts’. Similarly, constructive trustees ‘are not express trustees, but because of the
surrounding circumstances will be treated as if they were express trustees’. This
makes it plain that constructive trusts must indeed be trusts (ie, property splits),
but by contrast constructive trustees need not be trustees at all (ie, they need not
hold property on trust, although of course they may);27 they are simply people
owing trustee-like personal obligations in relation to the management of another’s
property. If this is the analogy, then they are, in short, fiduciaries, made so by vir-
tue of the personal obligations to which they are subject.28
There is a further twist to this. Notice that not all trustees are fiduciaries. An
ignorant donee who receives trust property holds that property on ‘construc-
tive trust’, but owes no fiduciary or other personal obligations in respect of it.
Notice too that not all fiduciaries hold assets on trust. A company director is a
familiar example. We thus need words which separate the property-holding struc-
ture (here, trusts and trustees)29 from the people subject to equity’s distinctive

24 Paragon Finance (n 5) 408.

25 See above, n 3.
26 See below, IX. ‘Limitation and Fiduciary Disgorgement’.
27 Hence de facto trustees and company directors can be ‘constructive trustees’, whether or not they

hold legal title to the managed assets on trust.

28 This terminology is only possible now that we use the term ‘fiduciary’ in a very much narrower

sense than we once did: see above, n 17.

29 And under that umbrella term, the trusts may be express, constructive, resulting, implied, or any

other descriptive terminology thought appropriate to characterise the property split. ‘Trust/trustee’ is
used here to indicate the property split only, and not to indicate any associated personal obligations,
notwithstanding the analysis in Westdeutsche Landesbank Girozentrale (n 21) 705, and its controversial
insistence that a trust only exists if there is both a property split and knowledge, with the latter justify-
ing the imposition of the personal obligations essential to a trust.
 Exposing Third-Party Liability in Equity 339

­ roperty-management obligations (fiduciaries). Precise terminology is impor-

p
tant, so note that this ‘fiduciary’ label is applied to the person, and is applied even
though most of the property-management obligations owed are not fiduciary;
but it is the fiduciary addition to the mix which makes the role distinctive and
warrants labelling the person a ‘fiduciary’. This labelling would avoid the current
confusing use of ‘constructive trustee’ to refer to two types of people: those hold-
ing property on trust (whether or not there are associated fiduciary obligations);
and those owing fiduciary obligations (whether or not there are associated trusts).
Such breadth makes the ‘constructive trustee’ category analytically useless. By con-
trast, ‘constructive trust’ does not mislead in the same way; there is indeed a trust
and a trustee (although the trustee may not be a fiduciary).
Digging further into the fundamentals, a ‘trust’ describes a property split
between legal owner and beneficial owner.30 The term itself does not identify how
that split arose or the particular details of the arrangement. The broad distinction
is between express trusts and trusts arising by operation of law. Express trustees
are subject to duties of strict compliance with the terms of the trust (and a duty to
discover what those are),31 and corresponding duties of care and skill in manag-
ing the assets, and fiduciary duties. This is a unique package, made distinctive by
equity’s addition of fiduciary constraints to the more familiar package of compli-
ance and care elements.32
Similarly, although this might seem a bold assertion, constructive trustees and
resulting trustees are also subject to duties of strict compliance with the terms of
the property split as they know them, and then to corresponding duties of care and
skill, and fiduciary duties.33 The qualifier is important. Individuals holding assets
on constructive trust may be completely unaware of that fact (as with innocent
donees), or they may know only that the assets do not belong beneficially to the
constructive trustees themselves, or they may be fully aware of all the detail of an
original express trust. Their duties of care and their fiduciary duties follow directly
from their particular knowledge of the underlying property split. At one extreme,
this means that a constructive trustee will owe no personal duties at all, whether
of compliance, care, or fiduciary obligation, if the trustee is entirely ignorant of

30 Sub-trusts follow analogous rules, although the detail is not noted in this chapter.
31 With non-compliance here embracing both excesses of power and abuses of power, although the
distinction between the two is important in assessing the respective remedies for breach.
32 These ‘fiduciary’ constraints require self-denial, ie, putting the beneficiaries’ interests ahead of

the fiduciary’s own, with disgorgement of gains as the remedy whenever this obligation is breached by
the fiduciary entering into transactions where there is a conflict between duty and interest. This fiduci-
ary duty is quite distinct from the duty to act in good faith in the beneficiaries’ interests by exercising
powers for proper purposes, which is a further duty owed by fiduciaries, but also by those who are not
fiduciaries: see the development of the language of ‘fiduciary’ over time as detailed in Worthington,
‘Fiduciaries: Following Finn’ (n 17). Note too that the compliance and care elements are also distinc-
tive in the context of property management, just more subtly so: see below, XI. ‘Exposing Third-Party
Liability in Equity’.
33 See the detailed analysis in S Worthington, Equity, 2nd edn (Oxford, OUP, 2006) ch 6. More

recently, see Mitchell and Watterson (n 8); R Chambers, ‘The End of Knowing Receipt’ (2016) 2 Cana-
dian Journal of Comparative and Contemporary Law 1.
340 Sarah Worthington

the property split. But otherwise, constructive trustees are liable for their own
misapplication or mishandling of the trust property, and for disgorgement of per-
sonal gains derived from misuse of the trust property, with the extent of liability
depending on the constructive trustee’s knowledge of the particular terms of the
original trust. If the constructive trustee has full knowledge of the investment or
other management requirements of the trust, as is often the case with de facto
trustees, then liability will follow accordingly, and will track the liability of the
corresponding express trustees. The same is true where there is no property split,
but the principal’s assets are simply managed by fiduciaries without being held
on trust: for example, the liability of de facto and de jure directors corresponds
with the liability as discussed for de facto and express trustees. None of this is
controversial, even if it has not been stated in quite this way before. Recall the
familiar proprietary and personal consequences visited on de facto trustees, Quist-
close trustees, knowing recipients and parties holding property on either vendor–
purchaser constructive trusts or common intention constructive trusts.34
Exactly when these property-holding and property-management consequences
arise is a further question, not addressed here.35 Two points are noteworthy,
however. Recall that in equity one party is considered to hold assets on trust for
another whenever the circumstances are such that it would be unconscionable
for the legal owner not to recognise the beneficial interest of the other.36 Notice
that the test does not require the legal owner to have knowledge of the benefi-
ciary’s proprietary interest in the underlying assets: a property split may arise by
operation of law in any event.37 By contrast, property-management obligations
are only imposed when that knowledge is present, whatever other factors might
also be deemed essential.38 And once those property-management obligations are
imposed, then the manager is subject to all the claims noted in the previous para-
graph: ie, loss-based claims for failure to comply, or failure to comply with due
care, with the known terms of the property split; and disgorgement remedies for
personal gains made from self-serving management.39
If these proprietary and obligational concepts are not kept distinct, significant
difficulties can arise. For example, if every trustee must necessarily owe duties of
compliance, care and fiduciary obligations, then we will be moved irresistibly to

34 Every textbook on trusts confirms this. Some of the detail appears in Worthington, Equity (n 33);

and S Worthington, Proprietary Interests in Commercial Transactions (Oxford, OUP, 1996).

35 All the main works on equity and trusts and a good number of specialist works cover the detail

of trusts arising by operation of law and the incidence of fiduciary obligations.

36 This means the line between express and other trusts can be seen as relatively thin: see S Gardner,

‘Reliance-Based Constructive Trusts’; and B McFarlane, ‘The Centrality of Constructive and Resulting
Trusts’ in C Mitchell (ed), Constructive and Resulting Trusts (Oxford, Hart Publishing, 2010). On the
other hand, recall the endless debates in the lead-up to the decision in FHR (n 21).
37 eg innocent donees of trust property, or legal owners subject to proprietary estoppel, vendor–

purchaser or common intention constructive trust claims.

38 Westdeutsche Landesbank Girozentrale (n 21) 705.
39 Recall the endless debates on notice, knowledge, dishonesty and unconscionability in the context

of knowing recipients and dishonest assistants, and then the loss and disgorgement remedies which
follow.
 Exposing Third-Party Liability in Equity 341

concluding that there is no trust at all whenever the context will not support duties
of compliance, care and fiduciary obligation. Westdeutsche Landesbank Girozen-
trale v Islington LBC itself,40 and its comments on Chase Manhattan,41 provide a
well-known example; so too did Lister v Stubbs.42 But we do not make the same
mistake with innocent donees receiving unauthorised distributions of trust
property.
The same is true of fiduciary obligations. It can be too easy to fall into the trap
of asserting without pause for thought that because certain individuals are not
trustees, they therefore do not owe fiduciary obligations. We typically do this with
dishonest assisters, as was done in Williams itself. We do not make the same mis-
take with company directors or partners.
Finally, we can be seduced by language, and insist that certain parties cannot be
fiduciaries because they have never undertaken to act in a loyal manner, or because
nobody ever reposed trust in them: see Williams again.43 But this is not, and has
never been, the test of when fiduciary obligations arise.44 Take express trustees:
these individuals may indeed have accepted or undertaken to act in a loyal man-
ner, and they may be trusted by their beneficiaries, but both points are irrelevant;
fiduciary obligations will be imposed in any event. The same is true of fiduciar-
ies outside status-based fiduciary relationships, as in joint venture relationships.45
And it is equally true—if remedies are anything to go by—of any individuals who
take it upon themselves to assume the care or management of property known to
belong to others. In short, personal undertakings and reposed trust are immate-
rial. Instead, the law insists, by its remedial force, that anyone involved in the hold-
ing or management of property known to belong to others is obliged to respect
that interest. This is considered in more detail below.46

V. Applying this Language to Limitation

All of this categorisation is material to limitation, and prompts a return to the list
of distinguishing characteristics of constructive trustees favoured in ­Williams.47
The very early non-statutory limitation rules differentiated between express

40 Westdeutsche Landesbank Girozentrale (n 21).

41 Chase Manhattan Bank NA v Israel–British Bank (London) Ltd [1981] Ch 105 (Ch).
42 Lister & Co v Stubbs (1890) LR 45 Ch D 1 (CA). Although now see FHR (n 21).
43 Williams (n 1) [31], [64], [165].
44 See Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64, (1984) 156 CLR

41 (HCA) 69 (Gibbs CJ): ‘an actual relation of confidence—the fact one person trusted another—is
neither necessary nor conclusive of the existence of a fiduciary relationship’.
45 Ross River Ltd v Waveley Commercial Ltd [2013] EWCA Civ 910, [2014] 1 BCLC 545 (CA).
46 See below, VI. ‘Dishonest Assistants Are Fiduciaries’ and VII. ‘Knowing Recipients Are Both

­Trustees (on Receipt) and Fiduciaries (on Acquiring Knowledge)’.

47 See above, III. ‘Distinguishing between Types of Constructive Trustee’.
342 Sarah Worthington

t­rustees (who could be sued without limitation) and others (who could not).
This rule was slowly expanded by analogy. A search for analogies might seek
alignment with the consensual nature of the express trust (its ‘express’ charac-
teristics), or the trust’s proprietary characteristics (the ‘trust’ element), or the
trustee’s personal characteristics (the ‘fiduciary’ element). Interestingly, and per-
haps surprisingly, the list in Williams seems to focus on the first. Yet the lan-
guage in Williams and earlier cases,48 and the universal acknowledgement of the
broader scope of the current statutory rules, suggest it is the last that is crucial.
Put another way, some form of property holding or property management for
another is crucial, but the managed property need not be held on trust,49 and the
property-holding/management obligations can be imposed by operation of law
rather than by agreement.50 What is crucial, however, is that the defendant is a
fiduciary.
This fiduciary language was adopted by Lord Hoffmann NPJ in Peconic Indus-
trial Development Ltd v Lau Kwok Fai.51 It is obviously more informative than the
‘constructive trustee’ language used in Williams and Paragon Finance.52 Neverthe-
less, Lord Hoffmann did not pursue the distinction from first principles, but sim-
ply adopted the classification proposed by Millett LJ in Paragon Finance. However,
he then described Type I individuals as fiduciaries and Type II as non-fiduciaries.
Accordingly, without more, he concluded that knowing recipients and dishonest
assisters were not fiduciaries. This is doubted, and is considered in more detail in
the next sections.

VI. Dishonest Assistants Are Fiduciaries

The overwhelming view of the courts is that dishonest assistants are neither
fiduciaries53 nor Type I trustees exposed to the risks of liability without time
limitation,54 but are simply accessories to the primary wrongdoers.55 On closer
examination, this may be flawed. There seems to be nothing material dividing
dishonest assistants from either fiduciaries or Type I trustees, and the parallels

48 See below, and note the number of references to fiduciary and fiduciaries in Williams (n 1).
49 Directors confirm this: ibid [9], [28], 152].
50 eg the illustrations in Paragon Finance (n 5) 408–09; Williams (n 1) [9]–[13].
51 Peconic Industrial Development Ltd v Lau Kwok Fai [2009] HKCFA 16, (2008–09) 11 ITELR 844
[19].
52 Although notice the explanation given by Lord Mance in Williams (n 1) [120]: the majority

position in Williams is that ‘the exception to the right to limit would be confined to trustees or those
owing fiduciary duties’.
53 Novoship (UK) Ltd v Mikhaylyuk [2014] EWCA Civ 908 (CA) [68]; Williams (n 1), by inference;

Paragon Finance (n 5). See also Peconic (n 51).

54 Williams (n 1).
55 ibid [65], [99], [124], [127], [154], [180]. This is also the tenor of all the modern authorities and

commentary on dishonest assistance.

 Exposing Third-Party Liability in Equity 343

between them are powerful. Moreover, although the courts say that dishonest
assistants are accessories, not primary wrongdoers, and in particular not fiduciar-
ies, what they do by way of analysing liability and delivering remedies suggests
otherwise.
Start with the fiduciary parallels. Individuals who are fiduciaries are subjected
to fiduciary duties of loyalty in the management of property for the benefit of
their principals. And, in reverse, if individuals are subjected by the courts to fiduci-
ary duties of loyalty, then they are fiduciaries.56 The distinguishing characteristic
of fiduciaries is the legal insistence on self-denial, and the corresponding disgorge-
ment remedy for breach.57 Disgorgement in other contexts is remarkably rare, and
then demands careful justification.58 So when dishonest assistants are compelled
to disgorge the personal gains derived from non-compliance with particular
property-management duties,59 as they are,60 then classification of these people
as fiduciaries seems irresistible, notwithstanding the courts’ explicit denial of that
conclusion.
This notion that a dishonest assistant is a fiduciary is further reinforced by a
comparison with Type I constructive trustees. Recall that these Type I individuals
may not be trustees at all (as illustrated by company directors), but they are invari-
ably fiduciaries. Consider first the roles of de facto trustees and de facto directors.
These are people who involve themselves in the management of trust or corporate
property, often without holding title to it. They are treated as if they were indeed
what they purport to be: ie, express trustees or de jure directors (Type I).61 The
remedies available against them, and the limitation rules protecting them, are as
for express trustees. These remedies are of course only available once the de facto
misbehaves. Sometimes that can happen early in their management endeavours,
sometimes later; the timing is immaterial.
Notice that precisely the same might be said of dishonest assistants. These indi-
viduals are also people who involve themselves in the management of trust or
other property. They do so with other trustees or fiduciaries, as do most de facto
trustees and directors. In addition, and barring the limitation rules, misbehaving

56 See the pointed articulation of this in Finn (n 17) 2.

57 S Worthington, ‘Fiduciaries: When is Self-Denial Obligatory?’ [1999] CLJ 500.
58 For such an exception, see Attorney-General v Blake [2001] 1 AC 268 (HL); and Esso Petroleum

Co Ltd v Niad Ltd [2001] EWHC 458 (Ch), one of very few cases applying it. Other jurisdictions have
declined to follow the UK authorities: see P Devonshire, ‘Account of Profits for Secondary Liability:
How Far is Too Far?’ (2015) 23 Restitution Law Review 59, 67. Note that common law cases awarding
compensation measured by ‘use value’ or ‘release value’ are making awards measured on a different
basis from disgorgement of personal gains: see Wrotham Park Estate Co Ltd v Parkside Homes Ltd
[1974] 1 WLR 798.
59 True, these duties are typically identified as the duties owed by the primary wrongdoer, but see

the discussion which follows, suggesting the pre-requisite of ‘dishonesty’—knowing contravention of

these duties—is proxy for imposing the same duties on the assister.
60 Novoship (n 53) [82]; see also [71], citing a large number of first instance decisions in support of

the conclusion affirmed in this case that a dishonest assistant must account for its own profits. See too
Westdeutsche Landesbank Girozentrale (n 21) 705.
61 Williams (n 1) [9]–[11].
344 Sarah Worthington

assistants are treated in exactly the same way as express trustees when determin-
ing the appropriate remedies. Again, these remedies are only available once the
assistant misbehaves, and this may be early or late in the relationship. Although
the Supreme Court in Williams appeared to assume that the assistant’s behaviour
was from the outset adverse to the beneficiary, this is often untrue. Banks and
solicitors are common targets for such claims, yet in most cases their behaviour in
dealing with the managed assets will be perfectly proper at the outset, only deviat-
ing at some later stage. In this regard too, the parallels with express and de facto
trustees are obvious, despite the assertions to the contrary in Paragon Finance and
the cases following it.62 Moreover, the ‘dishonesty’ element with assistants is not
a distinguishing characteristic of the type of wrongful activity, but of the actor’s
mental state. Its purpose is to confirm that the assistants are sufficiently aware that
the managed property is not at their free disposal, but is held for other parties, and
that their interference with it is contrary to that arrangement.63 This makes sense
as a prerequisite, just as it makes sense to have rules to ensure that express trustees
know which property they hold on trust, and on what terms. In short, in the con-
tinuum of express trustees, de facto trustees and dishonest assistants, the last two
seem to have key characteristics which are indistinguishable.64
Then there is the notion of accessory liability. The majority in Williams regarded
the fact that liability was accessory (or ancillary) rather than primary as particu-
larly persuasive in classifying dishonest assistants as Type II trustees. Accessory lia-
bility provides the prevailing explanation of the liability of dishonest assistants,65
yet in equity the line between primary and accessory liability is particularly dif-
ficult to draw. For example, in establishing ‘accessory’ liability, the court’s focus
is exclusively on the accessory’s awareness that the contemplated activities are
inconsistent with the terms on which particular underlying assets should be man-
aged for the principal;66 there is no focus on the relative degree of the accessory’s

62 See the paragraph cited above at n 13, and the distinctions exposed above at III, ‘Distinguishing

between Types of Constructive Trustee’.

63 See Barlow Clowes International Ltd v Eurotrust International Ltd [2005] UK PC 37, [2006]

1 WLR 1476 (PC) [28], where Lord Hoffmann held that the approach in Brinks Ltd v Abu-Saleh (No 3)
[1996] CLC 133 was wrong: the point was not whether the defendant knew of the trust, but whether
she knew or suspected that she was assisting in a misappropriation of someone’s property.
64 In Williams, Lord Mance similarly considered that dishonest assistants and Type I constructive

trustees should be assimilated for the purpose of both liability and limitation. He did not comment on
whether this assimilation would inevitably constitute them fiduciaries, and—contrary to the approach
advocated here—he viewed them as accessories, but regarded that as an added reason for assimila-
tion: Williams (n 1) [123]–[126], citing a number of older cases in support, and noting that of course
the scope of the personal obligations in issue may be much more extensive in relation to somebody
appointed as an express trustee.
65 SB Elliott and C Mitchell, ‘Remedies for Dishonest Assistance’ (2004) 67 MLR 16; P Ridge, ‘Par-

ticipatory Liability for Breach of Trust or Fiduciary Duty’ in J Glister and P Ridge (eds), Fault Lines in
Equity (Oxford, Hart Publishing, 2012); PS Davies, Accessory Liability (Oxford, Hart Publishing, 2015);
Dietrich and Ridge (n 8); Chambers, ‘The End of Knowing Receipt’ (n 33) 26–27. See also Devonshire
(n 58) 67, who thus disagrees with any move to make dishonest assisters disgorge their own gains, since
this is inappropriate for accessories. By contrast, see Whayman (n 8).
66 See above, n 59.
 Exposing Third-Party Liability in Equity 345

involvement in the primary wrong such as to make the accessory equally respon-
sible for that primary wrong. This suggests a focus on establishing the dishonest
assistant’s own duties, being duties as a fiduciary managing the principal’s prop-
erty, rather than potential liability for involvement in a separate and independ-
ent primary wrong committed by someone else. This initial intuition is further
confirmed by the remedies then awarded. As noted earlier, these are unequivocally
remedies which can only be generated by breach of the dishonest assistant’s own
obligations, and fiduciary obligations at that, requiring compensation for loss to
the managed property fund and disgorgement of disloyal gains acquired person-
ally by the dishonest assistant.67
On reflection—in my case a good deal of reflection—this says something very
important about accessory liability. With contract, tort and crime, accessory liabil-
ity focuses on a mental element and a conduct element, considering the details of
the relationship between the accessory and the primary wrongdoer to establish
whether the accessory, although not a principal wrongdoer, should nevertheless be
made liable, and liable for the primary wrong not for some independently com-
mitted personal wrong. In equity, however, the relationship under the microscope
is not that between the accessory and the primary wrongdoer; it is the relation-
ship between the accessory and the managed property. This replicates the analysis
applied directly to express trustees. The tag ‘constructive’ marks out those par-
ties considered to have either property-holding or property-management obli-
gations resulting from their analogous relationships with the managed property.
These people do not have a liability which is accessory to, or ancillary to, the pri-
mary wrongdoer; they have a liability which is directly referable to the principal’s
property, and they are themselves therefore also primary wrongdoers, just as co-
trustees or co-directors are. Thus, in a rather surprising way, equity’s focus on
property means that it determines the liability of strangers to an express trust, or
strangers to the property-management relationship, very directly: it asks whether
these people, too, are trustees or fiduciaries or both. It does not go through an
additional loop, first asking the unnecessary question about whether they are
accessories. This direct route to liability was the focus of the language of construc-
tive trusts, discussed earlier, a language used long before accessory and ancillary
liability became fashionable.
If further evidence were needed, consider the analysis applied to the liability of
parties who induce or procure a trustee to commit a breach of trust. English law

67 But see Novoship (n 53) [107]. Here it was suggested that since dishonest assistants are not fidu-

ciaries, disgorgement gains (and query compensation claims) should be subjected to the common
forms of causation, remoteness and quantification of damages. Fyffes Group Ltd v Templeman [2000]
2 Lloyd’s Rep 643 (QB Comm) adopts the same causation test. Although there is no complaint with
the outcome, the suggestion seems misconceived. Disgorgement claims face difficulty in identifying
precisely the quantum of the defendant’s profit made as a result of the breach of duty (on the argument
here, necessarily breach of fiduciary duty). The goal is no different for express trustees, and it is the
facts not the principle which typically create difficulty. The careful approach in the Australian case of
Warman International Ltd v Dwyer (1995) 182 CLR 544 (HCA) provides a useful illustration.
346 Sarah Worthington

often lumps these people together with dishonest assisters. However, that ignores
one subtlety. Although these people will be liable in the same measure as dishon-
est assisters, it cannot be on the basis of dishonest assistance, since no question of
honesty is ever asked, nor on the basis of accessory liability, since the ‘primary’ or
instigating wrong is the inducer’s, not the trustee’s or fiduciary’s.68 With these peo-
ple, too, the appropriate analogy would seem to be with Type I de facto trustees,
who do owe fiduciary obligations. Reinforcing this by reverting to the limitation
context, in policy terms it would seem odd to protect such people fully, applying
the six-year limitation rule without exception, but not similarly protect de facto
trustees.
In summary, the position with dishonest assisters in establishing breach and
in quantifying liability follows the model for fiduciary liability, not the model for
accessory liability; and on the facts it is frequently impossible to draw a clear line
between breaches by dishonest assistants and breaches by de facto or even express
trustees. That renders the Paragon Finance and Williams Type II classification of
dishonest assistants for limitation purposes as suspect.69 Instead, the analogies
suggest the dishonest assister is a fiduciary, and is made liable in a direct manner,
not an accessory manner, for any breaches.

VII. Knowing Recipients Are Both Trustees (on Receipt)

and Fiduciaries (on Acquiring Knowledge)

Next consider knowing recipients. In Williams, as in many cases before it, dis-
honest assistants and knowing recipients are bundled together,70 both regarded
as instances of ancillary liability, and both therefore meriting equal treatment
under the limitation rules.71 Neither are regarded as fiduciaries.72 By contrast,
and following what was said about dishonest assistants in the previous section, an
analogous treatment here would identify knowing recipients as trustees on receipt
of the property (not being bona fide purchasers for value) and as fiduciaries on

68 Even in jurisdictions such as Australia which still require a dishonest and fraudulent design on

the part of the trustee as a prerequisite for liability of the dishonest assistant: Farah Constructions Pty
Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 (HCA)[164]. See also Novoship (n 53) [161]. See generally
C Harpum, ‘The Stranger as Constructive Trustee: Part 1’ (1986) 102 LQR 114, 144; M Leeming, ‘The
Comparative Distinctiveness of Equity’ (2016) 2 Canadian Journal of Comparative and Contemporary
Law 403, 412–13.
69 Indeed, the usefulness of the Type I/Type II classification in any event is doubted. See below, XI.

‘Exposing Third-Party Liability in Equity’.

70 Contrast the commentators, who increasingly separate the two classes, regarding only assistants

as accessories: see generally Davies, Accessory Liability (n 65); and Dietrich and Ridge (n 8). By contrast,
the approach here is to regard both classes as primarily liable for their own wrongs, and neither as
accessories: see above, VI. ‘Dishonest Assistants Are Fiduciaries’.
71 See Williams (n 1) [36].
72 See above, n 53.
 Exposing Third-Party Liability in Equity 347

acquiring knowledge that any property still in their hands belonged beneficially
to another. At that stage, the knowing recipient with both property and the rel-
evant knowledge would be both a trustee and a fiduciary. Liability for mismanage-
ment of the trust assets would follow accordingly, including limitation rules. Put
another way, and using the language of Paragon Finance and Williams, knowing
recipients would seem to be ‘real trustees’,73 of Type I.
Williams was to the contrary, but that conclusion was not closely argued. It
appears premised on the assumed identical classification of recipients and assis-
tants, and ignored the detail of the classification advanced by Millett LJ in Para-
gon Finance and adopted by the Court in Williams. In particular, all the relevant
distinguishing features of Type I trustees were simply assumed to run against the
knowing recipient.
But the facts are often not amenable to such assumptions. The knowing recipi-
ent, typically a solicitor or a bank, will not usually take the trust assets adversely to
the beneficiary from the outset, but will instead take them under an agreed man-
date; the assets will be held on an institutional trust (whether express or construc-
tive); and the recipient will have a formal often trusted management role. On these
facts it is difficult to see what divides a knowing recipient from a de facto trustee,
or sometimes an express trustee. The remedial consequences should therefore be
the same, including the limitation consequences.
Of course, the facts may not be so kind. But whatever the factual scenario, know-
ing receipt inevitably requires a recipient to be holding trust property with knowl-
edge that it is beneficially owned by others, and then subsequently to dispose of
those assets in defiance of the beneficiary’s interest. A person holding assets known
to belong beneficially to others is, by definition, not just a trustee holding assets
subject to a property split, but also a fiduciary74—or, as the majority in Williams
would put it, a ‘real trustee’.75 When, in breach of that trust, the assets are disposed
of and eventually a claim is made, it is impossible to see what classificatory steps
justify a Type II conclusion rather than a Type I conclusion.
Moreover, and bar the limitation context, all the remedies available against
knowing recipients conform to the model that these are individuals who hold
assets on trust and then dispose of those assets in breach of their obligations as
fiduciaries under that trust. The relevant responsibility is a responsibility not to
deal with the assets inconsistently with the trust, with the recipient’s knowledge of

73 Adopting the form of language used generally in Paragon Finance (n 5) and Williams (n 1).
74 See above, IV. ‘Language and Logic’. Note that ‘property’ and ‘knowledge’ may not be acquired at
the same time: the trust arises on receipt; but the fiduciary obligations owed in relation to it (or in rela-
tion to whatever remains of it in the recipient’s hands) are imposed only when the relevant knowledge
is acquired.
75 Also see Westdeutsche Landesbank Girozentrale (n 21) 705. See also Chambers, ‘The End of Know-

ing Receipt’ (n 33) 10; Gardner, ‘Moment of Truth for Knowing Receipt?’ (n 8) 24; Finn (n 17) [205],
citing Reid-Newfoundland Co v Anglo-American Telegraph Co [1912] AC 555, 559; P Jaffey, Private Law
and Property Claims (Oxford, Hart Publishing, 2007) 190–91.
348 Sarah Worthington

the particular third party’s interests making that failure culpable.76 These recipi-
ents are accordingly liable to make compensation for losses to the trust property,
and to disgorge any personal gains derived from self-interested management.77
All of this accords with institutional trusts (constructive or otherwise), ortho-
dox fiduciary obligations, and Type I trustee categorisation. In short, the know-
ing recipient on any of these measures is both a trustee and a fiduciary who, by
the time the knowing receipt claim is advanced, has disposed of some or all of
the assets in a knowingly unauthorised manner so that the only claim available is
personal liability for equitable compensation, plus disgorgement of profits where
that might be relevant.
This assertion that a knowing recipient is indeed a fiduciary holding assets on
trust—ie, is a ‘real trustee’—is not new. I made it in extended form over a decade
ago, and will not repeat the arguments here.78 The same claim has been advanced
by others.79 The arguments seem compelling, yet the cases remain to the contrary.
They do not explain their contrary position, and convincing explanation seems
well-nigh impossible.
One further comment might be made. The law on knowing recipients focuses
on their personal liability, not on proprietary claims, but by definition these recip-
ients must at some stage have received property on trust. At the time of receipt,
when the claim may be purely proprietary, the issue might be seen simply as one
of priorities.80 In such a priority competition, a recipient who is not a bona fide
purchaser for value without notice will take subject to the beneficiary’s interests.
The trust which arises will be constructive.81 It has been suggested that in these
circumstances, where the relief is proprietary, there is no difference between
the limitation rules for express and constructive trusts,82 since the difference
explained by Millett LJ in Paragon Finance refers only to situations where the rem-
edy is non-proprietary and the term ‘constructive trustee’ is then ‘nothing more
than a formula for equitable relief ’. This is messy. It involves classifying recipient

76 Worthington, Equity (n 33) 185–86; see also P Jaffey, The Nature and Scope of Restitution (Oxford,

Hart Publishing, 2000) 329; Re Montagu’s Settlement Trusts [1992] 4 All ER 308, 320.
77 Novoship (n 53) [82]. See also Lord Sumption in Williams (n 1) [31]. On disgorgement, see in

particular Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638 (Ch) [1577]; Sinclair Investments (UK)
Ltd v Versailles Trade Finance Ltd (In Administration) [2007] EWHC 915 (Ch) [125]; Walker (n 8) 202;
Mitchell and Watterson (n 8) 142.
78 Worthington, Equity (n 33) ch 6 (and in the same terms in the first edition in 2003).
79 Chambers, ‘The End of Knowing Receipt’ (n 33); Gardner, ‘Moment of Truth for Knowing

Receipt?’ (n 8); Mitchell and Watterson (n 8). See also M Bryan, ‘Recipient Liability under the Torrens
System: Some Category Errors’ in C Rickett and R Grantham (eds), Structure and Justification in Private
Law: Essays for Peter Birks (Oxford, Hart Publishing, 2008) 340, 342–44.
80 Agip (Africa) Ltd v Jackson [1990] Ch 265, 292.
81 P Matthews, ‘The Words Which Are Not There: A Partial History of the Constructive Trust’ in

C Mitchell (ed), Constructive and Resulting Trusts (Oxford, Hart Publishing, 2010) 5, commenting on
Lord Browne-Wilkinson in Westdeutsche, citing PJ Millett, ‘Restitution and Constructive Trusts’ (1998)
114 LQR 399, 403–04 and W Swadling, ‘The Law of Property’ in P Birks and F Rose (eds), Lessons of the
Swaps Litigation (Oxford, Mansfield Press, 2000) 257–61.
82 Matthews (n 81) 24, following a long citation from Paragon Finance.
 Exposing Third-Party Liability in Equity 349

‘trustees’ as caught and penalised by section 21(1) while property is still in their
hands, but not on and after its disposal. Moreover, although the conclusion that
time runs without limit in reclaiming the assets themselves may well be right, it is
not self-evidently in line with the far broader analysis now advanced in Williams.
The Williams analysis, by contrast, potentially raises the possibility of a six-year
limitation period for property claims against recipients. This is considered in the
next section.

VIII. Innocent Donees Are Trustees But Not Fiduciaries

Although the position of innocent donees was not relevant in Williams, its con-
sideration completes the picture of third-party liability in equity. Much of the
basic law is uncontroversial, bar the comments on tracing made at the end of this
section. Yet applying the analysis in the context of limitation is difficult. The con-
fusion suggests a lack of clarity concerning the types of claim being made against
innocent donees, and the types of claim being limited by the Act.
Take the simplest case of a trustee making an unauthorised disposition of trust
property (a Picasso painting, say) to an innocent donee. The beneficiary’s title is
not lost, but persists in the property in the donee’s hands: the donee holds the
property on trust (a constructive trust) for the beneficiary.83 The same is true of
a purchaser who is not a bona fide purchaser for value without notice of the ben-
eficiary’s prior equitable interest. The notice requirement is significant. Notice is
relevant for the bona fide purchaser for value defence, but a person who holds
assets on trust because of an inability to rely on that defence does not necessarily
thereby become a fiduciary.84 That requires something more, being knowledge
that the transferred assets are not at the free disposal of the recipient,85 or that the
assets do not belong beneficially to the recipient.86 This stricter knowledge test for
fiduciaries (not mere notice) is the same knowledge test as is applied in consider-
ing whether a person can be sued personally as a knowing recipient if property
either received or held with this knowledge is then used or disposed of contrary to
the beneficiary’s interest.
Also notice that innocent donees do not hold the property on the original
trusts (except as they define the relative shares of the beneficiaries). These origi-
nal trusts may well entail significant management obligations, and innocent

83 This appears uncontroversial notwithstanding the analysis in Westdeutsche Landesbank Girozen-

trale (n 21) and its insistence that a trust only exists if there is both a property split and knowledge.
84 R Chambers, ‘Distrust: Our Fear of Trusts in the Commercial World’ (2010) 63 Current Legal

Problems 631, 645–49.

85 As in Quistlose trusts.
86 The arguments need not be rehearsed here, nor authorities cited. The detail appears in leading

texts. Also see Chambers, ‘The End of Knowing Receipt’ (n 33) 11–16.
350 Sarah Worthington

donees, having no relevant knowledge, owe no personal obligations at all in rela-

tion to the property they hold: they will not be personally liable for disposing of
it or acting in ways which diminish its value. Their only liability is to respect the
beneficiary’s proprietary interests once notified of them. This idea of a property
split without concomitant fiduciary obligations is widely recognised: ‘fiduciary
obligations do not derive from the trust but from the circumstances which give
rise to it’.87
The consequences in relation to limitation merit thought. Assume the bene-
ficiary does not discover the misapplication for over six years. Can the Picasso
painting be reclaimed? The beneficiary’s proprietary interest persists, but is action
to enforce barred?
On one view, the beneficiary’s claim is simply a priority claim. In the most
straightforward case, the beneficiaries are doing no more than seeking to vindicate
their own equitable title against the original trust property now in the innocent
donee’s hands. These beneficiaries do not need to assert a wrong by the donee as
part of their claim, nor impugn the transfer; indeed, its occurrence is the very basis
of their claim against the innocent donee. In these circumstances the Limitation
Act 1980 may be irrelevant, and time simply will not run. This priorities approach
looks sound, and the results are consistent with common assumptions about inno-
cent donees, although robust precedent seems lacking.88 In addition, the approach
has attractive parallels with the common law concerning both thieves and recipi-
ents from thieves: there time runs without limit until the property is taken by a
bona fide purchaser for value, and then time is limited: Limitation Act 1980 sec-
tion 4. This is discussed in more detail below.89 Notice that this priority approach
means that the analysis for trustees misdirecting assets to innocent donees is dif-
ferent from that for directors, even though both are fiduciaries managing property
for others.90 This is not indicative of a flaw in the logic, however. The proprietary
structure of trusts and companies differ fundamentally, so differences in propri-
etary consequences will follow inevitably.
Alternatively, it is also true that on a straightforward reading of the Limitation
Act the beneficiary’s claim against an innocent donee might be considered to fall
within section 21(1)(b), being a claim ‘to recover from the trustee trust property’
[here the trustee is a non-fiduciary constructive trustee].91 Just as time does not

87 Millett (n 81) 406. The distinction was also appreciated by Megarry VC in Re Montagu’s Settle-

ment Trusts [1987] Ch 264, especially 272–73, 278, 285.

88 See text to nn 80–82.
89 See below, X. ‘Parallels between the Equitable and Common Law Limitation Rules for Property’.
90 Trusts are as described here. But in analogous corporate situations the company is unlikely to

have a beneficiary’s prior equitable interest. The company’s purported disposition or contract with
the counterparty may be fully effective, despite being unauthorised, or may be merely voidable against
complicit recipients, with all the proprietary ramifications inherent in that analysis. See S Worthington,
‘Corporate Attribution and Agency—Back to Basics’ (2017) 133 LQR 118.
91 Especially since ‘trust’ includes ‘constructive trust’. Seemingly in agreement, see the dicta of

Henderson J in High Commissioner for Pakistan in the United Kingdom v National Westminster Bank [2016]
EWHC 1465 (Ch) [125], in relation to both resulting trusts and constructive trusts (citing Williams),
 Exposing Third-Party Liability in Equity 351

run against an express trustee who is considered to be holding without interrup-

tion for the beneficiary, so here too perhaps time simply runs without interruption
against an innocent donee. If this is so, however, then it is not clear which Williams
or Paragon Finance Type I and Type II analogies between the express trustee and
the innocent donee justify their equal treatment. And the further oddity is that
an innocent donee who later acquires knowledge then immediately becomes a
knowing recipient and, on the analysis in Williams92 (at least if the property is then
knowingly dissipated), would then be protected by the six-year limitation period
in section 21(3), and not exposed to either limb of section 21(1). If a knowing
recipient (admittedly one sued personally) is not caught by section 21(1)(b), then
there seems little reason to think that an innocent recipient should be caught.93
This is the conclusion reached by Smith and Davern.94 They advance a good argu-
ment, although one which highlights the problems with the analysis adopted in
Williams. In short, as they implicitly point out, the simple suggestion here—that
a straightforward reading of section 21(1) points to time running without limit
against innocent donees still holding trust assets—rather goes against the tenor
of the analysis in Williams with its Type I and Type II trustees. Nevertheless, the
simple approach seems doctrinally more compelling.
The issue is clearly difficult, and any proposed doctrinal response might usefully
be tested against questions of policy. On that basis, too, however, the same out-
comes still seem appropriate—ie, time running without limit in property claims
against an innocent donee. The Limitation Act is a statutory package designed to
protect defendants from unlimited exposure to claims for wrongdoing. Section
21 is directed to wrongdoing fiduciaries as a special category, providing them
with some protection against claims for breach of their property-holding and
property-management obligations, but subject to exceptions to that protection
in cases of fraud or where they have benefited personally. The fraud exception
occurs frequently in the Limitation Act; the personal benefit exception is special,
but is especially apt for fiduciaries given their fiduciary obligations. The implicit
agenda of most of the judicial and academic discussion cited in this chapter
accords with this, even if the precise detail varies. On this approach, section 21
provides protection to fiduciaries who hold or manage property for others: most
claims will be barred after six years. But exceptions exist where the fiduciary has

although see also [130] and the possible distinction between constructive trusts of Type I and II based
on knowledge. See also Burnden Holdings (UK) Ltd v Fielding [2016] EWCA Civ 557 (CA) in relation to
assets received by directors (ie, fiduciaries) in breach of trust; James v Williams [2000] Ch 1 (no limita-
tion iro executor/trustee de son tort). However, in all these cases, including the first, it might be possible
to argue that there is sufficient knowledge of the context to make the defendant a fiduciary holding
the assets on trust, and thus amenable to arguments which are tougher, but which may not necessarily
apply to innocent donees. See also nn 81–82 above (Matthews).
92 An analysis not accepted here.
93 It might be different if s 21(1)(b) dealt only with the recovery of traceable proceeds, and required
a continuing proprietary interest. But it does not.
94 Smith and Davern (n 19).
352 Sarah Worthington

behaved fraudulently, or has benefited personally (no matter how innocently).

Innocent donees subjected to proprietary claims for recovery of trust assets fall,
in policy terms, within the class of trustees who have benefitted personally, albeit
quite innocently.
If a choice has to be made, as it undoubtedly does, the priorities approach is
favoured here. It seems to best reflect the claim in issue. But it is reassuring that
both approaches would deliver the same outcome if section 21 were viewed in the
way just suggested.
The problems do not stop there, however. Picasso paintings and family castles
are perhaps the only types of asset where the illustrative scenario might indeed
be played out. Otherwise it is almost inevitable that within six years the inno-
cent donee will dispose of the property received in ignorance. Given the donee’s
innocence, there are no associated personal obligations. It follows that if no trust
assets remain in the donee’s hands, then the beneficiary will be left without pro-
prietary or personal claims. But what if the disposition delivers traceable substi-
tutes? Should the innocent donee be amenable to a tracing claim? By definition,
the innocent donee was not a fiduciary when the substitutions were effected. This
makes it crucial to know exactly what tracing is doing. Foskett v McKeown95 does
not directly address this scenario, but its foundational principle is that tracing into
substitutes is part of English property law. If the beneficiary’s initial claim was not
subject to limitation, then it seems difficult to argue against the same outcome in
relation to substitutes if they follow simply from the fact of English property law.
In policy terms, however, this looks unattractive: it is one thing to vindicate exist-
ing rights in the original identifiable assets which have been passed to a donee; it is
another to extend those rights into substitutes when the donee owed no personal
obligations at all to the beneficiary. To do otherwise promotes exactly the conse-
quences the limitation rules were designed to avoid. In earlier writing I suggested
an alternative view of tracing: the detail is beyond summary here, but the result
was to tie the relevant tracing analysis to wrongdoing; it is thus an approach which
contradicts the analysis in Foskett v McKeown, although not the outcome on those
facts, but has the advantage of delivering more palatable results in difficult non-
fiduciary cases.96

95 Foskett v McKeown [2001] 1 AC 102 (HL). See also Millett (n 81) 409.
96 According to the House of Lords in Foskett v McKeown (n 95), a property right can simply be
traced into its substitutes and preserved in that substituted form. The result is that a beneficiary may
have a continuing property claim in substitutes even though the innocent donee no longer has the
original property and even though the donee is not personally liable to her. On the other hand, if trac-
ing merely secures the insolvency priority of an associated personal claim once the original property is
gone, then the beneficiary would have no claim at all here. See Worthington, Equity (n 33) ch 4, where
the latter approach is preferred. Also see S Worthington, ‘Justifying Claims to Secondary Profits’ in
EJH Schrage (ed), Unjust Enrichment and the Law of Contract (The Hague, Kluwer Law International,
2001) 451.
 Exposing Third-Party Liability in Equity 353

IX. Limitation and Fiduciary Disgorgement

One of the less obvious consequences of the analysis in Williams is the doubt which
it feeds in relation to applicable limitation periods in the recovery of disloyal gains
from defaulting fiduciaries.97 The simplest possible case is surely where an express
trustee (unequivocally a Type I trustee/fiduciary) absconds with trust assets, or
takes an opportunity which ought to have been pursued for the trust, or takes a
bribe. As noted earlier,98 the problem might be approached on the basis that all
these disloyal gains are simply held by the trustee on the original trusts, adopting
the most favourable interpretation of FHR European Ventures LLP & Ors v Cedar
Capital Partners LLC.99 But the limitation cases themselves paint a more convo-
luted picture, recognising the various Type I and Type II distinctions described in
Williams, and pursuing them to their logical ends so as to hold that some of these
assets are held on Type II trusts, with a consequential six-year limitation window
and no possibility of time running indefinitely.
The leading cases in this area involve directors rather than trustees. A selection
indicates that companies can recover without time limitation from directors tak-
ing unauthorised distributions from the company,100 or making profits through
self-dealing with the company101 (a conclusion which seems doubtful, since these
transactions are merely voidable), but that a six-year limitation applies in respect
of gains from corporate opportunities102 (perhaps now subject to reinterpreta-
tion following FHR).103 The only escape from this analytical headache is to run
an argument to postpone the commencement of the limitation period on the
grounds of fraud, concealment or mistake, all rather widely defined: Limitation
Act 1980 section 32.
This is again an area where the policy underpinning the Limitation Act is nec-
essarily brought to the fore. If the purpose of the unlimited time provisions in
section 21(1) is to protect the property of beneficiaries and principals against
fraudulent losses or disloyal extractions by the managing fiduciaries themselves,
then a principled distinction in relation to disloyal extractions might be based on
whether their recovery would constitute an unexpected windfall to the beneficiary,
or whether it would simply represent recovery of the very assets which should have

97 See Talbot Rice and Holden (n 8).

98 See above, III. ‘Distinguishing between Types of Constructive Trustee’.
99 FHR (n 21).
100 Tintin Exploration Syndicate Ltd v Sandys (1947) 177 LT 412.
101 JJ Harrison (Properties) Ltd v Harrison [2001] EWCA Civ 1467, [2002] 1 BCLC 162.
102 Gwembe Valley Development Co Ltd v Koshy [2003] EWCA Civ 1048, [2004] 1 BCLC 131.

Although here the claim was saved because the director’s breach was considered to have been fraudu-
lent and dishonest, and thus caught by s 21(1)(a) in any event.
103 FHR (n 21).
354 Sarah Worthington

been part of the managed fund if all had gone according to plan. But even if this
difference appears compelling in theory, no case has ever relied on it, and in prac-
tice it is a distinction which disappears into non-existence.104 Something more
straightforward is clearly needed. The obvious candidate is to discard all Type I/
Type II distinctions in favour of far more pointed fiduciary/non-fiduciary distinc-
tions. This would capture all these disloyal gains on the same basis, with the sole
exception of self-dealing claims.
More needs to be said about self-dealing. Ignoring the authority noted above,
should section 21(1)(b) assist recovery without limitation of time? The answer
ought to be no,105 and without resort to Type I/Type II distinctions. What is cru-
cial is that in a self-dealing transaction the purchasing fiduciary does not hold
the received assets on constructive trust;106 the contract is merely voidable at the
option of the principal, and until the contract is avoided the fiduciary is the legal
and beneficial owner of the assets. This means that on its face a claim cannot be
brought under section 21(1)(b), since the fiduciary is not holding trust property
but simply property which was once the trust’s. The principal thus has six years,
under section 21(3), to avoid the voidable contract and recover the property
which originally belonged to the trust but has been lost by virtue of a self-dealing
breach by the fiduciary. This limitation outcome can be avoided, but only if the
claim can be brought under section 21(1)(a) as a fraudulent breach of trust.107
If the goal is to treat all recoveries of disloyal gains alike, then the pressure to fit
the disgorgement claim into this fraud box may seem irresistible. The pressure
seems even greater given our familiar assertion that a beneficiary’s proprietary
interest is not overreached by a transfer to a purchaser who is not a bona fide
purchaser for value: surely a self-dealing fiduciary must be regarded as having
at least this degree of notice. But this maxim suffers from its own generalities: it
indicates a priority outcome, not the steps or limitation impediments to reach-
ing it; a claim to an interest in the original managed assets must be linked with
rescission and restitutio in integrum of the corresponding benefits received by
the principal.

104 See an attempt in S Worthington, ‘Fiduciary Duties and Proprietary Remedies: Addressing the

Failure of Equitable Formulae’ (2013) 1 CLJ 720. The only case thought to fall outside the class involv-
ing ‘assets which should have been part of the managed fund if all had gone according to plan’ was
Attorney General for Hong Kong v Reid [1994] 1 AC 324 (PC).
105 Other cases have reached this conclusion relying on Type I and Type II distinctions. See Taylor

v Davies [1920] AC 636 (PC), concluding the self-dealing claim was Type II. Beckford v Wade (1805)
17 Ves 87 (PC) similarly relied on a ‘not a real trustee’ distinction on facts suggesting the need to
unravel an allegedly unauthorised sale to the defendant before any property could be said to be held
on trust for the claimant.
106 Contrast JJ Harrison (Properties) Ltd (n 101).
107 Fraud is equated with dishonesty: Armitage v Nurse [1998] Ch 241, 251, 261.
 Exposing Third-Party Liability in Equity 355

X. Parallels between the Equitable and Common Law

Limitation Rules for Property

The majority in Williams felt confirmed in their adopted distinctions between

Type I and Type II constructive trustees, and their characterisation of third parties
as Type II, because the outcome ensured that equitable fraudsters were not treated
more harshly than common law fraudsters, and were in a better position than
defaulting trustees.108
Of course it is possible to draw analogies with fraudsters who at common law
are protected by a six-year limitation rule.109 But there is an alternative and seem-
ingly more appropriate analogy. At common law, any fraudulent dealings with
the claimant are protected by six-year limitation rules; but fraudulent dealings
with the claimant’s property—ie, theft—run without limitation against the thief,
and against all those taking through the thief until the transactional chain reaches
a bona fide purchaser for value: section 4. The provisions in section 21(1) can
be seen as on all fours in relation to protecting equitable interests in managed
property.
The assumed stark contrast with defaulting trustees is also fragile. The Limita-
tion Act itself puts defaulting trustees in a special category, but then defines ‘trus-
tees’ to include ‘constructive trustees’. Thus, the important question is whether
dishonest assisters and knowing recipients are constructive trustees. ‘Constructive
trustee’ is the old-fashioned equivalent of ‘fiduciary’.110 The majority saw the fidu-
ciary relationship between claimant and defendant as key as long as it was pre-
existing.111 On the analysis here the fiduciary relationship is seen as key whenever
it provides the package of duties which is infringed. Functionally, surely this is the
same thing. The hard question, then, is whether dishonest assisters and knowing
recipients are fiduciaries breaching their duties. Here, contrary to Williams, it is
suggested they are.

XI. Exposing Third-Party Liability in Equity

The principal conclusions on third-party liability in equity can be summarised

relatively simply, but they, in turn, depend on a clear appreciation of the regime
relating to primary liability. This is familiar territory, but sometimes we miss key

108 Williams (n 1) [118].

109 Subject to the possibility that time may not start to run immediately: s 32.
110 See above, IV. ‘Language and Logic’.
111 See the earlier discussion of Type I and Type II constructive trustees: III ‘Distinguishing between

Types of Constructive Trustee’.

356 Sarah Worthington

facets and idiosyncrasies. Trust law and fiduciary law both concern themselves
with property holding and property management for others. Express trustees do
both, but it is equally possible to do one without the other: innocent donees hold
property without managing it; company directors manage property without hold-
ing it on trust.
The property-holding notion in equity is well understood. One person holds
legal title; another the beneficial interest. This is a trust, regarded as a special
invention of equity. So it is, but analogous sharing arrangements are equally well
known to the common law, and are of older parentage. The common law version
concerns possession: one person holds legal title, another the possessory interest.
In both cases, the relevant detail behind intentionally sophisticated arrangements
must be spelt out, but equally in both cases trivial and informal arrangements can
also be accommodated; innocent donees in equity and finders at common law are
illustrative.
The idea of personal obligations of property management for the benefit of
others is trickier. There are two key strands. First, property managers (fiduciaries)
must care for and administer the managed property in defined ways, but their
liability is inevitably measured by loss to the managed property fund, not loss to
the individuals with interests in the fund.112 This seemingly unremarkable fea-
ture is what distinguishes prescriptive property management in equity from com-
mon law contractual obligations and duties owed in tort. Second, the activities of
these property managers are constrained by fiduciary obligations. These provide
‘do not’ rules, rather than ‘do’ rules. Their purpose is not to incentivise property
managers to deliver peak financial performance or avoid terrible disasters. Their
purpose is simply to ensure that every benefit achieved, whether considerable or
meagre, is delivered to the beneficiaries and not diverted to the property managers
themselves. This is done by disgorgement remedies.113 In total, therefore, the equi-
table property-management regime requires strict compliance with the manage-
ment plan, appropriate care of the managed assets and fiduciary loyalty. The first
two rules are remedied by reference to any loss in value of the economic interest in
the managed assets; the last by disgorgement of gains. In all of this it is immaterial
whether the managed assets are held on trust or not.

112 Compare the assessment of liability for non-compliance with the strict terms of the trust deed,

or for negligence in performance of the management role, with the assessment of liability in contract
and tort. The former focuses on the lost value to the managed property: AIB Group (UK) Plc v Mark
Redler & Co Solicitors [2014] UKSC 58 (SC). By contrast, contract and tort focus on the economic loss
to the individual affected by the breach. Since the focus is on an individual, the particular economic
loss caused by any breach can be somewhat at large. As a result, both contract law and tort law have
developed rules on foreseeability and remoteness. There is no equivalent risk with property managers:
the managed property is known, and the managers take responsibility for changes in its economic value
caused by their breach. All regimes of course demand causation: defendants should only be liable for
the damage caused by their wrongdoing, not damage caused otherwise.
113 FHR (n 21); Novoship (n 53). See also Consul Development Pty Ltd v DPC Estates Pty Ltd (1975)

132 CLR 373.

 Exposing Third-Party Liability in Equity 357

The next issue is how these property-holding and property-management rules

are attracted. They can arise consensually or by operation of law. In either case,
the analogies are with express trust property holding regimes and express trus-
tee management regimes. Consensually agreed express trusts are well known, but
property holding also arises by operation of law when courts insist that one party
must be recognised as holding an asset for the benefit of another, as with vendor–
purchaser trusts, Quistclose trusts, proprietary estoppel, etc. Generically, these are
all ‘constructive trusts’—ie, ‘not an express trust, but is treated as if it were an
express trust’, with analogous property-holding consequences. Similarly, consen-
sually agreed express trusteeship is well known, but equally the law may insist that
others behave as if they were subject to equitable controls on their management of
property for others. These people are now called fiduciaries, with company direc-
tors, agents, solicitors, etc providing illustrations. Historically, however, these peo-
ple were called ‘constructive trustees’—ie, ‘not express trustees but treated as if
they were express trustees’.
That brings us to accessories.114 Although we now talk a great deal about
accessory or ancillary liability, equity historically dealt with these strangers to an
express trust or consensual fiduciary relationship without going through a loop
which sought to determine whether these people were accessories. Instead it
moved directly to considering whether these people were either property holders
or property managers for others. In making this move, equity’s focus is squarely
on the relationship between the stranger and the managed property (as it is with
express trustees and fiduciaries), and not the relationship between the stranger
and the beneficiary (as it would be in finding primary duty/liability relationships
at common law), nor on the relationship between the stranger and wrongdoer
(as it would be with common law accessories). Thus, in a rather surprising way
equity’s focus on property means that it determines the liability of strangers to an
express trust, or strangers to the property-management relationship, very directly:
it asks whether these people, too, are trustees or fiduciaries or both. It does not go
through an additional loop, first asking the unnecessary question about whether
they are accessories. This direct route to liability was the focus of the historical lan-
guage of constructive trusts, discussed earlier, a language used long before acces-
sory and ancillary liability became fashionable.115
Pursuing this line eliminates a good number of uncertainties. If strangers are
to be made fiduciaries, then their knowledge that the managed assets belong in
equity to others is crucial. This clarifies the focus of the current notice, knowledge,
unconscionability and dishonesty debates. And if strangers are trustees or fiduci-
aries, then their liability follows accordingly: it is personal not secondary, and it

114 Two important books have been written, both providing access to crucial secondary material:

Davies, Accessory Liability (n 65); Dietrich and Ridge (n 8).

115 Much of the modern commentary is critical of Lord Selborne LC in Barnes v Addy (1873–74) LR

9 Ch App 244, 251–52 (CA) but, in hindsight, he may have had it in a nutshell.
358 Sarah Worthington

includes proprietary claims, compensation for loss and disgorgement of disloyal

gains.
Pursuing this line will also necessarily include these strangers being subject to
the same limitation rules as express trustees, and these rules themselves should
be approached with a clearer and more useful focus on trusts and fiduciaries—
ie, property holding and property management—not Type I and Type II construc-
tive trustees.116

XII. Conclusion

The arguments advanced in this chapter are as follows:

1. The distinctions drawn by the Supreme Court in Williams are unduly compli-
cated. The line between Type I and Type II constructive trustees is inadequately
defined, probably inherently so, and its alignment with the characteristics that
are material to the distinctions drawn by the Limitation Act 1980 is unclear.
2. The language of constructive trusts and constructive trustees is confusing.
It disguises a relatively straightforward search for situations where there are
property splits (trusts) or property management responsibilities (fiduci-
ary responsibilities). These can exist independently of each other (innocent
donees and directors illustrate the possibilities). We should use language
which makes the specific details clear: ie, trust (referring to a property split
only), trustee (referring to property holding only) and fiduciary (referring to
personal property-management obligations whenever this parcel includes
fiduciary duties which ban self-interested management).
3. Accessory liability in equity is something of a misnomer, since the drive is
not to find individuals with particular associations with the wrongdoer and
shared liability for the primary wrong, but instead to find individuals who are
themselves trustees or fiduciaries because of their particular association with
the original managed property. Liability follows accordingly. It is a primary
liability not a secondary liability, notwithstanding that the characterisation of
the stranger as trustee or fiduciary arises by operation of law rather than by
consensual agreement.
4. Pursuing that line of analysis in the context of dishonest assistance and know-
ing receipt, dishonest assisters are seen to be fiduciaries, and knowing recipi-
ents to be trustees on receipt of the property and fiduciaries on acquisition
knowledge. These parties are sued for breach of their property-holding or
property-management duties. Innocent donees, by contrast, are trustees, but
not fiduciaries. Claims against them are priority disputes, not breach of duty
cases. Liability in each case follows accordingly.

116 See above, V. ‘Applying this Language to Limitation’.

 Exposing Third-Party Liability in Equity 359

5. Where there are fiduciary responsibilities for property management, liability

is in two forms: compensation for loss to the managed assets; and disgorge-
ment of disloyal gains. The former is distinguishable from common law com-
pensation in its focus on remedying loss to the property fund, not the loss to
individuals interested in the fund.
6. Finally, and rather as a sideshow to these other important conclusions, all of
this has obvious ramifications for the limitation rules. The preferable dis-
tinction is not between Type I and Type II constructive trustees, with only
the former exposed to time running without limitation under section 21(1),
but between fiduciaries and non-fiduciaries. Recognising this and bringing
it front and centre would immediately eliminate an enormous number of
practical difficulties which currently exist in applying the limitation rules, but
would nevertheless accord with the outcomes in the majority of decisions,
and with principle in the remainder.
360
 INDEX

A and B Trusts case 170 delegation/non-delegation rules 32–3

accessory liability, comparative perspectives ecclesiastical law model 31
controversial elements, US and UK 253–4 equity model 31
criteria 253 estoppel 38
culpable participation 253, 260 executor/trustee relationship 32
Delaware’s Court of Chancery, investment key issues 30
bankers 253–4, 263–4, 265, 269–71 limits to importing trusts into agency
accessory doctrine 270–71 relationships 44–7
contribution 272–3 moneys in agents’ hands 44–5, 47–50
duties, liabilities, roles 269–70 New Zealand cases 35
further implications 272–3 tandem operation of rules 32
key issues 269 unanimity rule 40–42
knowing inducement 272 Agip (Africa) Ltd v Jackson 127, 137, 308,
key issues 254–5 314–15
limitation see under limitation law, and AIB v Redler 47–9, 176–8, 324–5
third-party liability aiding and abetting liability see under accessory
United Kingdom 263–8 liability, comparative perspectives, United
accessory conduct 265–6 States
doctrinal structure 263 Akindele case 305, 307, 313, 314, 321, 325
equity 265–8 Allen v Gold Reefs 17–19
fiduciary duty 265 Allnutt v Wilding 190, 199
fraudulent and dishonest conduct 266–8 alter ego concept see under corporate accessories
joint tortfeasance 264–5 apparent authority rules see under agents and
United States 255–63 trustees’ interaction
aiding and abetting liability 256–7 arbitrability of trust instruments
breach of fiduciary duty 255–63 accountability 207
causality issues 260 advantages 203–4
contingent liability 257–8 arbitrable disputes 205
elements of claim 258–61 arbitral clause
knowledge of relationship and breach 259 examples 202
no-duty-to-rescue principle 260–61 as settlor’s stipulation 210–211
substantial assistance and as valid agreement in writing 209–210,
encouragement 259–61 211–12
tort doctrine 255–6 beneficiaries
types of defendants 258 claims through party 213
see also corporate accessories trustees’ obligation to account to 205, 206
Aerostar Maintenance International conclusion 218–19
Ltd v Wilson 283–4, 300 conditional transfer 212–13
agents and trustees’ interaction and continuous supervision 209
accidental release of trust funds, agent’s deemed acquiescence 211
liability 47–50 enforceability 209–216
apparent authority rules 33–4 existing legislation, jurisdictions
case law 34–44 with 201, 217
common law model 31 limitations 217–18 Table
complexity and incoherence 29–30, 32 relevant provisions 220–24 Annex
contracts/dispositions of trustees 32–4 inherent jurisdiction of courts 205–8, 214
decision-making models 30–32 key scenario 201–2
362 Index

minors, legally incompetent, unborn, bona fide purchase doctrine see under backwards
ascertained persons 213–14 tracing; knowing receipt; limitation law, and
New York Convention/UNCITRAL Model third-party liability
Law 202–3, 209, 212 Boscawen v Bajwa 140–1, 145
non-arbitrability 204–5 Brazil v Durant see under backwards tracing
public policy objections 205–6 Bribery Act 2010 229–30
and remedies’ availability 206, 208–9 bribery remedies
trustees, beneficiaries, third parties not background 225
participating in prior proceedings 215–16 briber, remedies against 233–43
Armitage v Nurse 162 causal link between wrong/profits 237–8,
ASB Bank Ltd v Davidson 37 242
Ashcroft v Barnsdale 198 combining remedies 243–52
Asseinagon Asset Management case 9 one defendant (Tang Man Sit case)
Associated Alloys case 106 situation 243–6, 249, 251
Australasian Annuities 39–40 two defendant situations 246–52
competing claims, beneficiary/state 229–32
backwards tracing constructive trust 228–32, 243
background 123 cumulating remedies 247–52
bona fide purchase doctrine 41, 138–9, dishonest assister 226–8, 234–43
143, 146 double recovery 244, 246, 248–50
Brazil v Durant 123, 133–5 equity claims 227
payments involved 131 fiduciary relationship 227–8, 229
pre/post-Brazil authorities 127–37 gain-based claims 235–43
cases/instances of 126–7 inducement/assistance distinction 238, 240
choses in action 128, 130 key issues/conclusion 225–6, 252
composite transactions 135, 137–40 limitation period 229
conceptual confusion claim 125–6 loss-based claims 235
conclusion 149 National Crime Agency 230
consideration 138, 139 nature of bribery 226–8
direct backwards tracing claims no-conflict/no-profit rule 226, 229
(D-claims) 137–9 payment with property from trust/other
exchange value terminology 123–4 property, distinction 231–2
explicit reference 131 personal remedies 232–3
forwards tracing 124 Proceeds of Crime Act 2002 228–32
indirect backwards tracing claims punitive damages 233, 241, 251–2
(IND-claims) 137, 139–40 quantifying profits of briber 242
nature of 124–6 recipient, remedies against 228–33
overall transaction 127–8, 137 rescission 233–4
restricted application 134–5 secret commission/bribery
subrogation right 140–48 distinction 226–7
terminological issues 123–7 strict approach exceptions 230–32
unjust enrichment 140–43, Bristol & West Building Society
145–8 v Mothew 265
unsecured debt 144–5 BS Mount Sophia case 56, 57–8, 59, 66–7
Bagnall v Carlton 248 Bubble Act 1720 2, 4
Baker v Archer Shee 321 Butlin’s Settlement Trust case 197–8
Bambury v Jensen 45, 47 Byrnes v Kendle 179, 181–4, 190–91, 200
Barlow Clowes case 268
Barnes v Addy 266, 268, 275, 276–7, capital gains tax/capital transfer tax see under
282, 284 enforcement of trusts
Bellis case 47 Casio Computer Co Ltd v Sayo see under
beneficial receipt see under knowing receipt corporate accessories
Bishopsgate Investment Management Central Bank case 257
Ltd v Homan 131, 133 Charterhouse Capital case 22
Black v S Freedman & Co 323–4 Chase Manhattan case 341
Blades v Isaac 165–6 chattels and shares, distinction see under
Blisset v Daniel 9 property law
Boardman v Phipps 236n, 242 choses in action see under backwards tracing
 Index 363

Citadel General Assurance Co v Lloyds Bank Michael Wilson & Partners Ltd
Canada 312 v Nicholls 295–8, 299
Civil Liability (Contribution) Act 1978 251 Singtel Optus v Almad 297
CKR Contract Services 62–4 Trustor AB v Smallbone 292–3
Clemens v Clemens 26 two models 276–87
CMS Dolphin v Simonet 280, 283 differences between 287–99
combining remedies see under bribery wrongdoer/company as same actor
remedies (model one) 277–82
Companies Act 1993 (New Zealand) 39 basis of liability 280–2
Companies Act 2006 12, 172 see also accessory liability, comparative
composite transactions see under backwards perspectives
tracing corporate companies see under shareholders
conditional transfer see under arbitrability of and equity
trust instruments Crabb v Arun DC 42
consideration see under backwards tracing Craigcare Group Pty Ltd v Superkite 295
Constantinidi v Ralli 197 Criterion Properties plc v Stratford UK
constructive trusts see under bribery remedies; Properties 305–7, 330
limitation law, and third-party liability Croftbell case 90
Consul Development Pty Ltd v DPC Estates culpable participation see under accessory
Pty Ltd 236 liability
contingent liability see under accessory liability, cumulating remedies see under bribery remedies
comparative perspectives, United States
Cook v Deeks 279–80, 281 Dauphin case 57
corporate accessories Davidson v Selig 171
account of profits/equitable compensation Day v Day 180, 191, 198
remedies 298–9 Dearle v Hall 89
alter ego concept 275, 276, 282–3, declarations of trust see under objectivity;
287–8 under property law
and discrete third parties 299, 300–1 Delaware’s Court of Chancery see under
Casio Computer Co Ltd v Sayo 293–5 accessory liability
company as separate actor, with imputed detached objectivity see under objectivity
knowledge (model two) 182–7 discretionary dispositive powers see under
directing mind and will (of enforcement of trusts
company) 282–3, 284–5 dishonest assistants see under bribery remedies;
fraud exception 286–7 corporate accessories; limitation law, and
human accessories and corporate third-party liability
accessories 284–6 dispositive fiduciary powers, objects of see under
superannuation trustees 285 enforcement of trusts
dishonest assistants double recovery see under bribery remedies;
gain-based liability 288 corporate accessories
loss-based liability 289–90 Dubai Aluminium Co Ltd v Salaam 116
double recovery 298–9
full satisfaction principle 298–9 Ebrahami case 7–8, 10, 14–15, 26
gain-based liability 287–9 ecclesiastical law model see under agents
accountability 287–8 and trustees’ interaction
discrete third-party 289, 299 El Ajou v Dollar Land Holdings 283, 284
dishonest assistants 288 enforcement of trusts
equitable compensation 289 accounting process 157–8, 176–8
non-recognition 288 administrative jurisdiction 151, 159, 174–5
Grupo Torras v Al-Sabah 291–2 basic principles 156–9
imputed knowledge see company as separate capital gains tax 153–4
actor, with imputed knowledge (model capital transfer tax 154
two) above discretionary dispositive powers 151
key issues 275–6 history 152–5
loss-based liability 289–98 dispositive fiduciary powers,
Australian cases 295–8 objects of 160–68, 173
dishonest assistants 289–90 equitable compensation 158–9
English authorities 290–5 estate duty 152–3
364 Index

fixed beneficiaries 159–60 forwards tracing see under backwards tracing

inherent jurisdiction 156–7 Foskett v McKeown 123, 128–30, 352
key issues/conclusion 151–2, 178 fraud in equity concept see under shareholders
legal profession/judiciary, importance of and equity
interaction 176 fraud exception see under unconscionability and
personal, non-fiduciary powers, performance bond restraint calls
objects of 168–9, 173 fraud on a minority see under shareholders and
in practice 173–4 equity
protectors fraud on a power see under shareholders and
claims by 169–73 equity
use of 154–5, 174 fraudulent and dishonest conduct see under
standing of remedy seekers 175–6 accessory liability, comparative perspectives,
theoretical implications 174–8 United Kingdom
equitable charges see under property law Freeman v Ansbacher Trustees 163–4
equity’s darling see under knowing receipt Freiburg Trust 170
estate duty see under enforcement of trusts
Estmanco case 25 gain-based liability see under corporate
estoppel see under agents and trustees’ accessories
interaction; under property law Gartside case 163
Evans v European Bank Ltd 323 Gencor v Dalby 277–8, 280–81, 283
executor/trustee relationship see under agents George v Webb 295
and trustees’ interaction GHL Pte Ltd case 53, 56, 57, 60, 65
exigibility requirement see under property law Goldcorp Exchange case 88, 97, 109–110
express trusts see under limitation law, and Great Investments Ltd v Warner 307
third-party liability; objectivity Greenhalgh v Arderne Cinemas 19
extant/future property see under property law Grimaldi v Chameleon Mining NL
(No 2) 286–7, 288
Farah Constructions case 143–4 Grupo Torras v Al-Sabah see under corporate
Farepak Food and Gifts 190, 194, 196 accessories
FHR European Ventures LLP & Ors v Cedar Guidezone case 14
Capital Partners LLC 353
FHR European Ventures LLP v Mankarious Halifax Building Society v Thomas 241
(FHR) 225, 228–9, 231, 280 Hardoon v Belilios 310
fictitious proprietary effect see under property Hastings-Bass jurisdiction 170
law Henry v Hammond 103–4
fiduciary obligations/disgorgement see under Holiday v Sigil 318
limitation law, and third-party liability homogeneous whole requirement see under
fiduciary relationship see under bribery remedies property law
Field v Lonsdale 183 hub company problems see under floating
Fielden v Christie-Miller 41–2 trusts
Finance Act 1894 152 Hunter v Moss 98–9, 100–101, 111, 118–20
Finance Acts 1965 and 1975 153–4
Finnigan v Butcher (No 2) 38–9 inconsistent dealing see under knowing receipt
Fistar v Riverwood Legion and Community Club inducement/assistance distinction see under
Ltd 307 bribery remedies
fixed beneficiaries see under enforcement of Industrial Acoustics Co Ltd v Crowhurst 196–7
trusts innocent donees as trustees see under limitation
floating trusts law, and third-party liability
hub company problems 113–14 Insolvency Act 1986 12, 287
intermediate securities’ operation 114–17 intermediate securities’ operation see under
LBIE (Lehman Brothers International floating trusts
Europe) 113, 114 investment bankers see accessory liability,
RASCALS case 108–9, 113, 114 Delaware’s Court of Chancery
certainty of subject matter 118–20
conclusion 122 JBE Properties case 55–6, 59
intention 117–18 Johns v Johns 162, 163
necessary intentions 120–21 Joint Stock Companies Winding Up
repo transactions 95, 109, 114 Act 1848 5, 6
 Index 365

joint tortfeasance see under accessory liability, Lehman Brothers case 46, 102
comparative perspectives, United Kingdom floating trusts, LBIE 113, 114
Jolliffe case 183, 184 see also MCC Proceeds v Lehman Brothers
Jones (FC) v Jones 321–2 Lemos v Coutts (Cayman) Ltd 160–62, 164
Judicature Act 1873 319–20 lightweight floating charge see under
just and equitable winding up doctrine see under property law
shareholders and equity Limitation Act 1980 331, 332, 335, 350, 351,
353–4
Kan v Poon 169–70 limitation law, and third-party liability
Kelly v Solari 317, 319 accessory liability 332, 358
knowing inducement see under accessory bona fide purchase doctrine 346, 348–50,
liability, Delaware’s Court of Chancery 354–5
knowing receipt common law/equity, parallels/
accountability language 315–17 differences 332, 333
award language 315 constructive trusts 332, 345, 358
beneficial receipt 314–15, 329 distinction in Williams 335–8
bona fide purchase doctrine 303, 309, terminological categorisation 338–41
311–12 dishonest assistants, as fiduciaries 342–6,
constituent elements 311–15 358
conversion analogy 327–8 accessory liability 343–5
equity’s darling 303, 309, 311, 313–15, 324 parties who induce/procure 345–6
genuine trustee who owes duty to account to equitable/common law parallels 355
beneficiary 322–6, 330 express trusts 338, 339, 341
account duty 323 fiduciary disgorgement 353–4
advantages claimed for thesis 323 fiduciary obligations 328–9, 341, 359
completeness of transaction 324–5 innocent donees as trustees 349–52
duty/liability distinction 325 institutional trust/remedial formula
imposition of trusteeship 324 distinction 337
justification to court 325–6 key issues/conclusion 332–3, 358–9
key features 322–3 knowing recipients 358
paucity of authority 323–4 fiduciaries on acquiring
and unjust enrichment 323 knowledge 347–9
inconsistent dealing 304, 307–9, 329–30 knowledge 339–40
key issues/conclusion 303–4, 330 trustees on receipt 346–7
knowledge 311–14 lawful/adverse possession,
limitation see limitation law, and third-party distinction 337–8
liability, knowing recipients proprietary/obligational
as misnomer 304, 330 concepts 340–41
notice 312 terminological categorisation
personal claim 303, 311–15 application 341–2
rights held beneficially 305–7, 311 constructive trusts 338–41
rights transferred in breach of trust 311 third-party liability 355–8
specific claim 303, 309–311 accessories 357
trustee commits a breach of trust 326–7 constructive trusts 357
unconscionability 313–14 personal obligations 356
unjust enrichment 303, 304, 317–22, 330 primary liability 355–6
equitable title 319–21 property-holding notion 356
and fault-based claim in strangers’ knowledge 357–8
wrongs 317–18 Williams v Central Bank of Nigeria 331,
as plausible explanation 321–2 333–6, 341, 342
strict liability 317 constructive trusts see constructive
unjust factor absent 318–19 trusts above
wrongs liability 303–4, 327–30 dishonest assistant 344
Korda case 46–7 facts 333–4
innocent donees as trustees 351
Law Society v Haider 130–31 knowing recipients 346–7
Lee v Sankey 307–8 limitation context 334
Leedale case 162 majority/minority approaches 336
366 Index

Lind case 91–2 safety-valve view of 191

Logicrose Ltd v Southend United FC 233–4 subjective model 190–93, 197–8, 199–200
London Wine Co case 98, 99 written documents 192–3
Lumley v Gye 226 sham trusts 184, 189
subjective intention 179, 183
Madoff Securities International Ltd v Raven 294 type of 187–9
Mahesan case 248–9, 251 uncommunicated/secret intentions 183–5
Manisty’s Settlement Trusts 164, 165 wills’ interpretation 186
Marinteknik Shipbuilders case 61 Odyssey Entertainment Ltd v Kamp 284
Marley v Mutual Security Merchant Bank 209 Odyssey, The (Homer) 225
MCC Proceeds v Lehman Brothers 321 O’Neill v Phillips 13–14
Meagher Gummow and Lehane 298 Otkritie International Investment Management
Menalaou v Bank of Cyprus 135–6 Ltd v Urumov 294–5
Michael Wilson & Partners Ltd v Nicholls 246 overall transaction see under backwards tracing
see also under corporate accessories
MNOPF v Watkins 199–200 Palmer v Carey 107
moneys in agents’ hands see under agents and Panama New Zealand and Australian Royal Mail
trustees’ interaction Company case 122
Montagu’s Settlement Trusts case 312, 317, Papadimitriou v Crédit Agricole Corp &
324, 330 Investment Bank 312–13, 314
Morice v Bishop of Durham 159 Paragon Finance Plc v DB Thakerar 45–6, 316,
Morris v Bank of India 287 335, 336, 342, 348, 351
Murrell v Hamilton 41 Paul v Constance 329
Peconic Industrial Development Ltd v Lau
National Crime Agency see under bribery Kwok Fai 342
remedies performance bond restraint calls see
New Cap Reinsurance Corporation Ltd v General unconscionability and performance bond
Cologne 295 restraint calls
Niak v Macdonald 35–7, 38, 43 personal, non-fiduciary powers, objects of see
no-conflict/no-profit rule see under bribery under enforcement of trusts
remedies Pettyjohn case 137–8
no-duty-to-rescue principle see under accessory Phillips v Mullings 191–2
liability, comparative perspectives, United Ponniah v Palmer 37–8
States Preedy v Dunne 42
North- West Transportation case 26 Prest v Petrodel Resources Ltd 280
Novoship (UK) Ltd v Nikitin 236–40, 241–3, Primeau v Granfield 129
278–9, 281, 328 Proceeds of Crime Act 2002 see under bribery
Nurcombe v Nurcombe 24–5 remedies
promisee/addressee objectivity see under
objectivity objectivity
certainty of intention question 189 property law
contracts/trusts, differences 180–81, bulk of property 95–6
182–3 charges, portions and quantities 105–8
declarations of trust 187–8, 190–91 chattels and shares, distinction 99–102
definition 181–2 common law counterparts 110–111
detached objectivity 188 competing assignments 89
express trusts 179 declaration of trust 97–104
family homes context 186–7 equitable charges 105–6, 107–8
intention assessed objectively 182–7, 189 estoppel 108–110
key issues/conclusion 180, 200 exigibility requirement 87
promisee/addressee objectivity 187–8 express language 106
rectification extant/future property 92–3
case law 196–200 fictitious proprietary effect 89–90
key issues 190 future property 88–93
objective model 194–6 homogeneous whole requirement 98
parole evidence rule 194–6 identification/intention to create, as separate
as remedy 179–80 matters 102–3
rescission cases 197–8 key issues/summary 87–8, 110–111
 Index 367

legal interests, portions and quantities 93–6 as descrete ground 5–6

lightweight floating charge 90–91 fraud in equity concept 8–9
promise to grant a charge 91–2 insertion into 1848 Act 6
sale of goods intention rule 93–4 legitimate expectations 16–17
segregation issue 98, 103–5, 107 and majority power 9–10
specified/unspecified quantity of power to wind up 10–12
goods 94–5 principles of equity derived from
trust interests, portions and partnership 6–8
quantities 97–104 unfair prejudice remedy 13–16
protectors see under enforcement of trusts legislative developments 4–5
punitive damages see under bribery remedies majority power limits 5, 25–8
proper plaintiff rule 24–5
Rabin v Gerson 195 proper purpose rule 21–3
Rachel v Reitz 201 quasi-partnerships 5
Radich v Brown 39 super-majority 17–19
Raphael case 185, 191 transferability of shares 2
RASCALS case see under floating trusts unincorporated joint stock
Raven case 206 companies 2–3
RBC Capital case 270–71, 272–3 Shore v Wilson 187–8
RBG Resources case 96 Singtel Optus v Almad see under corporate
rectification see under objectivity accessories
Relfo case 131–3, 137 Smith v Anderson 320
repo transactions 95, 109, 114 Sneesby v Thorne 43
rescission see under bribery remedies specified/unspecified quantity of goods see under
Restatement (Second) of Torts 255, 256, 259–60, property law
266 Spectrum Plus case 120–21
Rhodes v Muswell Hill Land Company 206 Steele v Paz 170
Rodick v Gandell 107 subjective intention see under
objectivity
Sale of Goods Act 1979 94, 95, 99, 138 subjective model see under objectivity,
sale of goods intention rule see under property rectification
law subrogation right see under backwards tracing
Salford v Lever 247–8, 249, 251 substantial assistance and encouragement
Scan-Bilt case 61–2 see under accessory liability, comparative
Schalit v Joseph Nadler 320 perspectives, United States
Schmidt v Rosewood Trust 153, 154, 164, 167, substantial assistance to fiduciary breach see
206 accessory disloyalty
secret commission/bribery distinction see under
bribery remedies Tailby v Official Receiver 119–20
segregation issue see under property law Tan case 267–8
Shalson v Russo 184 Tang Man Sit case see under bribery remedies,
sham trusts see under objectivity combining remedies
Shanghai Electric 61 Target Holdings Ltd v Redferns 47–50, 176–8,
shareholders and equity 324–5
benefit-detriment distinction 23–4 third-party liability see limitation law, and
company structure 1–2 third-party liability
conclusion 27–8 tort doctrine see under accessory liability,
corporate companies 4, 27 comparative perspectives, United States
corporate constitution alteration 17–24 Trustee Act 2000 35
deed of settlement company 2–3 Trustor AB v Smallbone 277–80, 281, 283
fraud in equity concept 8–9 see also under corporate accessories
fraud on a minority 25 Tuck’s Settlement Trusts case 203
fraud on a power 20 Twinsectra Ltd v Yardley 185,
joint stock trading 2 267–8, 271
just and equitable winding up
doctrine 5–17, 27 Ultraframe (UK) Ltd v Fielding 279, 294
alternative remedies 12–13 unanimity rule see under agents and trustees’
contractual approach 13–14 interaction
368 Index

unconscionability and performance bond letters of credit/performance bonds,

restraint calls symmetry 55–6
case study of decisions 53–5 negative academic reactions 58–60
cases’ analysis 65–9 Singaporean divergence from English
factors’ analysed 68–9 law 52–3
quantum value of bonds 67–8 standard of proof 57–8
summary of numbers 66–7 tactical/abusive calls 72–3
certainty/equity tensions 51–2, 56 see also unconscionability, knowing receipt
choice of English law 60–61 unjust enrichment see under backwards tracing;
conclusions 75 knowing receipt
as conscious policy choice 53 unsecured debt see under backwards tracing
construction law practitioners’ survey 69–75,
76 Appendix A, 85 Appndix B Vandervell (No 2) case 184
clients’ concerns 71
conclusions 74–5 Wait case 105
hearing dates/costs 73–4 Warman International Ltd v Dwyer 288
online legal guides 70 Westdeutsche Landesbank Girozentrale v Islington
positive negative views 74 LBC 310, 324, 341
questions asked 70–71, 85 Appendix B Williams v Central Bank of Nigeria 316–17
reasons for not choosing foreign law 71–2 limitation see under limitation law, and
tactical/abusive calls 72–3 third-party liability
contracting out 60–65 Williams-Ashman v Price & Williams 329–30
doctrinal basis 56–7 Wilson v Moore 290–91
express exclusion 61–4 wrongdoer/company as same actor see under
factors’ analysed 68–9 corporate accessories
fraud exception 69 Wynn case 206
ground for relief, unconscionability as 55–8
hearing dates/costs 73–4 Yenidje Tobacco case 7